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Operator: Good morning. This is Laura, welcoming you to ING's 4Q 2025 Conference Call. Before handing this conference call over to Steven van Rijswijk, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements such as statements regarding future developments in our business, expectations for our future financial performance and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Steven. Over to you. Steven van Rijswijk: Thank you very much, operator. Good morning, and welcome to our results call for the fourth quarter of 2025. I hope you're all well, and thank you for joining us today. As usual, I'm joined by our CRO, Ljiljana Cortan; and our CFO, Tanate Phutrakul. And today, I'm proud to walk you through another year of outstanding commercial growth and financial performance driven by [audio gap] and I will also share our updated and upgraded outlook for 2027, which further underlines the strength and resilience of our business. After that, Tanate will give you more insight into our income and cost expectations for 2026 and present the quarterly financials. And as always, we will be happy to take your questions at the end of the call. And with that, let's now move to Slide 2. This slide highlights the continued commercial momentum we saw in the fourth quarter with outstanding growth across all key markets. We added more than 350,000 mobile primary customers during the quarter, bringing total growth for the year to over 1 million, fully in line with the ambitious target we set at our Capital Markets Day. Loan growth was also robust with absolute growth doubling versus the prior year and resulting in an 8.3% increase since the start of the year. In the fourth quarter alone, Retail Banking delivered EUR 10.1 billion in net core lending growth, driven mainly by residential mortgages. Wholesale Banking added EUR 10.3 billion, supported by strong demand in lending and working capital solutions as our clients' financing needs increased. We also saw healthy deposit development. Core deposits rose by EUR 38.1 billion for the full year or 5.5%. In the fourth quarter, Retail Banking contributed EUR 11.3 billion, benefiting from targeted campaigns and normal seasonal inflows and Wholesale Banking recorded a small net outflow, mainly due to lower short-term balances in our cash pooling activities. Fee income also continued the positive trends. For the full year, fees grew by 15%, supported by continued customer growth and increased cross-sell, essentially doing more business with more customers. And the fourth quarter also included a one-off benefit of EUR 66 million. All of this translated into very solid financial results. Our return on equity for 2025 was 13.2%, well above the guidance provided at the start of the year. And finally, we remain fully committed to supporting our clients in their sustainability transitions. Our total sustainability volume mobilized reached EUR 166 billion for the year, representing a 28% increase versus 2024. Now let's move to the next slide to look at how the commercial momentum drove our financial performance. On Slide 3, you can see that commercial NII remained very strong at EUR 15.3 billion. This result was supported by the significant increase in customer balances, both on the lending side and in liabilities. The volume growth largely offset the expected margin normalization. Fee income was also strong, increasing 15% compared to 2024, and they now account for 20% of total income. And this reflects structural drivers such as customer growth and increased cross-sell. Investment products performed particularly well with strong increases across all metrics, the number of customers, assets under management and the number of trades. And taken together, the strong NII and fee performance fueled total income growth, which reached a record level for the third consecutive year. And with that, let's now move to Slide 4. On this slide, we highlight actions taken to strengthen operational leverage, reinforcing our disciplined approach to cost management. We continue to invest in growth and diversification while increasingly leveraging new technologies. We were able to offset these investments by enhanced operational efficiency as the model becomes more scalable. In 2025, for example, we reduced customer friction by increasing the share of customer journeys handled without any manual intervention. We also introduced our chatbot in several retail markets, providing customers with faster and more accurate answers in their questions and resulting in annual savings as a large part of the chats are resolved without any human support. These improvements have contributed to a customer experience that is highly appreciated as reflected in our strong NPS positions across all markets. In retail banking, we maintained our #1 position in 5 out of 10 markets. And in Wholesale Banking, we achieved an NPS of 77, demonstrating both the quality of our client service and the value of our continued investments in expertise and sector knowledge. And our investments in scalability are also translating into higher efficiency, and this is visible in our FTE over customer balances ratio, which has improved by more than 7% since 2023. Then we move to Slide 5, where we show how our robust commercial growth, strong development of total income and proactive cost measures have resulted in strong capital generation. Over the past year, we delivered more than EUR 6.3 billion in net profit, contributing almost 2 percentage points to our CET1 ratio. And of this EUR 6.3 billion, 50% is distributed as a regular cash dividend, offering shareholders an attractive and predictable cash yield. Around 50% of the capital we generated has been used to fund profitable growth across our markets, and this percentage would even have been higher without the steps we took to optimize capital efficiency in Wholesale Banking, such as the 2 SRT transactions completed in November. Finally, we announced additional distributions to a total amount of EUR 3.6 billion, which also helped bring our CET1 ratio closer to our target level. And on the next slide, I will show how these distributions have resulted in a higher, highly attractive shareholder return. And then we move to Slide 6, where we summarize the total distributions to shareholders, and I will build on what I just discussed. In line with the distribution policy, we have consistently paid cash dividends and have been executing share buybacks for several years. Together, these actions have consistently delivered a highly attractive yield, including in 2025, a year in which our share price increased by almost 60%. The share buyback program we announced in November is currently underway and is expected to be completed in April 2026. And in addition, we paid out EUR 500 million in cash earlier in January, which helps us to meet the cash hurdle for this year, now finalized at EUR 3.3 billion. Looking ahead, we remain fully committed to delivering strong shareholder returns, and we will provide an update on our capital planning with our first quarter 2026 results. And now starting on Slide 8, I will guide you through how our strategy continues to accelerate growth, increase impact and deliver value. Now on this slide, I'm talking about Slide 8, we highlight our key strategic priorities supporting our Growing the Difference strategy, building on our successes over the past years. Firstly, we will continue to grow and diversify our income by adding more customers and doing more business with them. And a good example is the further expansion of our investment product offering. We have also introduced a subscription model for retail clients in Romania, and we will roll out this concept in other markets as well, which will help grow income from daily banking services. Our affluent customer base continues to grow rapidly, and we see further growth potential, and we're targeting this with dedicated propositions designed specifically for their needs. We're also stepping up our engagement with younger generations. For example, we introduced new products for Gen Z, including an investment fund focused on improving financial awareness within this group. And in business banking, we successfully launched our propositions in Italy and Germany, where we are seeing strong and ongoing customer growth. And in Wholesale Banking, we are expanding our range of fee-generating capital-light products to support sustainable and diversified revenue growth. Now secondly, we will further improve our operational leverage by scaling processes, people and technology while maintaining strict cost discipline to further utilization and scale of Gen AI will enhance efficiency and will help us to reach our FTE over customer balances target ahead of schedule. Finally, we remain firmly focused on generating strong capital going forward, and our allocation priorities are well defined in that regard. We will maintain an attractive shareholder return supported by a 50% payout policy. Secondly, we will continue to invest in value-accretive growth, diversify income streams as fund the loan book and a capital-efficient way and consider M&A opportunities that meet our criteria. And thirdly, we will return any capital structurally above our CET1 target to shareholders. We will also further increase the capital we allocate to retail banking and optimize the capital usage in the Wholesale Bank and note that we have already increased the capital allocated to retail banking to 54%. And with our strategy, we are confident in our ability to become the best European bank. And with this confidence, we have raised our expectations for the coming years. And then we move to Slide 9. And then I'll present our outlook for '26 and '27. And for 2026, we expect total income of around EUR 24 billion, and this outlook is supported by continued volume growth and an anticipated 5% to 10% increase in fee income. Total operating expenses, excluding internals -- sorry, incidentals are projected to be in the range of EUR 12.6 billion to EUR 12.8 billion. We will continue to manage our CET1 capital ratio at a target of around 13%. And in addition, we will transition from a return on equity metric to return on tangible equity. And for the full year 2026, we expect an ROE of 14% and ROTE to be higher than 14% and note that the delta between the 2 metrics was around 40 basis points, 40 basis points in 2025. Then looking ahead at 2027, we are introducing a new outlook for total income. We now expect it to exceed EUR 25 billion, which is at the upper end of our previous target range. This income number includes a higher fee income outlook, which we now expect to exceed EUR 5 billion in 2027. And we've moved away from the cost/income ratio and instead provide a clear hard outlook for operating expenses, again, excluding incidentals of around EUR 13 billion, 13. And this reinforces our continued focus on cost discipline and operational efficiency. And taken together, this outlook translates into a return on equity of 15% and a return on tangible equity of more than 15%. And now I'll hand over to Tanate, who will give more insight on our outlook for 2026 and who will walk you through the fourth quarter financial results in more detail, starting on Slide 10. Tanate Phutrakul: Thank you, Steven. As this is the last time I'll talk you through these numbers as the CFO of ING, I'm very pleased that I can close on such a strong result and provide you with an upgraded outlook. On Slide 10, let's start with commercial NII, which will benefit from increasing support from the replication portfolio. We also assume continued customer balance growth of around 5% per year, above the guidance that we gave at Capital Markets Day and reflecting the commercial momentum in our franchises. The liability margin is expected to be at the lower end of the 100 and 110 basis point range, while the lending margin is assumed to remain stable compared to the fourth quarter. Fees are expected to grow by a further 5% to 10%, building on the strong performance we achieved in 2025. All other income is expected to be around TRY 2.8 billion, excluding incidental items. This is driven by continued strong performance in financial markets, while in treasury, we expect less income from foreign currency hedging given the current lower interest rate differential between the euro and other currencies such as the U.S. dollar and the Turkish lira. Based on the current rate environment, taking 2024 last quarter as a run rate would be a fair starting point. Taken together, total income is expected to reach around EUR 24 billion in '26. And then on the next page, I'll walk you through the drivers behind the expected cost development. We expect total annual cost to be in the range of EUR 11.6 billion to 11.8 billion, excluding incidental and regulatory costs. The main driver of the increase remains inflationary pressure, which will again predominantly impact staff expenses. We will also continue to make selective investment to support business growth and further improve efficiency, as Steven highlighted earlier. These investment costs will be more than offset by operational efficiencies driven by increased scalability of our processes, people and technology, further utilization and scaling of Gen AI and continued optimization of our footprint. Given the strong income outlook, this modest cost growth results in a positive jaw for the year. Now let's move to the quarterly financials starting on Slide 13. On Slide 13, you can see that our commercial NII increased driven by very strong volume growth and a slightly higher lending margin, while the liability margin remained stable. Fee income continues its upward trend, driven by customer growth and strong performance in investment products and insurance. This is more than offset by lower fee income in wholesale lending. As a reminder, fee income in the fourth quarter included a EUR 66 million one-off in Germany. All other income was supported by continued strong results in financial markets, although seasonally lower compared to the previous quarters. As a whole, total income came in 7% higher than the same period last year. Now moving to Slide 14, where we will show the development of customer balances. As you can see, we delivered another quarter of strong loan growth across both retail and wholesale banking. Net core lending increased by EUR 20 billion. Retail banking contributed EUR 10.1 billion, driven by continued mortgage growth. increases across both business lending and consumer lending portfolios. Wholesale Banking also posted strong growth of AED 10.3 billion, reflecting strong performance in lending and somewhat elevated client demand in working capital solutions. On the liability side, core deposit increased by 9.5 billion. Retail banking drove the bulk of the growth, particularly in the Netherlands, Spain and Poland, which benefited from targeted campaigns and seasonal inflows. Wholesale Banking saw a small net outflow as increased deposit volume in PCM were more than offset by lower short-term balances in our cash pooling business. The other category of deposits were impacted by seasonal reductions in treasury. On Slide 15, you can see that the commercial NII grew by more than EUR 100 million quarter-on-quarter and was almost 5% higher than last year. Lending NII was up EUR 75 million in the fourth quarter, driven by volume growth and a 1 basis point improvement in lending margin to 126 basis points. The liability NII also increased by EUR 30 million, supported by sustained volume growth in retail banking and higher net interest income from our cash pooling business and PCM in Wholesale Banking. Turning to Slide 16. Fee growth remained strong, increasing 22% year-on-year. Excluding the EUR 66 million one-off retail banking fees in Germany, fees grew by 17% compared to last year. This was driven by structural factors such as continued customer growth, significantly higher insurance fees and increase in daily banking fees. Investment products also performed really well across several metrics. For example, 9% growth in customers, 16% growth in assets under management, of which roughly half came from net inflows and 22% more trades. Although wholesale banking fees decreased sequentially, wholesale still delivered a strong quarter, supported by solid results in Financial Markets and Corporate Finance. Slide 17 shows the development of all other income. Income in Financial Market is mostly driven by client activity. We continue to support our clients through volatile market conditions, mostly with foreign exchange and interest rate management. Treasury was impacted by lower results from foreign currency hedging. Next, Slide 18. Expenses, excluding regulatory support growth. The decrease is mainly driven by structural savings from previous restructuring and VAT refunds recognized in the fourth quarter. These effects more than compensated for wage inflation and ongoing investments in customer acquisition and product development, including expanding our offering for new customer segment. Regulatory costs include the annual Dutch bank tax, which is always fully recognized in fourth quarter and then allocated across segments. Incidental item related mostly to restructuring provision for planned FTE reductions in corporate staff and retail banking. Once these are fully implemented, these measures are expected to generate approximately EUR 100 million in annualized cost savings. When excluding these incidental items, we ended the year with expense below the outlook range we provided earlier. Now let's move on to risk costs on the next slide. Total risk costs were EUR 365 million in the quarter, equivalent to 20 basis points of average customer lending. This is in line with our through-the-cycle average. Net addition to Stage 3 provision amounts to EUR 389 million, mainly driven by individual Stage 3 provisioning for a number of new and existing funds in the wholesale bank. This was partly offset by releases of existing provision due to repayments, secondary market sales and structural improvements. As a result, the Stage 3 ratio increased slightly. For Stage 1 and Stage 2, we recorded a net release of $24 million, reflecting a partial release of management overlays and updated macroeconomic forecast. Overall, we remain confident in the strength and quality of our loan book. On Slide 20, we show the development of our core Tier 1 ratio, which declined compared to last quarter. Core Tier 1 decreased, reflecting the 1.6 billion distribution that was partly offset by the inclusion of our quarterly net profit. Risk-weighted assets increased by USD 4.5 billion this quarter. Credit risk-weighted assets rose by 1.5 billion, excluding FX impact, driven by volume growth. This was offset by the risk-weighted asset relief from 2 SRT transaction executed in November. Operational risk-weighted asset increased by EUR 2.2 billion, while market risk-weighted asset increased by EUR 0.5 billion. We'll pay a final cash dividend of EUR 0.736 per share on the 24th of April 2026, subject to our Annual General Meeting's approval. Now I hand back to Steven to wrap up today's presentation. Steven van Rijswijk: Yes. Thank you, Tanate. And for the ones who have been here longer with us, this is Tanate's last analyst presentation. We have been knowing each other today for more than 25 years, and we've been in the Board together already for 7 years and more. So thank you very much for working with us all these years. Tanate will still be with us until the AGM of 2025, which will take place in April. But I just want to take the opportunity also here to thank Tanate, also for the friendship, also for the leadership and the sharp mind that you have here with us. And I'll come sure visit you when you're back in Thailand at some point. So prepare for that. Now we move to Q&A, but let me recap the key takeaways from today's presentation. We have delivered another strong quarter end year, successfully executing our strategy, accelerating growth, increasing impact and delivering value. We achieved a record total income for the third consecutive year. We maintained cost discipline and operational efficiency gains, and they more than offset our investments in business growth. And we delivered another strong year of capital generation and returns, enabling continued attractive shareholder distributions. And with our strategy, we remain confident in our ability to stay on track to become the best European bank. And with this confidence, we have upgraded our expectations for the coming years with a very strong outlook for 2026 and a more ambitious but realistic outlook for 2027. And with that, I would like to open the floor for Q&A. Operator, back to you. Operator: [Operator Instructions] We will now take our first question from Benoit Petrarque of Kepler Cheuvreu. All the best. I guess you will not miss the Dutch winter, but in Thailand. Benoit Petrarque: So it's an interesting time to live actually. It's the first quarter I actually see the volume growth benefiting fully the commercial NII as the negative effect of lower interest rates is getting smaller. I was wondering on the guidance of EUR 25 billion total income, what type of assumption do you take on growth? I think you've put somewhere in the slide 5% volume growth. I was wondering if that's the right number, given you are growing actually more than 5%. And also second question is on liability margin assumptions in your more than EUR 25 billion total income. Wondering where you stand on '27 on liability margin. And then maybe on Wholesale Banking, where are you on the risk-weighted assets growth plan for the wholesale? I think you were planning some optimization there. But I do see wholesale growing quite sharply again in the fourth quarter. So where do you see growth in wholesale going forward? Steven van Rijswijk: All right. I'll take -- thanks, Benoit. And yes, Tanate, for sure, will not miss the Dutch winter. Neither would I, by the way, if I would go to Thailand. But in any case, I'm here. If we look -- I will talk about the question about RWA and Wholesale Banking and also -- and then Tanate will talk about the NII and the growth for '26 and '27. So if you look at Wholesale Banking there we have been seeing good lending growth in the second half of this year, and the pipelines are also filled well now. So we want to continue to grow there as well. At the same time, to your point, we did 2 SRTs in November that had an impact of around 12 basis points on our CET1. For '26 and '27, by the way, we want to continue to do these SRTs. So we have just started with our more improvements that we have been making. So the first ones we did at the end of last year. This year, we continue to do SRTs, and we expect that to have an impact -- a positive impact on CET1 of 15 to 20 basis points, so a bit higher than we realized over 2025. Tanate? Tanate Phutrakul: Yes. Thanks, Benoit. I think in terms of the major assumptions we use in terms of giving out outlook, we have assumed 5% balance growth, and you say that, that is potentially conservative given what you see in Q4. I think what Q4 shows us is it gives us more confidence in achieving our target. That would be the first answer. The second one is really what curve did we use in terms of our projection. We use the December curve to do that projection, which is quite constructive in our view. And then the third margins. I think the 3 impacts that you see is really the continued reduction in the short-term replication negative impact on our results, the continued positive accretion because of long-term replication and the effect of deposit rate cuts that happened in 2025 that affects '26 and will continue to be accretive going into '27 as well. Our forecast for liability margin is on the lower end of the 100 to 110 basis points. Benoit Petrarque: This is also for '27? Tanate Phutrakul: I think we don't give that outlook there. But I think if you see the replication on Page 30 that we show, the momentum continues to accrete in '26 and '27. Operator: And we'll now take our next question from Benjamin Goy of Deutsche Bank. Benjamin Goy: My first question is on loans versus deposit growth. So another strong quarter of loan growth in particular, and I think it's the third quarter where your core lending growth has clearly outperformed core deposit growth. Is that something that you need to work on to be more balanced? Or are you happy to increase your loans faster as there are opportunities? And then secondly, on the costs, for the underlying cost guidance, but there has been historically a bit of incidentals every year. Should that now be smaller than in '25 going forward? Or what's best to assume for the incident that come on top of the cost guidance? Steven van Rijswijk: Yes. I think that on the loans versus deposit growth, I mean, if you look at 2025, the loan growth was about 8%. The deposit growth was about 6%, so EUR 57 billion against about EUR 38 billion. We've also seen years where that was the other way around. In the end, you want to balance the balance sheet. So long term, we want to approximately have same growth over a longer period with loans and with deposits. But 1 year can be a bit higher in loans and 1 year can be a bit higher in deposits. I think on both sides of the balance sheet, we see continued good growth with people continuing saving. Also, if you look at the deposit growth projections macroeconomically in the markets in which we are active, we continue to see that. And we do see significant loan growth in the different segments in which we're operating, most notably mortgages. But there, in the end, we want to balance the balance sheet, and we will always work on that. When we talk about the incidentals, yes, look, we will -- we continue to work on our cost discipline as we do. So on the one hand, we want to grow our customers, and we want to grow and diversify the activities in which we are active. And you've seen us doing that. We invest in more specific segmentation in existing retail segments. We have been rolling out business banking, for example, in Germany and Italy. We have been investing in diversifying our capital-light income in wholesale banking and transaction services and in financial markets. At the same time, we have seen since 2023, our FTE over balances decreased with 7%, and we believe we can reach our target that we gave in the Capital Markets Day in '24 of a decrease of 10% earlier than we anticipated what we then said in 2027. So we'll work towards this year. So we will work on both levers. But we always do this in a buy-side thing. So what you've seen, for example, with restructuring costs in 2025, those restructuring costs should deliver us a benefit of EUR 100 million in 2026. And each time that we have a process or area where we can realize better servers, better process optimization, better digitization, better use of Gen AI, then we will announce it because I just want to make sure that front to back, once we announce it, we can execute and we can execute while continuing to grow, and that's how we have been operating for the past 5 years, and we will continue to do so. Operator: And we'll now move on to our next question from Giulia Miotto of Morgan Stanley. Giulia Miotto: Thank you for your patience answering our questions and all the best for the life after ING. But now I have 2 questions, please. So the cost outlook beyond '26, '26 looks quite a bit better. I think it's encouraging to see operating jaws being able to grow the costs much less than the revenues. Should we expect this trend to continue also in 2027? Consensus has got 3% year-on-year growth. I guess, I don't know what we are seeing could suggest something better than that. And then separately, Steven, I wanted to pick your brain on M&A. We have seen some headlines on Romania, but also Spain and Italy have been in focus in your comments, although we don't see much actions. So any comments on what you're thinking strategically on the M&A front? Steven van Rijswijk: All right. On M&A. So look, we show good growth. You see that both in existing activities and also in diversification on the various fronts, both in lending and in fees, by the way, on investment products and insurance. Still, and I've said this before, we've also started with filling in the blanks in countries where we don't have all activities, such as business banking and private banking and certain types of investments in asset management in certain countries. Still, if we can accelerate that growth by means of acquisitions, then we will look at it. You've seen us taking a financial stake in private banking of [indiscernible] last year. In the fourth quarter, we announced buying the majority and thereby in the end 100% of an asset manager in Poland, integrating that asset manager into ING, we bought that from Goldman Sachs, the 55%. And we continue to look. We don't comment on individual markets. Also in Romania, what I can say is that the business is successful. We have been increasing the numbers of customers that we serve. We have been growing, again, also lending deposits and fees. And we have a very strong return on equity there. We consider ourselves one of the most successful, if not most successful bank in that country. But also there, if we can have opportunities to increase scale or add segments that we do not have, we will look at that as in any other market. And then the caveat, it needs to fit. It needs to add to that local scale and diversification, and we want it also to be accretive for shareholders, and that's the construct in which we're working and which we are willing to consider M&A. Tanate, the jaws. Tanate Phutrakul: Yes. I think given the outlook, we have now turned the corner in terms of positive jaw for '26, and we're confident that we'll continue that positive jaw in 2027. If you look at the 3 drivers of our cost growth in '27, the first one is inflation impact, which we expect that the stickiness of inflation impact should moderate in '27 compared to '26. We will continue to invest in our franchise in client acquisition. In fact, if we can do more, we would do more in terms of accelerating our client acquisition. We have some big programs in terms of investment, financial market infrastructure, payment capabilities, investing in segments that we are not currently present, as Steven has mentioned. And if you have seen in our '26 guidance, we upgraded our ambition in terms of cost reduction from 2% to 3%. So that trend is expected to continue into 2027 as well. Giulia Miotto: So I take away that probably growth will be more modest than what is to be expected in '27? Tanate Phutrakul: You can do your analysis, Giulia. We've given our guidance. Steven van Rijswijk: Tanate Didn't even blink when he asked that question. Operator: And we'll now move on to our next question from Tarik El Mejjad of Bank of America. Tarik El Mejjad: Tanate, thanks for the very interesting interactions we had all these many years and good luck for what's to come. Just from my side, 2 quick questions, please. With a follow-up one on the liability margins more in 2027. I mean just trying to back solve a bit what market expects, assuming asset margin are quite stable or growing a bit the volumes, we can put your assumptions with even some extra buffers and replicate portfolio, we kind of understand now how it works and so on. It's just the -- in my view, is it fair really to think that the gap between -- I mean the downside potential risk is for the market expect consensus is too optimistic, perhaps, assumptions of rate cuts or no rate raise in the core saving deposits in '27? Because if you use the forward curve as of December, clearly, you would also take a view on what's your ability to navigate the core savings deposits in Netherlands and other markets. And the second question is on costs is more really to want to understand how you think about the investments because, I mean, you have some headroom now created on the revenue side, higher growth and very comfortable to reach your targets. And then on the cost, the pressure from salary negotiation should come down with inflation. So that extra headroom, I want to understand how you think about the next 2 years in terms of investments in AI and tech. I mean, yes, you have the machine learning and with the compliance aspect, the Gen AI that you've already started to roll out with some early benefits we see. But what about the next step in AI and tech? And how much of more investments needed to deliver your ambition on that front? Steven van Rijswijk: Let me take the question, Tarik, on AI and then Tanate will talk about the margins. Look, I mean, we do clearly see benefits of AI coming through. I mean we have been working with AI already for a decade and then with Gen AI, we work with that in the last couple of years. But there, you see both on, let's say, the -- on the client side and on the operational leverage side benefits coming through. And let me give you a few examples. If you look at [ PI ] onboarding, the STP increased last year from 66% to 79%. So that means that close to 90% of our private individual clients were onboarding through STP. We do end-to-end [indiscernible] delivery. We increased that approvals with 11% last year. So the time to [indiscernible], therefore, improved. We do about 60 million in customer lending without manual intervention. So you see a number of customer benefits coming through. When we talk specifically about GenAI and also in chatbot, we have better scores, CSAT scores, which are sort of satisfaction scores for our customers. So we do see benefits coming through for GenAI, both on the revenue side, doing more with our customers and having more satisfied customers and on the operational leverage. We do that in 5 areas at current. So we took the 5 big wins that we see starting with contact centers, in IT, coding, in lending, in personalized marketing and in KYC. So those are the big areas. We do these benefits, we see them coming through. Every quarter, you see announcement, you've seen announcements whereby we say, okay, what impact does it have on our staff, what impact does it have on our operations? And you see it also coming through in FTE over balances. And we're actually quite optimistic on the impact it will have on our operational leverage going forward for '26 and also in 2027. And we will make announcements as we move along and when we can say this is now the next step that we will take, including, of course, good reskilling of our staff and making sure we can grow and continue to grow our franchise sustainably. Tanate Phutrakul: And Tarik, to your second question, I think we also see based on the December curve that the accretion and replication in '26 going to '27 and '28 are quite strong. The real debate is what -- how do you balance that additional revenue in terms of margins and in terms of mix, right? And what we see is that we are looking at the dynamics of maintaining growth in customer growth in volumes and making sure that we take into account the level of competition we see in the market. And if you look pre negative rates environment, ING operated on a liability margin of around 90 to 100 basis points. We have updated our guidance to 100 to 110. And we think we're comfortable with that rate given the balanced dynamics of growth, competition and to be remaining competitive while at the same time, being accretive to our shareholders. Tarik El Mejjad: I mean I don't want to put words in your mouth, but basically, to deliver on the consensus or market numbers means that market has to be much more bullish on the volume growth and lending and probably be less positive on the margin side. But I'm just trying to reconcile a bit what your guidance outlook, which is very helpful versus where market is positioned. Operator: And we'll now take our next question from Delphine Lee of JPMorgan. Delphine Lee: Also I want to take the opportunity to send my best wishes to Nate, thank you for everything. So my 2 questions. First of all, sorry, I just want to follow up on Tarik and other questions around NII. But -- so if we look at your guidance for 2026, which implies about EUR 600 million increases for liability margins. But if you look at the repricing actions that you've done in '25, I mean, the impact on '26 is already EUR 700 million. And then on top of that, you have some small benefits from -- well, your replicating income as well on '26 more, but like still. So I'm just kind of wondering like what is your current assumption and in terms of the deposit cost and deposit pass-through from 42% in Q4? And if you could just sort of elaborate a little bit on what are you seeing on competition on deposits at the moment? What do you expect for '26 and onwards? My second question is on cost. So you've done a good job of trying to kind of contain a little bit of inflation with the savings. I'm just trying -- just trying to understand a little bit if 2%, 3% is really kind of like the run rate that we should expect like even beyond '27. Is that something that you're trying to achieve in the long run? Yes, just trying to understand a little bit the moving parts of that cost number, you've provided this for '26, but even beyond that, like what are the savings? You've mentioned a couple of benefits from FTE reductions, but just kind of trying to quantify a little bit what else can we expect in the long run? Steven van Rijswijk: All right. Thank you very much. I think that on the costs, you see the effects of our digitalization and scalability now really seeing take shape. And we saw that now also in the fourth quarter, but also I'm pointing again at FTE over balances. You also now see that when we look at 2026 about the operational leverage and efficiencies that we have compared to the increase in investments. So the operational efficiencies are higher, and that's where we want to be. We want to make sure that when we make additional investments, we can have operational leverage that is higher than that. So that's maybe a little bit of direction to give you or guidance to give you in terms of where we want to end up. And indeed, therefore, you will see in '26 and '27 improved cost to income to what we have been showing and positive jaws territory that we have now been gotten into and I want to stay in that territory. And at the same time, we continue to want to grow our investments where we can grow our clients for long-term clients and shareholder benefit. But that's a bit of guidance towards the cost. Then Tanate, on the deposit cost of margins? Tanate Phutrakul: I think we gave a bit of detail on Page 20 of our presentation showing the movements in terms of commercial NII. I think the lending NII is driven by basically stable margin and approximately 5% loan growth. And similarly, for liability NII, we also assume 5% liability growth. Of that EUR 600 million we show, part of it is due to volume, about half. The other half is through the improvement in margins. As you say, the replication is getting better, but there's some short-term impact that still need to feed through our numbers and the EUR 700 million is factored into that guidance. Operator: And we'll now take our next question from Namita Samtani of Barclays. Namita Samtani: The first question I have is on German retail. There's quite a lot of cost growth in 2025 there. I think it's around 11% year-on-year, and it's a lot higher than other regions. So I wondered what are you exactly spending on in Germany? And is this defensive spend given the new players entering the market? And then I think about your liability margin, which is, of course, at group level, but are you telling us that we're at peak earnings for Germany in retail given high expense spend and [indiscernible] spend to gather deposits? And my second question, based on your updated '27 targets today, the cost to income implied in '27 is maybe 51%, 52%. It's hardly a standout amongst European banks, even ABN is now going to below 55%. I just wondered, given the digital model ING has or aspires to have and the use of AI, what's holding the group back from delivering a better cost to income target? Steven van Rijswijk: Yes. Thank you very much. On the cost to income side, our main opportunity is to grow our revenues, our revenues over our client balances, our diversification in Wholesale Banking, our revenues over RWA and as a result, but that's then a consequence of it also that will have a positive impact on our cost to income. But what we need to do, that's why our strategy is called Grow the Difference is grow our revenues because that's where we can make the biggest difference in further improving our returns and then indirectly also our cost to income. And so the digital model has brought us a lot in terms of presence in markets, but that's why we're talking about doing new activities in these markets or doing more with customers in these markets because that is the next step in our evolution, what we're currently doing. Tanate? Tanate Phutrakul: Yes. The German cost/income ratio is a robust one despite the increase in investments that we make in Germany. One thing that you have to remember is that the client growth that we have, 1 million customer per year, a very significant portion comes from Germany, which is our main market. So that's why the investments in client acquisition, in creating new products, creating new segments is very strong in Germany. very, very much like the rest of ING seeing a turnaround in terms of the momentum in terms of revenue and cost in Germany. And we do expect that the positive jaw will return to Germany in 2026, while continuing to invest in our franchise, both in terms of the fundamental platforms as well as client acquisition. Operator: And we'll now take our next question from Cyril Toutounji of BNP Paribas. Cyril Toutounji: So I've got 2. One on lending margin. So we had an improvement this quarter, which is welcome and I think pretty good news. And you're saying it's due to mortgages. I'm just curious in which market has happened? And if you can give us more indication whether this can continue maybe a bit? And the second one would be on deposit campaigns. Can you update us on the ongoing campaigns right now? And I don't know if you can give this indication as well, but should we expect more or less campaigns versus the 2025 run rate? Steven van Rijswijk: Yes. Thank you, Cyril. I'll take the question on deposit campaigns and Tanate talks about the lending margin. So yes, about the deposit campaigns, look, we have these campaigns regularly. We had them also in the fourth quarter with Black Friday in some markets or in Germany, as they call it Black Friday. So we will continue these campaigns, and we typically see that there's a good response in getting either new money from existing clients or getting new clients in. And then typically, we see that we get money to stick to around 2/3 of the money that after campaigns will stick with ING and therefore, we can gain new primary customers and increase our deposit levels. So for us, that works well. And what we work on every time is we make them more bespoke to certain customer segments and we make them more data-driven, so we can target them more and more. So we are very happy with the approach we've taken. We are confident about what we are doing, and we will keep on having these campaigns and we make them more bespoke about a year. Tanate, about the margins? Tanate Phutrakul: Yes, So I think we are also pleased to see that we have stabilized our lending margin and that it's improved by 1 basis point. And to your specific questions on mortgage margin, it's been stable or increasing across the board. I think some of the markets where the new production margins are improving is in Belgium, increasing in Germany, increasing in Italy and Spain. So it's quite widespread in terms of margin improvement, but we do see a bit of pressure in terms of new production margin in the Netherlands. Operator: We'll now take our next question from Johan Ekblom of UBS. Johan Ekblom: Thank you for everything, Tanate, and best of luck. Just most questions have been answered. But at the Capital Markets Day, we spoke a lot about the business banking opportunities, and I guess, in particular, in Germany. How should we, from the outside, try and measure your success there? Because it's very difficult to track where you are in terms of the rollout and I guess also when you are expecting to see volumes start to come through in a more meaningful way. So any update on kind of how the business banking rollout in Germany is going would be much appreciated. Steven van Rijswijk: Yes. Thank you very much, Johan. Indeed, business banking is one of the levers that we pull to diversify. To give you a few data points, we -- the third largest growth we had in business banking customers in terms of number of customers this year was Germany. So that already shows you that we're starting to grow quite well in Germany. It starts from a very small base, obviously, because we started from virtually 0. So that's one. Two, we also get very good deposits in from our business banking customers in Germany, so also there. So increasingly, that will become more sizable. But compared to our business banking franchises in the Netherlands and Belgium, for example, of course, it is very minimal because we have EUR 114 billion business banking lending book. And in Germany, we're just starting. So that will take time. But it is almost like you saw with the insurance fees there you see in the fee income line, as an example, it was not even a separate fee line. And there you see step by step by step, it's almost like a snowball. We do more and more and more. And at some point, it will become a sizable business, and that's also what we see happening in business banking in Germany. Operator: And we'll take our next question from Shrey Srivastava of Citi. Shrey Srivastava: Thank you, Tanate, for answering all the questions over the previous quarters. I just want to look more top down because obviously, following on from previous questions, we've talked about the upside on the replicating income versus your guided liability margin still at 100 to 110 basis points. A, is your sort of 5% volume growth guidance predicated on further deposit campaigns to get you within this 100 to 110 basis points? Or is any sort of upside to volume growth from that incremental to the 5%? And secondly, what are sort of the hurdle rates you have in mind when thinking about going forward with a new deposit campaign? Because obviously, as you've heard sort of many of us to get from the assumptions we have when plugging your replicating income into the model to the liability margin of 110 basis points would require some sort of pretty significant deposit campaigns. So what are some of the things you think about when deciding to give up that short-term upside for sort of longer-term growth? Steven van Rijswijk: All right. Tanate, can you give the elements of our replication income or lease liability margin again? Tanate Phutrakul: Yes. I think the 5% deposit growth, I think it's a good base number, right? And I think you look in the context of 2025, where the growth is around 5%. So that trend line, we expect to continue despite competition, despite quantitative tightening. So I think it's a good number to assume 5% growth. Does campaign play a big role in that? It continues to be the case, right, that we have campaigns in many markets we operate in. We continue to use that as a tool, but we also get additional flows coming into the bank all the time. And what I look at really is the growth in our primary customer, the intensity of which we have a relationship with our customer is there. And I think looking at the replication, it's still the 3 moving parts, right? It's really the impact of the short-term replication still having a tail impact is continued accretion of long-term replication coming through and the actions that we would take in terms of rate increases or decreases over time. And I think we like to reiterate that we don't give guidance for '27 in terms of liability margin, but we expect it to operate in '26 at the lower end of the 100 to 110, and we're comfortable that we can achieve our target with that guidance. Operator: And we'll take our next question from [ Seamus Murphy ] of [indiscernible] Seamus Murphy: Sorry, I'm coming back again to a lot of the questions that have been asked in one sense just in terms of the guidance. So I suppose you've guided 16 to -- sorry, EUR 16.3 billion to EUR 16.5 billion for commercial NII in 2026. But in Q4, it was [ EUR 3.928 ] billion. So that suggests an exit rate of just over EUR 4 billion into Q1 2026. That's already in the bag. And if I annualize that, I'm kind of getting EUR 16.2 billion at the start of the year, just before anything else happens and the upper end of your guidance, therefore, only needs 2% growth to achieve the 16.5%. And obviously, we have -- so I suppose question one, is there anything wrong with the math as you start the year that you have kind of EUR 16.2 billion of NII heading into the -- sorry, EUR 16.2 billion into this year at the start? And the second question then is, obviously, we have growth, so there's only limited growth needed. But the second question then is, you mentioned earlier on the call that the long end of the replication portfolio is a positive further into '26 and '27. Two things have happened. Your current account balances have grown EUR 5 billion, I think, to [ EUR 175 billion ] now. And secondly is that, obviously, the curve has deepened. So it would be super useful if you could tell us how much the long end of the replication portfolio will contribute in '26 and '27. And the last question, I asked this also on the Q3 call because it's becoming more and more important for banks, I think, is that do you expect FTEs to fall as we look into '27 and '28 at the group level? Steven van Rijswijk: Thanks, Seamus, for your questions. Well, we do expect FTE over balances to fall. So this is about, of course, a continuous focus on growth and then on a marginal basis, doing that with less marginal cost. And that's why we use the metric FTE over balances, whereby we continuously accept -- sorry, see an improvement or expect an improvement based on our digitalization and AI and GenAI and better process management as we have been doing over the past years. And that trend we see continuing. At the same time, we want to grow because we need to diversify and grow our revenues over our balances and our RWA. But from an FTE over balancing perspective, we should see further improvements. Tanate, how does it work with that? Tanate Phutrakul: Yes, Seamus, we will see each other in London, so we can go into a bit more detail. But I think it's a dangerous game to take Q4 and then extrapolating it. But I think if I look at full year to full year, the impact is over EUR 1 billion, right? That's a 7% growth in net interest income, which I think is a strong number and strong guidance. And I also -- we don't give replicated income in such details of how much the long end would contribute, except that we have disclosed in our presentation that 55% of our replication is long dated. And I also noted the fact that the drive of our primary customer is driving increasing current account and that increasing current account means better margin. So we do recognize that. Operator: [Operator Instructions] And we'll now move on to our next question from Anke Reingen of RBC. Anke Reingen: But firstly, thank you very much, Tanate,and all the best. And then to questions. So firstly, can you just talk a bit about your expectation on lending volume growth in 2026? I guess the 5% applies here as well, but I suppose, Q3, Q4, you've seen very strong growth. So where do you see sort of like the mix falling into 2026? I mean I hear your margin comment, but maybe just more a bit in terms of the mix. And then you commented earlier on about the SRTs of 15 basis points benefit. Can you just clarify, is that per year? Or is that over the 2 years, '26 and '27... Steven van Rijswijk: Thank you very much, Anke, for your questions. If you look at the SRTs, the impact in '25 was 12 basis points and that impact remains there. So once we have taken, let's say, the first loss piece of our balance sheet, it will remain [indiscernible] of our balance sheet. But in '26, we're going to do an additional number of SRTs that should benefit an additional 15 to 20 basis points on our CET1. And we, of course, will then also continue for '27 and thereafter. But on those years, we haven't yet given guidance. When we talk about lending growth, we see good growth across the board, like you've seen in the third and the fourth quarter that both in and mortgages and in Business Banking and Wholesale Banking, we continue to see good growth. The pipelines are good. Clearly, especially with the underlying macro drivers, there is shortage of housing in many of the markets in which we operate, in this case in the Netherlands, that is the case in Belgium, that is in Germany. That is the case in Spain. We are -- we have a total mortgage book of EUR 370 billion. So we are a top 3 mortgage provider in the region in Europe. And in many of the markets in which we are active, we see there are good macroeconomic fundamentals to continue that growth, low unemployment levels, good salary increase over the past couple of years, shortage of housing, lower number of people in individual households, so an increase in the number of households and those fundamentals continue to be there. And that's why that is going to be a significant driver of the loan growth in 2026 and '27. Operator: And we'll now take our next question from Matthew Clark of Mediobanca. Jonathan Matthew Clark: So firstly, coming back to this EUR 25 billion target for 2027 revenues or greater than EUR 25 billion. I mean, are you trying to talk down consensus there, which is EUR 25.8 billion, I think? Or do you think that's still consistent with the greater than component of that target? So I just want to understand your thinking for framing that target that way against the context of a higher consensus? And then secondly, on wholesale lending, why is now the right time for you to be putting your foot down on wholesale lending? What's changed in terms of risk reward, et cetera? And I guess asking that in the context of an uptick in credit losses on wholesale this quarter. Steven van Rijswijk: Yes. Thank you very much. Well, let me put it this way for 2027. So we said that the revenues are larger than EUR 25 billion. So we are confident about our growth, and we're also confident about '27. So don't forget the larger then sign in EUR 25 billion for '27, but yes, that's where we currently are. And we're very comfortable with that level. When you talk about Wholesale Bank lending, well, look, we had slow quarters in the first half of 2025, and then it picked up very well in the second half of the year. In the end, what we want to realize in Wholesale Banking is higher revenues over RWA and a higher return over RWA. And in that regard, we have been investing and we are continuing to invest in Transaction Services and Financial Markets. That will help us to drive the diversification in Wholesale Banking and do more with our customers next to lending, but lending, of course, is also good. And secondly, we're attacking, let's say, our capital there. Our capital was about 50-50 in '24. Now we said for '27, we had a target of 55% in retail and then 45% in Wholesale Banking. It's already at 54% for retail and 46% for Wholesale Banking. So we're on a good path quicker than we initially anticipated. And that's why we continue also to work on the SRTs to make sure that also on the capital side in Wholesale Banking, we can do more with less capital to help with return going up. So it's not a particular focus on lending alone. In the end, we're focused on return. Operator: And we'll now take our next question from Farquhar Murray of Autonomous. Farquhar Murray: Obviously, congratulations, Tanate and best wishes for the future. Coming back to the day job though for now, 2 questions, if I may. Firstly, please, can you reconcile the indication of EUR 0.4 billion of hedging tailwinds into '26 of 4Q with kind of flat replicating income on a year-on-year basis on Slide 29. Is that simply a matter of how things came through in the quarters? And perhaps can you just flesh that out through '25 and into '26? And also, is there a quarterly pattern to that hedging impact and also maybe the short-term effects you mentioned earlier? And then secondly, if we look last year, lending outpaced deposits, if we look at the 8% versus the 5% I know you said the kind of planning assumption as a kind of balanced 5%, but what's your general sense about where customer demand is at present? Steven van Rijswijk: I think that -- so on the customer demand at present, I mean, we -- actually, we do see continued good mortgage growth, again, because we see the macroeconomic elements that we saw in there, we see them continuing. And therefore, if you look at the number of houses being sold last year in a number of our main markets in the Netherlands, Belgium and Germany, they all have increased. And also, we see increases in a number of these housing markets to continue in 2026 and '27. So again, we're very positive towards that end. I think in business banking, we have also been improving our processes, and therefore, we've made it easier for our customers to borrow with us. So I think there, it's also an improvement of capabilities that we have had and by the way, rolling out business banking step by step by step in Germany, Italy and potentially also in other markets that we're looking at. We've spoken about Spain before. And then in Wholesale Banking, it's always more lumpy, funny enough, whereby you do see geopolitical uncertainty on the one hand and the PMI index being relatively low, we've seen sort of a catch-up demand of Wholesale Banking lending in the third and fourth quarter. The pipeline is still good. Yes, probably that Wholesale Banking in that sense is always a bit more choppy in terms of growth than the other elements. But the main consistent element in the lending growth sits in the mortgage side. Then on the hedging tailwinds, there, I want to give the floor to Tanate. Tanate Phutrakul: Thank you very much, Farquhar. I think what we see is that if you look at our quarterly commercial NII, it reached a trough in Q2, improved from EUR 3.7 billion to EUR 3.8 billion and from EUR 3.8 billion to EUR 3.9 billion during the course. So you already see signs of that replication impact. I think what the EUR 400 million refers to is the fact that the short end pressure that we see is decreasing. We see the fact that in Q4, we also have the benefit of the rate cuts already materializing into the numbers and that 55% of the long end is already positive. So it's a combination of all these 3 factors that drives the EUR 400 million tailwind. Operator: And we'll now take our next question from Chris Hallam of Goldman Sachs International. Chris Hallam: I just have one question left. And obviously, good luck, Tanate. I'm sure you're going to miss all these questions on replicating income and liability margins when you're relaxing in Thailand. But just on this question on the corporate side, you talked about increasing levels of working capital lending and lower deposits. Are those 2 points linked, i.e., are corporate customers building up working capital and therefore, draining their cash balances in anticipation of higher activity later in the year? And if so, how long should that working capital cycle last for? And would we notice any impact on NII through this year as and when it reverses, either on the lending margin or on the liability margin? Steven van Rijswijk: Yes. Thanks, Chris. And yes, Tanate will miss those questions. But luckily, we have Ida Lerner, our new CFO, and she already told me yesterday, said she's really looking forward to all these questions. So next quarter, you can expect her to answer these. On the working capital side, yes, I mean, on the wholesale side, you saw that EUR 10.3 billion lending and working capital solutions growth. So part was indeed working capital solutions. That had to do with a couple of large deals, very large companies doing very large deals, and we were leading those deals. So that doesn't necessarily have a link with each other that those are, let's say, seasonal swings that sometimes you have and sometimes you don't have. Clearly, those working capital solutions deals because they are typically short term and self-liquidating or collateralized or they have a borrowing base behind it. They have lower margins. But we have many of these. And so that doesn't have a particular big impact on the lending margin. When we talk about the cash pooling business, that's the pooling both in our payments and cash management and the notional pooling business, typically, clients at the end of the year, they will consolidate their positions and net them off. And because they net them off, they net them off in our accounts, and therefore, you see a lower amount coming in there. So a seasonal pattern. Operator: There are no further questions in queue. I will now hand it back to Steven Van Rijswijk for closing remarks. Steven van Rijswijk: Yes. Thank you very much. I think we can -- we are very proud of our 2025 numbers and also very confident about '26 and '27, hence, the improved and heightened outlook. And I want to thank you for all your questions and observations today, and again, Tanate, for the fantastic collaboration, and you are a great friend and a great colleague. Thanks very much, everybody, and I hope you have a great Thursday. Operator: Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.
Francoise Dixon: And welcome to the Mach7 Q2 FY '26 Results Briefing. My name is Francoise Dixon, and I'm Head of Investor Relations for Mach7. Today, our CEO, Teri Thomas; and our CFO, Daniel Lee, will provide an overview of our Q2 FY '26 results. We will then open it up for questions. If you have a question, please submit it by the Q&A text box at the bottom of the screen. I'll now hand over to Teri. Teri Thomas: Thank you, Francoise. All right. Before I speak about the quarter, I want to briefly ground everyone in who we are and what we do, particularly for those who are newer to Mach7. So we complete the patient's picture with the patient's pictures. We get the right medical images to the right people in the right places at the right time. We do it fast and with diagnostic quality. We operate in a growing and important industry. And in my frequent conversations with our customers, I'm reminded regularly just how mission-critical our work is. While the health care industry has seen pretty solid progress organizing text-based clinical data over the years, imaging data, which goes far beyond x-rays, remains quite fragmented. Many types of images are locked in proprietary systems spread across multiple departments, stored in lots of different formats, and that causes fragmentation. That fragmentation represents opportunity and this opportunity Mach7 is well positioned to address. So our ambition is for Mach7 to become the world's imaging EMR. That ambition, big, it underpins our strategy of moving from archive to architecture, connecting imaging across the enterprise and enabling AI, improving interoperability with EMRs like Epic and Cerner and closing the gaps that still well exist to create comprehensive and unified patient records. Now turning to what you all are looking for the quarter. So today, Mach7 is providing a business update and quarterly cash flow report for the quarter ending 31 December 2025, our 4C. The quarter reflects continued and deliberate execution of the reset we outlined last quarter, sharpening our strategy, strengthening discipline and aligning the organization for sustainable and profitable growth. The quarter marked an inflection point, the strategy that we designed in September and October, and we announced on Halloween is now in motion. This is no longer about planning. It is about execution. The reset has been comprehensive. We've taken a top-to-bottom look at our structure, our processes, our technology, our commercial model, our culture, and we've brought this together into a dynamic operating model that links strategy, execution and accountability. This is hard work. As part of that work, we are taking a disciplined look across our customers, partners and contracts to ensure they support long-term profitability and strategic alignment. That includes being more selective about who we work with and in some cases, stepping back from low revenue relationships that create competitive conflicts or long-term risk to our growth and profitability. The outcome with the VHA, it was disappointing, but it also allows us to focus our resources on opportunities that better align with our core platform, our operating model and path to sustainable profitability. The VHA program required a level of custom development and service intensity that would have continued to weigh on margins over time. Now not all of these changes show up immediately in the numbers, but the foundations are now in place. We are building a performance-driven culture that values top talent, measurable outcomes and disciplined execution while balancing innovation with rigorous cost management and a respect for shareholder capital. So with that context, I'm going to hand it over to Dan, our CFO, to walk you through the financials for the quarter. Dan? Daniel Lee: Thanks, Teri. Looking at our financials for a moment, the second quarter reflects continued execution against the reset strategy that we did outline last quarter with improving discipline and operating performance. Our annual recurring revenue run rate was stable at $23 million on a constant currency basis, reflecting the underlying resiliency of our subscription and maintenance revenues. Our contracted annual recurring revenue or total CARR, closed at $26.1 million, representing a net reduction of $2.9 million over the quarter. This was primarily driven by the removal of the NTP project from our CARR backlog, partially offset by net new CARR sales. Sales orders totaled $6.8 million in the second quarter, including $3.1 million of new sales, reflecting industry confidence in Mach7's value proposition and the effectiveness of our strategy to date. Operating cash flows improved significantly over the prior quarter. Cash receipts from customers were $7.9 million, reflecting a catch-up of the majority of timing-related renewals and invoices that were delayed into Q1 and driving positive operating cash flow for Q2. On the cost side, total payments were $7.9 million, down 9% compared to the same quarter last year and 6% lower than the first quarter, reflecting the benefits of our efficiency and cost reduction initiatives. Advertising and marketing spend was $0.4 million, consistent with the prior year and higher than Q1 due to targeted investment in our primary marketing and lead generation event, RSNA. All other expense categories were on par or lower compared to both the prior quarter and prior year. We ended the quarter with $18.5 million in cash and 0 debt, maintaining a strong balance sheet that positions us well to continue executing on our strategy. Overall, the fundamentals remain very sound, and we continue to operate efficiently as we move into the second half. With that, I will hand it back to you, Teri. Teri Thomas: Thank you very much, Dan. All right. I'll now share a little bit more progress about the progress we're making on executing on our strategy. So first of all, commercial transformation, a big focus for me. It is well underway. During the quarter, we continued simplifying how we operate and lowering our cost base while selectively investing in areas that directly support commercial momentum and customer outcomes. Our primary focus has been strengthening our commercial engine. Today, our sales organization has grown, is more focused and is better supported than when I began 6 months ago with clear ownership across new customer acquisition, expansions, partners and services. We have reenergized the sales and marketing model, and we're strengthening our partner engagement through a more proactive and structured approach, including expanded partnerships with AWS, Dell and Ingram. Our new commercial leadership team is currently with me in California, translating strategy into execution plans across pipeline quality, revenue discipline, partner leverage and demand generation. Now RSNA 2025 was an important commercial activity for us. We showcased our move from archive to architecture with the launch of Flamingo, and we generated some high-quality sales leads through a more customer-grounded marketing approach, and we deepened engagement with more than a dozen partners, an increasingly important growth lever for us. We celebrated a significant product and commercial milestone this quarter with our first Flamingo architecture customer in Q2 fiscal year '26. This was our first contract for the new product and our first brand-new direct customer relationship since July 2023. It is an important signal that our refreshed commercial engine has begun executing. Expanding our commercial opportunities, Flamingo is modular by design, allowing customers to adopt capabilities incrementally, whether for existing Mach7 customers or those entirely new to us. It can be deployed alongside our VNA, our eUnity Viewer with both or independently. And over time, we will continue to expand the capabilities under the Flamingo's wings, strengthening clinical impact, AI integration, EMR connectivity and delivering seamless imaging access to complete the patient's record. While this extends beyond the quarter, January has been busy, and it represents a solid continuation of our execution. We achieved a key regulatory milestone with the eUnity Viewer receiving a new CE certificate under the EU medical device regulations, supporting continued access to European and critical Middle Eastern markets. We initiated platform expansion in Malaysia by hiring a developer, including also an experienced API integration developer, who is now fully onboarded and leading our first development work from that region. Development is underway supporting our global customer base and strengthening Flamingo's integration capabilities. We've established an intern program in both North America and Malaysia for access to fresh graduates with fresh ideas. These new staff are part of a deliberate expansion of our Asia-based team with plans to continue scaling as execution progresses. Operating discipline does remain a core focus. As Dan outlined, the organizational reshaping completed during the quarter delivered cost savings from reductions in IT, operating costs and infrastructure changes, also licensing optimization and contract renegotiations. We're moving and shaking things in a good way. Execution quality with customers also improving. Early gains in eUnity Viewer KLAS scores reflect the initial benefits of our flight crew customer engagement operating model and a renewed focus on accountability, responsiveness and consistency. This remains a top priority area as we continue to refine our model and raise that bar on the customers' experience. As we continue to shift from strategy definition into execution, leadership alignment continues to evolve. We've commenced a search for an experienced Chief Technology Officer following the departure of the Chief Innovation Officer in January. This reflects our focus on strengthening our engineering leadership, delivery of technology, platform scalability and execution excellence. We are also recruiting additional sales staff across Asia and North America to support expected demand from our expanded marketing activity, but we are doing this selectively and in alignment with demand. Looking ahead, Mach7 enters the second half of FY '26 with a clearer strategy, stronger operational foundations and improving commercial momentum. We remain focused on disciplined cost management while selectively investing in growth critical capabilities across sales, product development and platform scalability. As we shift away from the high effort Veterans Health Administration Teleradiology program, we're increasing our emphasis on capital deals in Asia and the Middle East. Over the past 2 weeks, I visited 4 customers across these regions, including one of our largest customers and was encouraged by the innovation we are seeing with Mach7 in production overseas. A parallel focus is continuing to build our transformed commercial engine. Expanded marketing initiatives are in planning and officially launched in February. The industry will see us showing up differently, and we intend to get more visibility with our target customer types. Now I'd like you to know, we are expanding our marketing capability in a disciplined way. Rather than materially increasing spend, we're partnering with an external marketing provider that brings stronger tools, deeper capabilities and greater scale. And this allows us to significantly expand our marketing output as well as our market presence and branding while keeping our investment essentially flat. The same approach applies to how we're expanding our development capability. By hiring developers in Malaysia, we can bring on 3 to 4 engineers for the market cost of 1 in the United States. Paired with our deeply knowledgeable engineering team on the ground in Malaysia, this approach allows us to expand our innovation capacity and accelerate the development of Flamingo as well as other innovations without a matching increase in our development cost base. While our industry sales cycles of 1 to 2 years means it will take time for these initiatives to produce the expected growth in revenue, we are digging in and we are doing the hard work with urgency and with focus, emphasizing not just growth of pipeline, but improved sales conversion rates. We expect Flamingo-related opportunities to begin contributing more meaningful to our ARR in the second half of fiscal year '26 and into fiscal year '27. I will provide further updates at our half year results, including additional insight into execution progress as we continue to build and gather momentum. Before I close, I want to thank our Board for their guidance and support, our employees for embracing change with energy and optimism and our shareholders for your patience and your continued belief in the company. And now time for questions. Francoise Dixon: Thanks, Teri. We have received several questions via the live chat, and I'll commence with the first one from Max. He asks, in dollar terms, what was the contribution to sales orders from renewals and separately, add-on and expansions? Teri Thomas: [indiscernible]. Go Dan. Daniel Lee: I'm happy to take that one. Thanks Teri. Thanks, Max, for that question. Renewals represented around 40% of our sales orders for the quarter. In dollar terms, that was $2.9 million. And add-ons and expansions were just over $0.9 million or 14% of total sales orders. Francoise Dixon: Thanks, Dan. Our next question comes from Andrew Stewart. I noted the comment of improvement in KLAS. Where do we sit at the moment? Teri Thomas: The best-in-KLAS results come out on February 4. And so I cannot tell you it's a few days away what they're going to look like. I do look regularly at KLAS myself as well as several of our other team members, and we put it on our corporate vital signs dashboards. Our eUnity numbers have been improving and looking great. They were tops, they went down. They're coming back up. Our VNA isn't where I wanted to be quite yet. Even this morning, I got a very nice positive comment from one of our VNA customers. So the positive comments are starting to trickle in. However, it's going to take a while before we work through some of the comments that brought our score down over time. So we're targeting the VNA. KLAS is a little challenging because it is a lagging indicator. So I see the VNA not where we want it to be yet, but we're systematically going through our customer base to engage with them in a different way than we've done before. We're executing a systematic engagement and assessment process, which will take several more months for us to complete. With the KLAS reporting lag, we expect it will take up to a year to see the benefits come through fully. So while we've had some fantastic early comments and feedback, including the comments KLAS publishes, but also the direct engagement and feedback from the KLAS staff themselves. And in fact, by the way, I'm going to share one of the most recent comments, they said they are very pleased with the results of our restructure. They love having a cockpit of people, and they're finding those people to be responsive and knowledgeable. The last part of the comment, I feel extremely confident in their ability to fix problems, which I would not have said a year ago. That's the profile I want to see from all of our KLAS comments, but it will take a while for KLAS to get a hold of those people and also for us to orient those customers to the changes underway. Francoise Dixon: Thanks, Teri. We have another question from Max who asks, can you expand on how some of these low revenue relationships were creating competitive conflicts? Teri Thomas: Yes. I'm not sure I'm comfortable sharing the actual names of the companies as that could create some legal risks. Therefore, I'm not going to name any names. However, when we acquired eUnity, some of the eUnity customers had a competing VNA and used our viewer. And that's a delicate situation. Do you want to enable a competitor to better compete with you with your own technology? So we've gone through and prioritized our partnerships, and we've looked at them carefully based on how much revenue they currently bring in, but also how strategically are they aligned with our growth expectations and the quality of the relationships. And there are a small number of those relationships that essentially cost more to maintain than they bring in for revenue and also carry some business probably not best practices. So we are doing a little bit of cleaning up the closets. Francoise Dixon: Thanks, Teri. We have another question from Max. What have you learned from customers around mission criticality? Teri Thomas: Now I've been in health care technology since 1989, and I'm a nurse. And so I understand the pain if a customer goes down or if the system isn't responsive. However, one thing I've learned is that I need the whole team to feel that pain, not just the flight crew, not just the support person. So one of the biggest things I've learned is how incredibly important it is to make sure that our staff really fully understand the impact on patients' lives and clinicians who are just trying to do their best work if our software isn't performing. And in fact, even this morning, I had a call with our team about a customer, and I said, forget the flow charts. If a customer is in trouble, you all get on the phone with them together right away. And if it means a developer is on, a developer is on. So it's creating that strong understanding across all of the roles and living our culture code, which starts with customers drive all of our decisions. So as a leader, I regularly prompt and ask the question, how would this answer feel to the customer? What does this mean to the customer? And what is the impact to the customer and training our company to think about that, not just in the customer-facing part of the business, but also product management, development and even the simple thing that we executed in our strategy, which is having someone answer the phones. Francoise Dixon: Thanks, Teri. Our next question comes from Darren who asked, if you could only focus on one weakness at Mark7 as a business right now, what would it be? And how would Mark7 fix it? Teri Thomas: That's a tough one. I do regularly sit back and think what is the most important thing for us to do. And I actually have a meeting next week to get alignment on big hairy audacious goals for the quarter because I do believe that can be an effective approach to rally our customers or rally our staff around our customers. That's actually the theme of what we're talking about. So I think what -- that last question is actually the answer to this next question. I think somehow Mach7 over time did a good job with taking care of its staff, organizing the business, but stepped away from that deep understanding of the customers' world, and we need to build that back. So in a great intentioned way, let's protect developer time, for example, developers stopped engaging with customers. They started operating on specifications that might have come from a customer to a support person to a product person to a development ops person to a developer. And it's a little bit like the phone game. You actually need to get people on the phone talking directly to be effective and not only do better quality development, but also it teaches people to really care. And it's a different level of caring when you talk to the customer than you're writing to a spec. So if I would say biggest weakness, that's the one we are attacking most heavily that I think will have the most profound impact on the work that we do as a company from top to bottom. Francoise Dixon: Thanks, Teri. Our next question comes from Scott Power who asks, can you expand on your plans to sell Southeast Asia and the Middle East? Teri Thomas: Sure. Yes, I had a whirlwind tour there last week. We have a fantastic team on the ground in Malaysia and Singapore. They're deeply knowledgeable. They actually don't have that Mach7 weakness in that they're really closely connected to the customers there, good understanding of the products. And the customers are really happy. I -- they were proud to show off what they're doing with our software. I visited 3 hospitals in Hong Kong. And I was amazed. They were telling me they were doing things that I heard from the North American team we couldn't do. And I'm like, well, are you doing this with our software? And I validated that, yes, in fact, they are. And so I thought build on where you've got success, and so my first visit there, I was impressed. This last visit there, I was even more impressed. And that's part of why I brought our founder, Ravi, back into the business. He lives in Singapore. He sees Mach7 kind of like a child of his. He wants us to grow up and be all we can be. And so he has this infectious enthusiasm and this energy and this just deep caring about the technology itself that carries a massive amount of credibility in Asia, a high context culture that really values founders. And between the new sales hire that we've got, another person that we're looking to hire, Ravi and that really strong technical team on the ground, we have several prospects in the pipeline that I think we have a great chance of closing as well as some expansion opportunities with our current customers, primarily in Qatar, in Hong Kong, but also even in Malaysia. People like to see their software being used in their country. And so there -- it's not super high profit compared to other areas, but they're right there and it makes a lot of sense. So we haven't done a lot of work on prospecting and trying to build the pipeline deliberately yet, but that will be one of the first things for both the new hire that just began and the open position that we hope to fill soon. So it's a great team. It's happy customers. That's a great recipe for that sales marketing flywheel. So I want to get that thing rolling. Francoise Dixon: Thanks, Teri. Our next question from Max is actually for Dan. Dan, what attracted you to the opportunity? Daniel Lee: Yes. Thanks again, Max. Well, I was drawn to the opportunity because really a combination of the company's reset mission, the stage of growth that the company is currently in and the mission to turn around the culture of the leadership team. The company had a very strong balance sheet. Fundamentals look very sound. And truthfully, it just felt like the kind of environment where I could make the most meaningful contributions and impact as well as continue to grow professionally. Francoise Dixon: We have no further questions on the chat, but I'll just pause a moment in case there are any final questions that crop up. Last chance for people. No, nothing has come through. I'll hand you back to you, Teri, for closing remarks. Teri Thomas: All right. I do believe in setting expectations correctly and then delivering, whether it's with customers, staff or even our investors. So with that in mind, I'm going to close by noting that we are driving a fundamental change in culture, in operating model and in execution, and that kind of change does not happen overnight. While we're pushing hard to accelerate sales cycles, the reality is the full impact on revenue, and as we mentioned, the KLAS scores will likely take 12 to 24 months to be fully visible in the form of our growth of ARR. So progress will be steady, but that kind of transformation and that acceleration of growth and profitability will take time. I'm very proud of the progress we've made, and I'm super excited by the opportunities ahead of us. I'm confident in where we're headed. Our strategy is pretty clear. The market opportunity, very real, and our balance sheet is strong. Delivery is what matters now. So I appreciate your patience as Mach7 evolves. It changes for the better, and we realize our immense potential. And with that, I thank you, and I look forward to sharing more with you soon. Thanks for joining us.
Operator: Good morning, and welcome to Banco del Bajio's Fourth Quarter and Full Year 2025 Results Conference Call. My name is Anna, and I will be your coordinator today. [Operator Instructions]. Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for future economic circumstances, industry conditions, company performance and financial results. These statements are subject to a number of risks and uncertainties. Please note that this video conference is being recorded. Joining us today from BanBajío are Mr. Carlos De la Cerda, Executive Vice Chairman of the Board of Directors; Mr. Edgardo del Rincon, Chief Executive Officer; Mr. Joaquin Dominguez, Chief Financial Officer; and Mr. Rodrigo Marimon, Investor Relations Officer. They will be available to answer your questions during the Q&A session. For opening remarks and introductions, I would now like to turn the call over to Mr. Rodrigo Marimon. Mr. Marimon, you may begin. Rodrigo Marimon Bernales: Good morning, everyone. Thank you for joining us to discuss BanBajío's results for the fourth quarter and full fiscal year 2025. Today, we will review our quarterly and annual performance, analyze the key drivers and financial trends and share our strategic outlook for 2026. The industry data cited today throughout the presentation is based on CNBV's information as of November 2025, which is the most recent publicly available data. Without any further ado, let's start with the presentation. Starting on Slide 3 with a look at our key financial highlights for the quarter and full year 2025. It was a year of solid execution despite the challenging operating environment with a stagnant GDP growth and a lower interest rate. Turning to credit performance. The total loan portfolio expanded by 4.6% year-over-year. This was primarily driven by the company loans portfolio, which grew at a rate of 5.2%. On the funding side, total deposits saw a robust increase of 10.5% compared to the previous year. Regarding asset quality, our NPL ratio improved significantly to the end of the year at 1.49%, supported by a strong coverage ratio of 126.5%. This trend also drove an improvement in our risk profile with the cost of risk for the full year at 0.96%, while in the fourth quarter, it decreased further to 0.75%. In terms of profitability, we achieved an efficiency ratio of 39.8% for the full year and 43.5% for the fourth quarter. Our return on average equity stood at 19.4% for the 12-month period and 18.1% for the quarter, while the return on average assets was 2.4% and 2.2%, respectively. Net income for the full year 2025 reached MXN 9.1 billion with the fourth quarter contributing MXN 2.2 billion. Finally, our preliminary capitalization ratio as of December 2025 stands at a solid 15.5%, composed entirely of common equity Tier 1 capital. Moving to Slide 4. We examine our 2025 performance against the guidance provided to the market. We are very proud to report that BanBajío met or outperformed most of the targets established for the year. Starting with our balance sheet, loan growth stood slightly below our range, reflecting disciplined growth in a challenging year. Conversely, deposits outperformed expectations with a 10.5% increase, well above our 6% to 9% target. Our net interest margin landed right on target at 6%, while noninterest income, the combination of fees and trading income grew by 4.4%. Operating expenses grew 8.2%, close to the bottom of the guided range, reflecting our ongoing commitment to cost control. This led to an efficiency ratio of 39.8%, outperforming our 40% to 42% guidance. The significant improvement in our portfolio mentioned earlier resulted in a cost of risk that our target range of 1% to 1.1%. As for our bottom line results, the delivered net income of MXN 9.1 billion significantly exceeded the high end of our guided range. This drove a strong return on average equity, which reached the upper bound of our target. Finally, regarding our asset quality and solvency, we exceeded our guidance for the NPLs, coverage and capitalization ratios. Moving to our loan portfolio growth details on Slide 5. The total loan portfolio reached MXN 278 billion at the end of the fourth quarter, leading to the mentioned year-over-year expansion of 4.6%. This growth was primarily driven by our core business, company loans, which include both corporate and SME segments, increasing by 5.2% and now representing 86% of our total loan book. Consumer loans continued with a double-digit growth trend reported in the past quarters, growing 11.4% year-over-year. The 12.1% expansion in the government portfolio was driven by a specific exposure originated in December with good levels of interest margins, an opportunity aligned with our focus on profitable growth. This trend, coupled with a 11.4% contraction in financial institutions, underscores our strategic reallocation of capital towards our higher-margin business line. On Slide 6, I want to highlight the strategic evolution of our sales force as we move into 2026. This initiative is an enhancement of our existing business model and our competitive edges, designed to further accelerate loan growth by deepening our segment specialization and sharpening our operational agility. We are reinforcing this through 3 strategic pillars. First, we are optimizing our credit process to ensure we improve our speed and responsiveness. Second, we are increasing our regional presence in major cities with an important growth in our sales force and executive bankers. This allow our bankers to focus exclusively on the specific needs of their respective segments, ensuring a higher level of expertise and tailored service. Third, we are scaling our successful SME centers. We recently opened a new hub in Mexico City, and we have 3 more scheduled for the next quarters in Querétaro, Guadalajara and a third location in Mexico City. We expect to conclude 2026 with 11 specialized centers, keeping us on our path to 20 centers by 2030. Turning now to Slide 7. Let's examine our asset quality and risk profile. Notably, our NPL ratio improved significantly to 1.49%. This performance significantly widened the gap with the system average of 2.25% Similarly, our adjusted NPL ratio stood at 2.84% compared to the system's 4.45%. This marked improvement in portfolio health allowed us to optimize the cost of risk to 0.75% for the fourth quarter. Regarding coverage, we maintain a prudent ratio of 126.5%. And as of December 2025, we continue to hold MXN 330 million in additional reserves, which we plan to absorb over the next 6 months. These improvements allow us to enter 2026 with a healthier loan portfolio, ensuring BanBajío's position to support a more active lending environment in the upcoming year. Turning to the funding side on Slide 8. Total deposits reached MXN 273 billion in the fourth quarter, representing a robust 10.5% year-over-year increase. This performance was underpinned by an 11.6% rise in demand deposits and a 9.4% increase in time deposits. Over the last 4 years, we have maintained a resilient 10% compound annual growth rate in total deposits, a track record that remarks the strength of our franchise and the deepening of our core customer relationships. On Slide 9, our current funding breakdown shows that demand deposits remain the core of our strategy, representing 40% of our total funding mix. Notably, zero-cost deposits saw a significant increase during the period, now accounting for 19% of the total breakdown. This robust growth in noninterest-bearing funding was the primary driver behind the market decrease in our overall cost of funds in the quarter. This highlights the reversal of the upward trend observed in third quarter 2025 and the widening of the gap with the reference rate. Our cost of funds for the fourth quarter reached 4.94%, a 169 basis point decrease compared to the same period last year and 50 basis points below the previous quarter. Likewise, our cost of funds as a percentage of TIIE dropped to 64.7% in the quarter, a positive divergence from the system average that saw funding costs climbing closer to the reference rate. Moving to Slide 10. The net interest margin for the fourth quarter was 5.77%. This represents 100 basis points contraction year-over-year, primarily driven by the lower interest rate environment, which contributed 68 basis points to the decline and changes in the portfolio mix, which accounted for the remaining 32 basis points. Through active balance sheet management, we maintained rate sensitivity at around 20 basis points throughout 2025, effectively cushioning the impact of the accelerated rate cycle on our margin. While our expansion into zero-cost deposits drove a temporary uptick in sensitivity during the final quarter, we have already seen a normalization in early 2026, and we expect this stability to prevail throughout the year. You will see the overall stable performance of BanBajío's revenues on Slide 11. Total revenues for 2025 stood at MXN 25 billion, a minor 2.6% decrease despite the significant pressure on margins. This stability was underpinned by the successful execution of our diversification strategy as normalized noninterest income grew a robust 26.2% for the full year. Net fees and commissions increased 16.3% year-over-year, driven by a 39.8% surge in cash management fees and a 38.4% increase in revenues from our digital platform, Bajionet. Additionally, normalized trading income rose 18.2% during the same period. These results validate our intentions to grow recurring fee-based income, limiting the impact of economic and interest rate cycles on our long-run performance. Moving to Slide 12. Our efficiency ratio for the full year 2025 stood at 39.8%, successfully outperforming our guidance range. For the fourth quarter, the ratio was 43.5%. Despite this quarterly uptick, BanBajío continues to be one of the most efficient banks in the industry, maintaining a significant gap against the system's average of 46.3% and demonstrates the operational discipline and strict cost control that we have been anticipating to the market. Turning to profitability on Slide 13. It is important to highlight that despite the quarterly compression seen throughout the year, we successfully exceeded the upper end of our net income 2025 guidance. This performance drove a robust full year return on average equity of 19.4%, effectively reaching the top of our target range, where return on average assets stood at a sound 2.4%. Finally, on Slide 14, we closed 2025 with a preliminary capital adequacy ratio of 15.5%. This level stands significantly above our 14% commitment and well exceeds regulatory requirements. Our robust capital position provides the bank with substantial flexibility to continue with the sound levels of return of value to our shareholders while supporting our growth objectives. Lastly, on Slide 15, we introduced our guidance for the 2026 fiscal year. Beginning with macroeconomic assumptions, we estimate GDP growth at 1.3%, stable inflation at 4% and a 50 basis point decrease in the reference rate from current 7% to 6.5% by the end of 2026. Based on these drivers, we are forecasting loan growth between 8% and 10% and deposit growth from 10% to 11%. We target net interest margin between 5.4% and 5.5%, and we expect fee and trading income to continue to grow at a sound pace of 13% to 15%. Our cost control efforts will prevail. And operating expenses are projected to increase between 7% and 9%, maintaining our efficiency ratio within a 43% to 45% range. We forecast that these factors will lead us to a net income of MXN 8.25 billion to MXN 9 billion and a return on average equity between 16.5% to 18%. This guidance reflects a transition towards a more normalized interest rate environment while maintaining our revenue diversification strategy and top-tier cost efficiency. Regarding our risk profile, we anticipate a cost of risk between 80 and 100 basis points, while keeping our NPL ratio below 1.7% and a coverage ratio above 1.1x. Furthermore, we maintain our commitment to a capitalization ratio above 14%. In summary, our fourth quarter and full year results report BanBajío sound fundamentals and solid balance sheet. We are pleased to have met most of our targets for the past year and remain fully committed to delivering on the guidance provided for 2026. With this, I conclude my presentation, and we can open the call for the Q&A session. Operator: [Operator Instructions] Our first question comes from the line of Ernesto Gabilondo. Ernesto María Gabilondo Márquez: Ernesto Gabilondo from Bank of America. My first question will be on asset quality. You were mentioning that you still have excess provisions of around MXN 400 million and that you expect to consume in the next 6 months. Looking to your guidance, you're expecting cost of risk between 0.8% to 1%. So even that you are consuming the excess provisions, you're expecting that range of cost of risk. So would that be explained because you are going to have a more credit risk appetite this year as you were saying in your now -- your new strategy for the year? And my second question is on your guidance. When looking to your ROE expectations for the year, what is the dividend payout ratio we should be assuming? And when could we have more color of a potential special dividend this year? And lastly, I would like to pick up your brains and to see in which lines of your guidance do you see upside and downside risks? Edgardo del Rincón Gutiérrez: Thank you, Ernesto. Regarding asset quality, NPL, as you saw, at 1.49%, a very similar level that we reported a year ago. So we are very happy with the improvement compared with previous quarters. And also cost of risk, actually, cost of risk was the best cost of risk reported during 2025. So yes, we have not MXN 400 million, Ernesto, we have MXN 333 million of additional reserves. The idea and the commitment with the CNBV is to use them during the following 6 months. So as we mentioned in previous calls, we are going to have a coverage ratio that is equivalent to the regulatory reserves that we need to have. So for this year, we expect more stability. As we mentioned in 2025, we have several isolated cases that we already -- several of them we write off during the fourth quarter because of the low probability of recovery. Of course, we continue with the legal actions regarding those cases. But for this year, we feel comfortable with the level of cost of risk between 0.8% and 1%. We believe we are going to have less important cases transitioning to Stage 3. Actually, the 0.75% that we had during the fourth quarter in part because we didn't have any important case transitioning to Stage 3. Regarding risk appetite, we are not considering increasing our risk appetite. Actually, asset quality remains a cornerstone of the strategy. So we will have additional risk appetite. The name of the game, of course, for us is to bring customers to BanBajio. And that's why we are increasing -- I mean, we are increasing the business units we have in several places, mainly in those cities like Mexico City, Guadalajara, Monterrey in which the financial system is very, very concentrated. So that means additional bankers and additional business units. So that's why we are forecasting to recover growth and to grow the loan portfolio between 8% to 10%. Regarding dividend, Carlos, please? Carlos De la Cerda Serrano: Ernesto and everybody. Yesterday, the Board of Directors approved a proposal to be made in April to the stockholder meeting of a 50% payout dividend on the 2025 net profits to be paid half of it in May and the other half in September. Later on, depending on how the year is developing, the growth in the loan portfolio and so forth, we will consider an additional dividend, but that will be probably considered during the third Q. Edgardo del Rincón Gutiérrez: Regarding your latest question, Ernesto, about opportunities in the guidance, we are very happy with the expense level that we reported during the year. You remember in the guidance that we provide to the market in January, we were expecting between 10% to 12%. So reaching 8%, it was very good. So we feel comfortable with the expense level of 7% to 9%. The plan, let's say, is based in the middle of that range with 8%, but we could have some opportunity there. But this expense level includes also new branches and all the new positions because of the new business units we are implementing. And of course, all this additional expense will be through mainly the first semester because in getting that talent in place is not something that you do immediately. It's going to take a few months. I could say also we are very happy with the results in fees and trading income. Last year, we didn't have the volatility in FX, so we can have more volumes and better margins. we expect this to have a recovery during 2025. And I could say also that the mix of the portfolio that we are expecting in terms of growth is related to having the corporate portfolio growing between 8% to 10%, SMEs that have a better margin around 15% and the consumer portfolio between 15% to 20%. So this could provide an additional yield and better margins because of the mix of the assets. So I could say those could be some opportunities in the guidance. Joaquín Domínguez Cuenca: This is Joaquin Dominguez. Another upside risk could be in case of the sale of some disclosure assets and the recovery of some loans that we had in past due loans during the last few years. Ernesto María Gabilondo Márquez: Super helpful. Just a last question. We continue to see a super peso and a weak dollar. So what would that imply for your loan portfolio that is denominated in dollars and to your loan portfolio related to exporters. I just wanted like to understand if this could have an impact on NIM or in asset quality, for example, we have the peso at 16.5% if reaching a USMCA agreement. Edgardo del Rincón Gutiérrez: Yes. Actually, we had an impact in the loan size because of the exchange rate. The impact was a little bit more than MXN 4 billion, representing 1.6% of the loan book. So this means that instead of having a growth of 4.6% with the stability in the exchange rate, it would be 6.2%. So that impact is already in place. And we don't see additional impact in 2026. Actually, that could be an opportunity. Regarding exporters, those customers represent about 10% of the loan book, the loan portfolio. Until today, what we are seeing in the financial statements, of course, is bringing challenges, but we don't see past due loans because of that. Of course, they need to strategy looking for better expenses and better efficiency. But until today, those customers are reporting good numbers. Operator: Our next question comes from the line of Danele Miranda. Danele Miranda de Abiega: Just a very quick one from my side on loan growth guidance. I was wondering if this 8% to 10% is assuming all positive scenarios already. I mean is this your base case with potential upside? I don't know with USMCA private investment reactivating? Or is this already your positive scenario? And also, is this guidance seasonal? I mean, can we expect acceleration in the second half of the year? Or will it remain in this 8% to 10% level all year? Edgardo del Rincón Gutiérrez: Thank you, Danele. What we are seeing is, I mean, we made several changes in the organization to provide more focus. And as I said, to have additional business units. We are talking about 4 new regional corporate banking offices, one in Guadalajara. I mean, 2 in Guadalajara, 1 in Mexico City that is going to be the tier regional director and additional one in Monterrey. Of course, all of them with additional bankers. And in terms of the SME centers, we currently have 8 SME centers. Those units are to attend companies with loan sizes between MXN 30 million to MXN 100 million. We have 8 because we opened an additional one, the second one in Mexico City last December. And we are planning to open Guadalajara, Querétaro and in the second semester, an additional one in the satellite area in Mexico City to end that year with 11 SME centers. All of this will provide support to attract more new customers to BanBajío. We are talking about between 50 to 70 additional bankers for those 2 important segments that is the core business of BanBajío. So we feel confident with the pipeline that we are seeing today that we can reach the guidance between 8% to 10%. Maybe it's too soon to say if we have an upside risk, an upside opportunity in loan growth. Operator: Our next question comes from the line of Yuri Fernandes. Yuri Fernandes: Yuri Fernandes here from JPMorgan. I have a follow-up regarding margins. And I think the explanation was already a little bit more positive one. But when you think about the implied margin decrease, this year, you mentioned that some 30% of the decrease was mix, right, and 70% was rates. For 2026, for sure, we have like maybe 50, 100 bps lower rates and the average rate in Mexico should be even lower than that. But you mentioned FX volatility maybe should be less and this can help. And then the growth of the loans, they also should help, right? I think you're growing less on the financial sector, SMEs, you mentioned around 15%. Consumer portfolio also growing a little bit less. I know it's small, but it should grow more. So the question is the following. For 2026 for your guidance, how you are viewing the decrease on NIMs? Is this purely rates? Do you have some kind of mix inside that or funding was good this quarter, maybe you are baking in some funding deterioration. Just trying to understand a little bit like the drivers. I know rates is the big part of the answer. But if you can help us build the blocks for the margin decrease, that would be helpful. And then I can ask a second question. Joaquín Domínguez Cuenca: Yuri, thank you for your question. This is Joaquin Dominguez. Well, first of all, our sensitivity remains around 20 basis points for each 100 basis of change of the TIIE rate. For the 2026, maybe the impact of the mix will be more important than last year's in deposit side because as you saw, we grow much more on deposits than in the loan portfolio. That means that we accumulate some investment in the treasury with lower interest rates. If our plans of growing in terms of loan growth, we do deliver as we expected, we will change the mix in assets. We will have more loan portfolio instead of securities in the treasury, and that will provide us an improvement in the total assets. In terms of the loan portfolio, the market we are focused on has a higher interest rate than the average of the total loan portfolio. So if we do well with these SME centers, we will improve the mix of assets, and that will help to improve the NIM. And in the other side, we have been doing well in terms of deposits and increasing and especially at the end of the last year, the demand deposit accounts not bearing interest. So if we maintain that mix of the growth in demand deposits without cost, that will improve the margin, but will increase the sensitivity. And all those factors have a different result in the NIM. But at the end of the day, what we are looking for more than a specific objective in terms of margins is improve all the lines, the mix of total portfolio, the mix of loans and the mix of deposits. And what we did for this guidance is that we maintain the composition of the assets and the deposits as they were at the end of the fourth quarter. So any change of that mix could affect positively or negatively the guidance about the sensitivity and the margins. Yuri Fernandes: No, super clear, Joaquin. So let's do the blocks. Like the average rates in 2025, I think the average Banxico rate was around 8.4% maybe rates go to 6%. I'm not sure what is your estimate there, like 6%, 6.5%, maybe the average rate will decrease some 200 bps with a 20, 23, 24 bps sensitivity. This is like 40, 45. Your guidance is implying a 50 to 60 bps decrease, right, from 6% to 5.4%. So what I'm trying to get here is, is your guidance too conservative? Maybe if the mix plays well, as you mentioned, maybe the margin decrease is higher than -- it's less than the guidance is implying at this point? Joaquín Domínguez Cuenca: I could say that it's not exactly conservative. It's just the result if you make the account considering the balance sheet in the fourth quarter, not the average. I mean, there is something that you should consider that the last reduction in the interest rate was at the end of December of the last year. That impact was not captured in the fourth quarter. It will be reflected in the first quarter of this year. And that effect runs for the rest of the year. So probably that would explain what you're saying. But we are maintaining the NIM sensitivity in our forecast and in our guidance without change. Yuri Fernandes: No, no. Super clear. Just a second one on another topic, asset quality, just going back to Ernesto's questions on this. When we go to your new NPL formation, your new Stage 3 formation putting all together, right, the NPLs and the higher write-offs this quarter, it was a very good formation. It was lower. Just checking, like could we have hopes that maybe there could be a surprise on this because I think Edgardo mentioned before that you had very few cases going to Stage 3 this quarter. So just checking if there was something specific you did something different on renegotiations, reprofile of debt and this explain or sale of portfolio because it was a good number on formation. And when I look to your guidance, the guidance implies 0.8%, 1% cost of risk, slightly higher NPL. So just trying to understand if there was any kind of a one-off in the new NPL, new Stage 3 formation for the fourth quarter. Edgardo del Rincón Gutiérrez: Thank you, Yuri. Actually, no, what we saw in the fourth quarter is a reduction in the balance of Stage 3 loans and the write-off that we did is preparing us to, let's say, to clean up the portfolio. Our criteria is always those loans with low probability of recovery. We'd rather write off them and of course, continue on the recovery actions. But the level that we have at the end of the fourth quarter, let's say, is a more normalized level of NPL. And we expect to be around those levels during that year. As I mentioned before, during 2025, we have several important but isolated cases from different sectors that transition to Stage 3. And during the fourth quarter, we didn't see any important case. Of course, that could happen in '26. We don't have, in our view, any important case at this moment. But we feel well with the 0.8% to 1% that is a more -- also more regular or normal level of cost of risk for the bank. So of course, the -- as we transition and grow more the SME portfolio and the consumer portfolio that normally have higher NPLs, that could change in time. But with the guidance that we are providing, we feel very comfortable. Operator: Our next question comes from the line of Eric Ito. Eric Ito: This is Eric Ito from Bradesco BBI. I have 2 here on my side as well. The first one, I'd like to touch basically on a more strategic point here on your new sales force structure. So you are deploying a lot -- investing a lot. You have this plan of 2030 of 20 branches. So I just want to get a bit sense for, let's say, beyond 2026, 2027, what can we think about efficiency here if that should be one of the points that could continue pressuring OpEx going forward? So this is my first one, and then I can ask my second later. Edgardo del Rincón Gutiérrez: If we want to have a good efficiency ratio and a good ROE, the best strategy that we can follow is to grow the loan portfolio. That's why we decided to increase the business units and sales force of the bank at the end of the fourth quarter. So as I mentioned already, we are adding 4 regional directors for the corporate segment in Mexico, Mexico City, Guadalajara, and Monterrey. And also the SME centers, we are very happy with the results we are having. Each SME center has more than MXN 1 billion in loans. And as I mentioned, is dedicated to a segment, let's say, with loan sizes between MXN 30 million to MXN 100 million. The idea for the following 4, 5 years is to get to 2030 with more than 20 SME centers. We have 8 to date. So we are developing, let's say, a new strategy with new business units to attend that segment that is very, very profitable. But in the corporate area, we have a lot of room to grow. Our market share in commercial loans portfolio is a little bit more than 6%. So we continue with huge opportunity to attract new customers. So that is the idea. Regarding branches, during 2025, we opened 9 branches. And we already have 10 branches that is I'm completely sure we're going to open this year. That number could increase up to 15 if we have the right location, et cetera. So those, let's say, new branches are already approved, but the number of new branches is between 10 to 15 this year. And the idea for the following years is to continue with a similar number of about 10 to 15 branches. So the bank has a lot of opportunity to grow, and we need to grow also our branches and our bankers, et cetera, to capture that opportunity. Joaquín Domínguez Cuenca: Just to complement in the efficiency ratio side, we -- in our projections, we made the exercise considering the maximum number of branches and SME centers to open. So they will not surprise us in terms that we will be expanding more than we budget. So there is no downside risk in terms of not delivering the guidance in terms of expenses. Eric Ito: Okay. Super clear. And then my second one is just maybe a follow-up here, especially on the strategy to grow SMEs, which is a portfolio that you are investing a lot. How can we think about your portfolio mix? Currently, you have 50% of your book in corporate and 29% in SMEs. I don't know if you guys have a target that you could share with us, but I feel like we can continue having this much higher CAGR on SMEs. Edgardo del Rincón Gutiérrez: Yes. With the internal definition of SMEs, we have an SME portfolio or more than MXN 40 billion. That is important because, I mean, we are growing very well. But the margin that we have in that segment is much better than in the corporate segment. It's about 1.5% more margin in the loan book. But more important than that, it is easier to bring the customer and to engage the customer to all the rest of the services regarding cash management, FX, et cetera. So the revenue coming from that portfolio proportionally is very, very important. So that is the, I would say, the main segment for the bank. And I believe with these SME centers, we are putting in place a competitive advantage of BanBajío, we feel that the business model that we are implementing is working very, very well. Then that's why we are accelerating the number of SME centers in the following years. Operator: Our next question comes from the line of Neha Agarwala. Neha Agarwala: This is Neha Agarwala from HSBC. First one on the loan growth, which stands out as a bit on the higher side, especially when compared to some of the peer numbers that we have seen. What is the expectation in terms of USMCA agreement? In your budgeting, when do you expect that to be finalized as that could be a kicker in terms of loan growth? I'll go to my second question after. Edgardo del Rincón Gutiérrez: Thank you, Neha. Of course, loan demand has been affected by the uncertainty coming from the USMCA agreement and the negotiation that will happen during this first semester. In the loan growth, we are forecasting a more conservative growth during the first semester and a better second semester. So that is implied in the business plan that we are guiding. But our scenario is that we reach an agreement with the U.S. We believe that dependency that we have in those 2 markets is very important. And the best scenario for both countries is to reach an agreement. So that is the best scenario. Neha Agarwala: Okay. My second question is on the branch expansion that you've mentioned. With all of this investment to drive up the loan growth, could you compare the NIM profile for the large corporate segment and the SME segment? Because if the mix shifts more towards the SMEs, how in the next 2, 3 years should that impact your NIMs and your cost of risk? And given the expansion plan, it seems like the cost growth will probably be on an elevated level, not just in '26, but in '27, '28 as well, which could pressure the cost-to-income ratio. So how should we think about the evolution of cost-to-income ratio in the next 2, 3 years given the expansion plan? Edgardo del Rincón Gutiérrez: We don't have the NIM by segment at this moment. What I can tell you is the margin in the loan book is better, but also the mix of deposits has a better margin. And also nonfinancial income person at the size of the customer or the loan is more important. So profitability is better. The cross sale ratio in SMEs is more than 5 products and services. And the corporate is a little bit more than 3.2. So as a result, let's say, the SME is much more profitable than the corporate segment. Neha Agarwala: Perfect. And cost to income, if you could give some color on that, the impact on cost to income and how should it trend given the cost growth should be slightly higher? Joaquín Domínguez Cuenca: Neha, well, that cost to income maybe is one of the most important drivers we follow month by month. And what we saw in the last quarter is a quite increase in the cost of risk, but also an improvement in the generation of net interest income. So what we are considering for this year is that the growth on noninterest income that is well supported by a very diversified lines of products that we are offering to our clients will support the increase on expenses, even the reduction of the NIM. So we feel that we can very well supported and control the efficiency ratio due mainly to the growth of the net interest income. Operator: Our next question comes from the line of Brian Flores. Brian Flores: Brian Flores from Citi. I have 2 questions. The first one is on your NIM sensitivity because the cost of funding as a percentage of TIIE has been improving, and you've mentioned the efforts you have made on the asset side. I just wanted to maybe understand how you're positioning yourself, not for 2026 because we understand what is likely to happen. But the sensitivity for further ahead, I mean, when maybe Bajio becomes a bit more stable in the policy rate. Would you be willing by design to reduce the sensitivity for further cycles? I just wanted to understand. And also, I think in the last call -- last 2 calls, maybe you have mentioned a sustainable ROE of high teens. So do you think this guidance actually shows the, let's say, structural level ROE where we should see Bajio going forward? And then if I may, just a second one on GDP growth. In your presentation, I think you have 1.3% as a base case here. One of your peers was a bit more optimistic maybe on tailwinds from the World Cup and internal consumption in Mexico. Do you see if a scenario more similar to them, which is around 1.6% in terms of GDP plays out that there is upside on the loan growth side? Joaquín Domínguez Cuenca: Regarding the NIM sensitivity, what we are seeing is that we do not have a specific target of NIM sensitivity because that by itself do not necessarily reflects an increase in the income or the value of the bank. What it is important for us is to maintain a healthy growth even if the NIM have a reduction, it doesn't matter if the volume of business is higher. So it is quite difficult to say that we have a specific objective of reducing the NIM sensitivity because if we just have the idea to reduce it to 10 basis points, it probably will have high cost to make -- or to create that reduction and would reduce the net income. So it's not directly the relation between lower NIM sensitivity and higher income. So our focus is increased total income and margin income despite what happens with the NIM at itself. So what we are focusing is in improving the mix of assets and deposits, but not having a specific target of NIM sensitivity. Edgardo del Rincón Gutiérrez: Regarding -- thank you, Brian. Regarding ROE, as you saw, we are considering here an additional decrease in rates of 50 basis points to get to 6.50%. And we believe we are getting closer to the floor in rates with all the geopolitical situation and inflation in Mexico, we feel that we are getting close to the floor. And with that, sensitivity will be less important. We are sure that we feel comfortable in providing a sustainable ROE in high teens that is reflected in the guidance. And regarding GDP, we consider the average of the analysts. Actually, that bank that you are mentioning is one of the highest forecast in GDP growth, but the median of the different analysts in that analysis is 1.3%. Of course, if we can have a potential additional growth, more GDP growth that will help a lot in growing the loan portfolio, of course. Brian Flores: And just, I mean, do you have any sensitivity in terms of, let's say, this could add 4 bps to your base case scenario here in terms of loan growth? Edgardo del Rincón Gutiérrez: If you can repeat, it was the transmission connection. You can repeat, Brian, please? Brian Flores: Sure, sure. No problem. No, just wondering if you have a sensitivity measure as to the multiplier. So for example, if we have some upside risks here on GDP, where could we see your loan growth compared to your base case scenario? Edgardo del Rincón Gutiérrez: Actually, the multiple that we are using already in the guidance with a GDP growth of 1.3% is higher than previous years. And what we are planning to do is to gain market share and to bring more customers. So of course, with additional growth in the economy, that will help. But it's maybe difficult to forecast at this moment an upside opportunity regarding that. Operator: Our next question comes from the line of Ricardo Buchpiguel. Ricardo Buchpiguel: This is Ricardo Buchpiguel from BTG Pactual. Just have one question here. How do you see the competitive landscape in the corporate lending environment evolving? We see that BanBajío and other peers have been expanding a lot of their branches network you also have Banamex, is a big bank in Mexico came out of a change in control and eventually could become a bit more aggressive. And at the same time, as we have been discussing in this call, you have a lot of uncertainty mainly in the first half of the year because of this USMCA deal, right? So my question here, with a lot of uncertainty regarding how much the size of the market will grow and a lot of banks including ourselves increasing the number of branches and people, are you concerned in any way for potential pressures in rates? Edgardo del Rincón Gutiérrez: I believe that is a situation that always happen in this market. Competition is important. Of course, we try to compete more with service than with price. Of course, we need to provide a competitive price to the customer. But our business model is more to be really close to the customer, have a very good communication with them, understand very well the opportunity and risk that they are seen and try to help them in all the cycles. So -- but competition is huge. And I believe with the potential IPO of Banamex and they recover, let's say, the strategy that they used to have several years ago, competition will increase. But I mean, that is always happening. Normally in the corporate segment, we are always competing with at least one bank. We have less competition in the SME segment. But I mean, that is part of the regular scenario in this market. And I believe it's good for the market evolution and also for customers. Ricardo Buchpiguel: That's very clear. And just one quick follow-up. If you look at the last few months, not only in Q4, but a little bit in Q1, have you seen any changes in terms of competition, the pressures on rates or is overall stable? Edgardo del Rincón Gutiérrez: It's a huge competition environment. And I believe the fourth quarter was similar with the rest of the previous quarters during 2025. And of course, all the banks are trying to grow and to bring the best customers possible to those banks. So -- but I feel that the environment is stable. It's the same. Operator: Our next question comes from the line of Lindsey Shema. Lindsey Marie Shema: Lindsey Shema here from Goldman Sachs. I just have a quick question following up on the increase in write-offs in the quarter. Given the increase in write-offs this quarter, do you see any impacts from the change in regulation to the ability to be able to deduct write-offs from your taxes, and that's why you moved them ahead? Or is that completely separate? Edgardo del Rincón Gutiérrez: Thank you. We're expecting really the same level. If we consider write-off of 2025 plus the reserves associated with past due loans minus recoveries, we are talking about MXN 2.8 billion during 2025. And actually, that was the same number for '24. For '25 and with this NPL and cost of risk that we are expecting, we could have a small reduction in write-off during 2026. Regarding the new regulation, it will have an impact in the P&L, but will delay the capacity of the bank to deduct those write-offs. It will take at least 2 years starting in the moment that we start the legal action, let's say, to recover that loan. In terms of small loans lower than 30,000 UDIs is going to be 1 year. So it to have the P&L really, but the deduction of those write-offs will take longer. Operator: Our next question comes from the line of Federico Galassi. Federico Galassi: Federico Galassi from The Rohatyn Group. Two questions, if I may. The first one is last year, in the last part of the year was very vocal from the government that could be some caps on fees. I don't know if you have any comment on that. And the second one, maybe you mentioned that, but if you can repeat me what is the Mexican peso that are using in your guidance from the loan growth? Edgardo del Rincón Gutiérrez: Thank you, Federico. The only initiative that is on the table today is regarding interchange fees. There is not a decision yet, but it's an important reduction in interchange fees. Actually, the plan that we are proposing today to the market is not including any impact of this. But the revenues coming from interchange fees represent about 1.8% of total revenues of the bank. And as you saw in the initiative, they are putting a cap in interchange. That means that the discount rate that we are -- that the banks are charging, let's say, to the merchant, that acquiring bank will pay less interchange to the issuer. So on that regard, our acquiring business represent about 3% of total revenue. So that could imply in the short term, a benefit for the bank because of that difference, let's say, in percentage of revenue. Nevertheless, we see this initiative as negative for the market. And let's see what is going to be the final decision regarding that. But with the initiative as it is today, it has a potential positive impact in our numbers. Joaquín Domínguez Cuenca: Federico, this is Joaquin Dominguez. Regarding the second question, we have approximately $1,450 in loan portfolio. And what we are expecting is FX rate pretty close to MXN 80 per dollar at the end of the year. And that would imply a very marginal impact in the valuation of that loan portfolio. MXN 18. Operator: Our next question comes from the line of Andrew Geraghty. Andrew Geraghty: This is Andrew Geraghty from Morgan Stanley. Just a small question to clarify. When you guys said that you plan to open between 10 to 15 branches this year, does that consider the regional corporate banking offices and the SME centers? Or is that separate? Just wanted to clarify. Edgardo del Rincón Gutiérrez: Thank you, Andrew. And it's separate branches, it's that regular branch to make transactions and to sell products and services and the SME centers and the corporate regional offices are business units mainly with bankers to attend those segments. So it's completely different. Operator: Our next question comes from Brian Flores. Brian Flores: Just very quickly here, I was checking here my notes. I think one of the upside risks you mentioned here was probably a recovery of some loans, which I understand. And I think you mentioned sales of assets. Could you just give us examples as to what were you meaning by these sales of assets? Joaquín Domínguez Cuenca: Brian, as we have mentioned in several cases, we used to take warranties in most of our collaterals in more of the loans. So during the years, not specifically last year because it takes many years to recover assets. We have some disclosure assets. We should have a MXN 0 valuation in the balance. And if we sold those assets, we will have immediately an income due to that sales. And also, there are other cases also thanks to the guaranty collaterals that we are negotiation recovering before going the next step in the judicial process. So we have some cases in the pipeline in order to see that we can affirm that we will have some recoveries in this year due to the advanced process we have for those recoveries. Operator: We have not received any further questions at this point. So I would now like to hand the call back over for some closing remarks. Rodrigo Marimon Bernales: Thank you very much, everyone, for joining us today. We remain available to address any follow-up questions via e-mail and any meeting request. We look forward to speaking to you again in April 2026 when we release our first quarter 2026 results. Thank you very much, and have a nice day. Operator: That concludes today's call. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the WM Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Ed Egl, Vice President of Investor Relations. Please go ahead. Edward Egl: Thank you, Olivia. Good morning, everyone, and thank you for joining us for our fourth quarter and full year 2025 earnings conference call. With me this morning are Jim Fish, Chief Executive Officer; John Morris, President and Chief Operating Officer; and David Reed, Executive Vice President and Chief Financial Officer. You'll hear prepared comments from each of them today. Jim will cover high-level financials and provide a strategic update. John will cover our operating overview, and David will cover the details of the financials. Before we get started, please note that we have filed a Form 8-K that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release and the schedules in the press release include important information. During the call, you will hear forward-looking statements, which are based on current expectations, projections or opinions about future periods. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including the most recent Form 10-K and Form 10-Qs. John will discuss our results in the area of volume, which unless stated otherwise, are more specifically references to internal revenue growth or IRG from volume. During the call, Jim, John and David will discuss operating EBITDA, which is income from operations before depreciation, depletion and amortization. References to the Legacy Business are total WM results, excluding the Healthcare Solutions segment. Any comparisons, unless otherwise stated, will be with the prior year period. Net income, EPS, income from operations and margin, operating EBITDA and margin, operating expense and margin and SG&A expense and margin have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release and tables, which can be found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures. This call is being recorded and will be available 24 hours a day beginning approximately 1:00 p.m. Eastern Time today. To hear a replay of the call, access the WM website at www.investors.wm.com. Time-sensitive information provided during today's call, which is occurring on January 29, 2026, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of WM is prohibited. Now I'll turn the call over to WM's CEO, Jim Fish. James Fish: Okay. Thanks, Ed, and thank you all for joining us. We're pleased to report another year of outstanding results in 2025, including a record performance in operating expenses as a percent of revenue. This performance, combined with our disciplined approach to pricing, drove full year operating EBITDA margin 150 basis points higher in the Legacy Business. Strong operational performance translated to double-digit growth in cash flow from operations and nearly 27% growth in free cash flow. Our results highlight the strength and momentum we built in our business model through operational excellence, scaling sustainability businesses and integration of Healthcare Solutions. You've heard me talk about the strength of our collection and disposal business with our differentiated assets and the best people in the industry. All of these were on display in 2025 as we drove our best ever operating leverage in our collection and disposal business, reflecting the intentional investments we've made in our people, technology and fleet. Better frontline retention and a decreased average age of our trucks delivered improvements in labor and maintenance costs. Meanwhile, we continue to drive organic revenue growth from both price and volume. By using data and analytics, we're offering pricing that reflects the premium value of our service, our leading commitment to environmental sustainability and the strength of our asset network. It's our unmatched network, particularly our transfer and disposal assets that drove volume growth in 2025, more than offsetting the residential volume declines as we shed some low-margin business. In our Healthcare Solutions business, 2025 was a year of teamwork, focus and execution to build momentum to our integration. Our service delivery metrics and customer service scores have improved to levels above our Legacy Business. Customer call volume has been trending down, and the standardization and enhancement of customer-facing processes and invoices are all leading to rising customer satisfaction. Just last week, we received an acknowledgment from one of our largest Healthcare Solutions customers for the improvements we've made on invoicing, which is a great indicator of the significant progress we've made in the last year in our systems and back-office processes. At the same time, we continue to significantly reduce SG&A and operating costs, streamline our operations and greatly improve asset efficiencies. While there's still work to do, the progress we've made to date puts us in a good position to grow the earnings and cash flow from this business with a lean and efficient cost structure, a healthy pricing environment and new opportunities for volume growth through both cross-selling and market share expansion. On the sustainability front, we drove notable strategic expansion in our sustainability businesses. We commissioned 7 new renewable natural gas facilities, expanding our renewable energy network and further positioning WM as a leader in environmental sustainability. We completed automation upgrades at 5 recycling facilities and added facilities in 4 new markets, which are enhancing the performance of our recycling network and creating new opportunities with customers. The value of our recycling investments is clear, particularly when you consider our recycling segment delivered over 22% operating EBITDA growth despite nearly 20% lower commodity prices in 2025. This combination of operational excellence and strategic investment across our business has produced record margin performance and accelerated cash generation. As we enter 2026, we're well positioned to convert more of our earnings into long-term shareholder value. Turning to our outlook. We expect continued strong growth in the year ahead. Our guidance is for operating EBITDA growth of 6.2% at the midpoint or 7.4% when you normalize for wildfire cleanup volumes in 2025. Free cash flow is expected to grow nearly 30% at the midpoint, reflecting structural earnings strength and the benefit of our investments. As announced in December, our Board approved a 14.5% increase in the planned quarterly dividend rate in 2026, our 23rd consecutive year of dividend growth. We also authorized a new $3 billion share repurchase program. We plan to return about $3.5 billion to shareholders through dividends and share repurchases in 2026, representing more than 90% of free cash flow we expect to generate. We will continue to balance these returns with disciplined reinvestment, tuck-in M&A and a solid investment-grade credit profile. Looking ahead, our priorities are clear: first, growing the core business by leveraging our focus on customer lifetime value, operational excellence and network advantages; second, capturing and maximizing returns from our investments in our recycling and renewable energy businesses; and third, driving accretive growth in Healthcare Solutions as we take the business from integration to scalable growth. Finally, executing our disciplined capital allocation plan to deliver compelling long-term shareholder value. Our results reflect the hard work of our entire team who serve our customers with pride every day. Their commitment fuels our performance and sets the foundation for the opportunities ahead. In 2026, we will build this momentum strengthening the core, scaling our growth platforms and creating meaningful value for all our stakeholders. I'm incredibly proud of what we've accomplished and excited for what's ahead. And with that, I'll turn the call over to John to provide more detail on our operational performance. John Morris: Thanks, Jim, and good morning. WM delivered another fantastic quarter to close 2025, driven by disciplined pricing and continued cost efficiencies across the business. In the fourth quarter, operating EBITDA in our collection and disposal business grew more than 8% and operating EBITDA margin expanded by 160 basis points, supported by strong execution and the ongoing benefits of automation and technology across our operations. The strength in Q4 was driven by operating expenses as a percentage of revenue improving 180 basis points to 58.5%, marking our third consecutive quarter below 60%. And for the full year, our cost management is just as impressive. We finished 2025 at 59.5%, which is the first time in company history that operating expenses have come in below 60% for a year with each quarter of 2025 improving sequentially. As I said on Investor Day, we are fundamentally changing our cost structure through the investments we're making in our people, technology and processes. 2025 was a year we proved the change is real and durable, and we're well positioned to continue capturing these benefits for years to come. The improvement in operating cost was led by substantial improvement in repair and maintenance costs on both a dollar basis and as a percentage of revenue, driven by operational and fleet strategies that are yielding tangible benefits. Accelerated investments in new trucks over the last 3 years has improved our average fleet age, significantly reducing unplanned repairs and the need for third-party maintenance support. And at the same time, our disciplined focus on fleet optimization and a more streamlined maintenance model increased technician productivity and reduced reliance on rental units and external services. These structural improvements were complemented by enhanced route automation and resource planning tools that lessen wear on the fleet and improve overall asset utilization. Taken together, these initiatives reflect our strategic commitment to operational excellence and are driving sustained cost efficiencies that strengthen our performance. Our repair and maintenance costs were not the only cost category reflecting the strength of our operating model as we saw a similar story in labor. In Q4, labor costs improved as we continue to see benefits from our people-first culture across our frontline teams. Driver turnover reached its lowest level of the year at 15.7%, demonstrating our ability to sustain our meaningful improvements in frontline retention. We've implemented a people-centric approach to onboarding, training and accountability, which is improving retention, safety and operating efficiency while also reducing overtime hours and training needs. We also benefited from our connected truck platform, which gives leaders real-time visibility into sequencing, downtime and efficiency to help reduce labor dependency while improving service reliability. And it's also worth noting that our connected truck benefits are not limited to cost advantages as the technology enables rightsizing service levels and other revenue opportunities. These people, process and technology-driven improvements extend beyond our Legacy Business. And now that we've successfully integrated the Healthcare Solutions business into our existing field operations management structure, we expect to extend these improvements we've already seen in on-time service delivery, driver turnover, asset rationalization and network optimization. In both the Legacy Business and the Healthcare Solutions business, we are structurally lowering our labor cost base, strengthening day-to-day execution, enhancing service reliability and delivering continued opportunities for long-term operating improvements. Turning to the top line. We delivered another quarter of strong balanced growth. Pricing continues to be a strength for us with core price of 6.2% in the fourth quarter, not just because of disciplined execution, but because of our strong customer focus and the consistent value we provide to our customers. Our asset positioning at scale, service reliability and the investments we've made in technology and automation differentiate our service offering, which all support our pricing. And on the volume front, we've seen notable growth in 2025 in special waste, renewable energy and recycling. In residential collection, intentional shedding moderated in the fourth quarter, and we continue to drive operating EBITDA and margin growth. We anticipate steady residential volume improvement as we move through 2026. In closing, I'll close by thanking the entire WM team for their commitment and execution throughout 2025. We're entering 2026 with strong momentum, an optimized operating model and clear opportunities to continue delivering value to our customers and shareholders. And now I'll turn the call over to David to discuss our 2025 financial results and 2026 financial outlook in further detail. David Reed: Thanks, John, and good morning. Our 2025 performance demonstrates the meaningful progress we're making toward our long-term strategic goals. Operating EBITDA margin expanded 40 basis points to 30.1% for the full year, which is a result that overcame a 140 basis point margin headwind from the combined impact of the acquisition of the Healthcare Solutions business and the expiration of alternative fuel tax credits. This result significantly exceeded the margin outlook we provided at the beginning of 2025 as we outperformed our own high expectations for cost optimization in our Legacy Business and synergy capture in the Healthcare Solutions business during each quarter of the year. Normalized for these known headwinds I just mentioned, our Legacy Business delivered 180 basis points of margin expansion for the year. This was driven by 120 basis points of growth in the collection and disposal business from the benefits of price, cost optimization and improved business mix, particularly growth in landfill volumes and the shedding of low-margin residential business. Margin growth was also bolstered by a combined 60 basis points from lower commodity pricing in the recycling brokerage business, recycling automation benefits, the growth of our high-margin renewable natural gas business and the lower risk management cost. Cost optimization remained a central theme in 2025. SG&A expense for the Legacy Business was 9.2% of revenue for the full year, a 10 basis point improvement compared to 2024 as we continue to rationalize discretionary spending. Within Healthcare Solutions, we are making consistent progress in reducing SG&A expenses as we integrate and optimize the business. Fourth quarter 2025 Healthcare Solutions SG&A of 20.8% of revenue is a notable improvement of 350 basis points from the prior year period and a significant step toward our long-term ambition to get the SG&A of this business in line with the rest of the company. At 10.4% for the full year, it is clear that we are on track to get total company SG&A as a percentage of revenue below 10% in short order. Our strong execution translated into robust cash flow generation in 2025. Cash flow from operations grew more than 12% to $6.04 billion, and free cash flow reached $2.94 billion, an increase of nearly 27%. These results showcase our success in driving margin expansion and disciplined approach to capital investment. For the year, we spent just under $2.6 billion on capital to support the business and $633 million on sustainability growth investments. In 2025, we allocated $1.3 billion to dividends and paid down $1 billion in debt, reaching a leverage ratio of 3.1x. We expect to reach a leverage ratio within our targeted range of between 2.5 and 3x during 2026. We also invested more than $400 million in tuck-in acquisitions to expand our traditional solid waste and recycling footprint. Moving to the outlook. We expect operating EBITDA to be between $8.15 billion and $8.25 billion in 2026. This projection reflects an update to the classification of accretion expense, a change we are making to enhance the comparability with our industry peers and to better reflect operating performance. As a result, our 2026 operating EBITDA guidance excludes projected accretion expense of approximately $150 million. Our plan calls for a typical quarterly cadence of operating EBITDA contributions across the year. Additionally, we expect an effective tax rate of approximately 24% and a share count at the end of the year of about 402 million shares. We anticipate capital expenditures for 2026 to be between $2.65 billion and $2.75 billion, which is inclusive of about $200 million directed towards high-return sustainability projects. Sustainability growth capital includes spending of about $85 million on 2 recently approved renewable natural gas facilities and 1 new recycling growth project, each expected to be completed and to begin contributing operating EBITDA by 2028. These projects are attractive opportunities to extend our network while bolstering WM's industry-leading return on invested capital. In 2026, we expect free cash flow growth of nearly 30% to $3.8 billion at the midpoint of the outlook, which drives our projected operating EBITDA to free cash flow conversion above 46%. Our guidance includes an anticipated benefit from investment tax credits of about $110 million, which is about a $75 million headwind from the prior year. In closing, 2025 underscored the strength of our business model, the resilience of our operations and the discipline with which our teams execute every day. We are proud of our progress toward our long-term strategic goals, driving margin expansion, strong cash flow generation and continued optimization across the enterprise. I want to thank our dedicated team members whose commitment makes these results possible. As we look ahead to 2026, we are confident in our ability to sustain this momentum to continue delivering operational excellence and to generate long-term value for our shareholders. With that, Olivia, let's open up the lines for questions. Operator: [Operator Instructions] Our first question coming from the line of Sabahat Khan with RBC Capital Markets. Sabahat Khan: Just maybe starting with sort of the top line guidance. Can you maybe give us some perspective on the industrial activity has been weak for some time. There's some views just broadly out there that the economy picks up this year. Maybe just what you've embedded in terms of the macro backdrop. Obviously, we see the sort of the directional volume and pricing commentary. But if you can just delve into what you're seeing in some of your local markets? And is the industrial C&D type market picking up at all? James Fish: Yes. Regarding kind of the macro economy, I would say that we've said for the last few quarters that we're cautiously optimistic, and I think that we stay with that. I might even remove the word cautiously. I think we're optimistic about the macro economy. When we look at our own internal figures, and you mentioned the industrial line of business, that's a line of business that has been pretty soft over the last couple of years. I think we've been down 3% or 4% in volume each of the last probably 7 or 8 quarters. And that business actually has bounced back to almost flat. So that's an encouraging sign for us. I think similarly, as John mentioned in his remarks about the residential line of business, that's been negative for some time. That's been much more by design. But he also mentioned that, that is starting to come back to more of a normalized number. And we think by the time we get to kind of the back half, I think, John, of 2026, we should see that down maybe half. John Morris: Yes, half [indiscernible]. Yes. James Fish: So all of those are encouraging signs. If you look at the landfill line of business, that's been a source of strength for us for a number of reasons, special waste, as John mentioned in his remarks as well, has been good. So all of that would tell me that the economy is on pretty firm footing. Sabahat Khan: Great. And then just a follow-up on the health care side a little bit. Can you talk about -- it sounds like the integration is largely there, but can you just talk about for '26, what you're sort of thinking on the pricing front, maybe some of the larger initiatives on the cost refinement, getting that percentage more to where you want it to be on the SG&A side. So maybe you can delve into some of the commentary shared earlier on the initiatives for this year on the health care side? And what could those margins look like sort of over the next 12, 24 months? James Fish: Yes. So a lot with Healthcare Solutions. We've made a ton of progress just in the last quarter. There's a lot going on between Q3 and Q4, even if you look at Q3 to Q4, there was -- we talked about some lost accounts last quarter that would carry forward into this quarter and carry forward into 2026. And so that did, in fact, happen. But as I said in my remarks, we've made a ton of progress on our customer service -- the customer service side of our business. In fact, the metrics that you use to measure those have actually jumped above our Legacy Business, which is very, very encouraging. Similarly, from Q3 to Q4, we saw credit memos, we think they peaked in Q4. And so as you know, those credit memos have been used to, in part, take care of some of these past due accounts that we've had. I think what I would say is we've really kind of built a wall now between all that is continuing to go on, on the back office side of that business and the customer themselves. And that's a real positive. And the result of that, as we think about 2026 is going to be, I think, better price realization. We've been getting price all along, but we just haven't realized as much of it. And a lot of that has been these credit memos that we've been giving that has offset some of that price. I think when you get into 2026, we're expecting 4.2% price in 2026. Top line is going to be 3%, and that is a reflection of those lost accounts that will anniversary for the most part in the back half of '26. So that's the reason why it looks like all of our growth is coming from price. It is, in fact, coming from price, and it's due to those lost accounts. And then when you think about the expense side of the business, John mentioned that we've rolled that in. And I think Rafa last quarter talked about how we've rolled that business into our areas. And so we're seeing the real benefits of that. We're seeing that what we've honed on the Legacy Business over the last probably 10 years, some of it through technology, some of it through process, all of that gets brought to this routing and logistics business, which is WM Healthcare Solutions. So we're really encouraged about what we're seeing as we roll the business into the areas. I guess the last thing I'll mention here is that cross-selling, which we put $50 million of cross-selling in the EBITDA synergy number back in June of last year. And I would tell you that if I were a betting man that I would take the over on that because in talking to our area leaders last week, almost to a person, they were very encouraged by what they're seeing from their sales folks. In terms of cross-selling, I think it's important to keep in mind that some of that cross-selling benefit though, does show up in the collection and disposal line of business. Not all of it shows up necessarily in the Healthcare Solutions business. Operator: Our next question coming from the line of Bryan Burgmeier with Citi. Bryan Burgmeier: I appreciate all the detail in the press release. It was really helpful. I thought that Footnote h seemed to say that maybe discussion on the 2027 financial targets would be put on hold for a little while. I'm not sure if I'm sort of interpreting that correctly. And if I am, maybe from a high level, can you help us understand sort of what went into that decision? I guess there have been sort of some accounting changes. It's a pretty dynamic macro environment, but just kind of hearing in your own words would be really helpful. James Fish: We did debate, [ Tony ], whether we would get a question on Footnote h. So Heather is the winner on this one. But here's what I would say about the 2027 number. On Investor Day, we gave some high-level estimates. I would -- what I would say about those is that they weren't detailed guidance as we're giving today for 2026. And we will give detailed guidance on 2027 a year from now. So I would tell you that those were estimates. They're kind of the best estimates we can make at the time. I mean our business typically about as far out as we can look is 12 months. It's hard to look at things like commodity prices 18 to 24 months out. So those estimates, I wouldn't rely on those as guidance. I would rely on them as what they were intended, which is estimates. But I will tell you this about '27 that we don't see anything on the horizon that's concerning for us. And I would also say that if there's one thing you know about us over the last number of years, the consistency of our performance has been one of our strong suits, and I think that continues going forward. Bryan Burgmeier: Got it. Got it. It's really helpful. And then maybe just digging into the guidance for '26 a little bit more. Maybe, John, can you give us an idea of maybe the level of margin expansion that you're looking for in collection and disposal this year on sort of an apples-to-apples basis? I guess it's kind of noisy with the landfill accretion and the wildfire comps, but John, your thoughts on net price and maybe some key cost buckets could be quite helpful. John Morris: Yes, Bryan, you saw the guidance we gave in terms of yield and core price. And what we've really been focused on and was really shown up well in Q4 and this year, as I mentioned in my prepared remarks, is sort of the -- is the spread between price and cost, and we're continuing to expand margins. So we're really pleased. Directly to your question, there is a little bit of noise in there. We talked about the wildfires being one of those things that really showed up in Q2, but 50 basis points on a same-store sales basis is kind of what we're targeting from a margin improvement standpoint across the portfolio. James Fish: Don't grade me down by calling the wrong name. I think I called you Tony. Operator: Our next question coming from the line of Trevor Romeo with William Blair. Trevor Romeo: First one I had was maybe on the 2026 outlook for Healthcare Solutions, particularly on EBITDA because I know you did give kind of a revenue outlook. You talked about kind of continuing to optimize the business. I was hoping maybe you could level set how much cost synergy capture you realized in 2025 and then how much is baked in for incremental in 2026? And then along with that, how much sort of underlying growth and margin expansion you expect from the business ex synergies? James Fish: Yes. There's probably a couple of us could take this one, but I'll start and then maybe David or John can jump in. But first of all, as far as '25 goes, we did say, at least on the SG&A synergies, we gave a range initially of $80 million to $100 million, and we finished above the top end of that. So we're encouraged by that, and that ends up being a benefit -- a carryover benefit for us. Some of it is -- well, it all carries over, but some of it's happened ratably throughout 2025. So that ends up being a carryover benefit for us as we come into 2026. We -- the original synergy goal of $300 million, and that, of course, mentioned the $50 million that's included in that for cross-selling, we feel very comfortable with that. I think there's a little bit of a scrambled egg happening here with these businesses because some of this, and I mentioned in cross-selling, some of that ends up showing up in collection and disposal. The same thing happens on the cost side, particularly operating cost, but also SG&A. I will say this about SG&A, which is kind of the long pole in the tent here that David mentioned it in his remarks. But as you look at SG&A pre-acquisition, and that's been something that Devina and I spent a ton of time -- all of us, but Devina and I, in particular, were very focused on getting SG&A down. And that number pre-acquisition had gotten down to, I think, the third quarter of last year was -- or of 2024 was 8.9%. And as for a year, I believe 2024 was 9.4%. And then that jumped up after the acquisition to a high of 11% in Q1 of last year, 2025. We have, through the synergy capture, have really kind of chopped away at that. It ended the year at, I believe, 10.3%. But as David said, there's a near-term pathway to getting that -- continuing to get that thing down as a corporation, that includes Healthcare Solutions down to below 10%. And as we've said many times, that business was running at a much higher SG&A. I think it was as high as 25% when we bought it. It has come down to 20%. I think the number that was in our synergy capture was 17%. And then Devina said a number of times, look, we think that there's no reason we couldn't expect that number to be down close to our own number, which is kind of 9%. And as it gets down there, you could expect to see that SG&A number continue to come down. And then maybe, John, on the operating side? John Morris: Yes, I would say from a synergy perspective, cross-selling and internalization, those avenues are going very well. And as Jim mentioned, Trevor, we're seeing a good bit of the benefit right now showing up sort of in the core solid waste business. I commented on our roll-off volume last quarter being a portion of it, about 60 basis points being driven by simply taking that work and putting on WM trucks. That's not something that's going to show per se in the Healthcare segment. And like I said, in terms of internalization and other synergies we're getting out of the business, that's all going extremely well. Trevor Romeo: Yes. Makes sense. Okay. And then I did want to follow up on the RNG business. I don't know if maybe Tara is on the call, but I appreciate the, I guess, the 60% of volumes contracted for 2026. That's encouraging. For the 40% of the uncontracted volumes, I think the comment in the press release was an expectation for $24.50 per MMBtu on the pricing side. I think if you use today's spot prices, that would imply something -- a decent amount higher than that, let's say. So maybe you could just talk about that a bit. Is that kind of where you see the voluntary market right now? Or is there some conservatism built in there? Or just thoughts on pricing? Tara Hemmer: Yes. So I'm here, and we're really pleased with the progress that we've made on selling a portion of our volume, a pretty significant portion, and it's a testament to how we've been managing the risk that's in this business. On the 40% that remains unsold, this is going to be the first year. If you look at it, our volume is doubling year-over-year from about [ 40 million ] MMBtus to now 21 to 22 plus. So we're going to have a portion that is not allocated to our fleet that will be sold in the voluntary market, and that's what you're seeing in there. From a RIN pricing perspective, we're anticipating RIN pricing to hold steady in that [ $2.30 to $2.40 ] range. So that's what it's all based on. Operator: Our next question coming from the line of Tyler Brown with Raymond James. Patrick Brown: I'll reiterate lots of good detail was in the release. But David or Tara, I just wanted to unpack the comments about the approaching $1 billion in sustainability EBITDA by '27. So I think in the release, you provided a baseline now. So I think that baseline is $300 million. And I just want to make sure that I have it right. But are you basically expecting the investments to yield, call it, slightly less than $700 million of incremental EBITDA over the time frame? And can we comp that to the $760 million to $800 million that you laid out at the Analyst Day? And if so, can we just talk about what's driving that delta? Tara Hemmer: So you absolutely have the parts right. And let me just take a step back on 2 key points. First, we're incredibly pleased with the progress on the recycling and the renewable energy investments. It bears repeating what was in Jim's script with 18% lower commodity prices and delivering 22% higher EBITDA on the recycling business. That's a testament to what we're delivering in labor savings, in premium savings, and we've had strong volume growth, which has a halo effect with our customers. And then likewise, really having a lot of momentum on the RNG business. I mentioned before that we're going to be doubling our output. What you can bridge from the $700 million to the $760 million is really just in 2 buckets. The first is a difference in recycled commodity prices. What was in our Investor Day materials was $125 a ton and now what is in the number is $70, which we do view as a low point. So you can consider that there could be some upside if and when commodity prices come back. And that's over half of it. The other piece is, if you go back to 2023, when we had come out with this broader platform, we've learned a lot. And one of the things that we've learned is that there have been some differences in operating costs, primarily related to electricity costs, which is a bit of a headwind, but also in the medium and long term, a potential tailwind for us because we do have a robust landfill gas-to-electricity platform, and that is something that we can lean into as we look at whether or not we expand those types of facilities on our landfill. James Fish: Tyler, this is kind of case in point to my earlier comment about trying to predict things in our business way out. And that Investor Day was the 2025 Investor Day, and you can go all the way back to the 2023 Investor Day about sustainability, just really difficult. So we're kind of dealing with what we have at the time. And so yes, commodity prices have dipped and hence, the $700 million. But I think it kind of makes the point for us that, a, as Tara said, I mean, these businesses are incredibly good investments and the paybacks on them, particularly the renewable natural gas plants. Well, I think we originally said they were [ 2.5 to 3 ], now they may be [ 3 to 4 ], but still incredibly good paybacks. But this -- if anything that's commodity related, as you can imagine, it's just really hard to predict that far out. Patrick Brown: Yes. No. I just was trying to get the delta. That was extremely, extremely helpful. John Morris, a question for you. So if I look at the normal course CapEx, it looks like that CapEx number is running at less than 9.5% of sales. It just feels maybe a bit light. I realize that Stericycle is less capital intensive, so that's part of it. But is this kind of a good, call it, forward capital plan? Is there something unique in '26 that keeps the budget down? I think you and Jim mentioned the lower fleet age, but I just want to just try to level set on where that CapEx will run longer term. John Morris: I think probably a little higher than that, Tyler, probably the 10-ish percent off the cuff. There's a few things to mention. One, 1,500 trucks is what we said is probably normal run rate for the traditional solid waste business. And as Jim mentioned, we've been obviously catching up and advancing some of those investments, which, by the way, are clearly paying off. As I mentioned in my prepared remarks, we got -- we do have some work to do on the fleet with the health care -- on the health care side is because they leased virtually every one of their vehicles. So we are systematically unwinding that where it makes sense and when it makes sense, right? So there's a timing aspect to when we peel back some of those leases. And then lastly, obviously, the sustainability investments, as you saw in the release and the remarks here is coming down by roughly $400 million to $200 million. So there's some puts and takes. But back to where we started, I think that 10-ish percent range is probably a good mile marker in terms of go-forward capital. Operator: Our next question coming from the line of Toni Kaplan with Morgan Stanley. Toni Kaplan: I also wanted to ask about the Healthcare business. You talked about the 3% growth next year, the 4.2% pricing. It sounds like you're still having some of the issues with the Stericycle customers. You mentioned the credit memos. Do you expect all this to be resolved this year? And how are you thinking about growth in this segment for future years? And just maybe if you could talk about market conditions within the medical waste space and if that's proceeding how you sort of saw when the deal was launched or when you announced the transaction where you were talking about sort of a higher market growth for the health space? James Fish: Yes. So fair question here. And one thing I would maybe correct you a little bit is the customer -- that's why I wanted to make sure I mentioned that we're getting to, and I would argue we're there where the customer is getting a good invoice, they're getting a payable invoice. There's a lot going on behind the scenes for that, especially for the larger customers. By the way, there is a lot going on behind the scenes for our larger customers in the Legacy Business, too, and our national accounts. There's a lot of manual effort that is ongoing there. But our intention was to really kind of build a wall between the back office work that is ongoing and will be ongoing through '26 and what the customer sees. And that's why in my remarks, I talked about the improvement in our customer service stats to levels above our Legacy Business. That is all super encouraging and tells us -- and I think I mentioned that one of our customers recognized us for really improving our invoicing. That was a big customer. I didn't name the customer, but a big customer. So all of that tells me that we've done an effective job of putting that kind of wall in place. So the customers, they really don't care what goes on in the background as long as they're getting good service and good invoice. And then we will take care of the system issues, we'll take care of the process issues, all of that. And that is all -- we're making big progress on that. It's all ongoing. So all that's part of the ERP that we've talked about many times. It also gives us the ability to, as I mentioned, and you asked about kind of the growth of this business. Look, I would tell you this, I think we said 5% to 6%. And really, as you think about what we gave for 2026, 4.2% price, but only 3% top line. And that negative volume piece, as I mentioned, is largely related to these accounts that we've lost. And we knew we had lost them, and we knew that it was going to have an impact on Q4, and we know it's going to have an impact on the first half of 2026. As we get to the back half of 2026, that actually turns into potentially a tailwind for us on a year-over-year basis. And then the last thing I'll mention about this -- so I guess to finish that point, we do feel very good about the strategic business case for this. I know there's been some skepticism out there about, well, is this business not going to grow at the 5% to 6%. You take out those lost accounts and you're almost there right now. So when we get to the back half of next year and into 2027, when you look at that -- the pricing power that we have across the entire organization and when you look at the fact that this business demographically, I mean, if I were to ask you what business should you be in over the next 20 years, I would think that health care is one of those with this aging population in the U.S. and in Canada and the U.K. So that has to be a beneficiary of it. So I think my long answer is, yes, we're very confident in the growth trajectory for the business. And we're also very pleased with the progress we've made, not done yet, but we've built this wall, and the customer is now seeing a good invoice and a good service level. Toni Kaplan: Great. And just moving to -- you mentioned some technology and automation improvements that you've made. When you think about 2026, which areas are you most focused on for efficiency or technology? Just anything that to highlight with level of automation that you're able to continue to do and which areas have the most runway for that? John Morris: Maybe I'll start with, and Tara can chime in. On the recycling side, I think you've seen the benefits. Tara commented in some of her answers about the progress we've made from the investments we've made in recycling. A lot of that has driven sort of the middle of the P&L. And that's where technology enablement and AI are paying off already, and we've made a lot of progress there. When you think about the 15,000 refuse vehicles we run and now another -- call it, another 4,500 on the health care side, building out technology enablement as a logistics service is where you -- I think that's paying off too. When you look at the margins and the OpEx in particular and the momentum that we've built in '24 into '25 and into Q4, I think you're going to see that continue to carry forward into 2026. And then lastly, on the post-collection side, we've talked a lot about the value of our network and having strategically placed assets in the post-collection side, whether it's transfer facilities, recycling facilities, landfill facilities. We're taking kind of an IoT approach at our landfills, too, by embedding technology in those facilities that's going to give us visibility to the operation in a much more efficient manner than we traditionally have done. And those are complex operations, as you know. So we still see a lot of opportunity on the post-collection side, particularly landfills to embed technology to really drive down operating costs there as well. Operator: Our next question coming from the line of Faiza Alwy with Deutsche Bank. Faiza Alwy: I wanted to ask about just volumes in the collection and disposal business in the fourth quarter. I thought they came in a little bit light relative to what we've seen. And I know we've had some -- obviously, special waste volumes. And I know earlier in the call, you talked about sort of the industrial business and the macro environment there and that you're optimistic. So I'm just curious, is there anything more to consider as it relates to collection and disposal volumes in the quarter relative to trend other than just special waste? James Fish: Yes. Look, we don't talk much about weather just because we choose to make it up. I would tell you that weather impacted us in December and likely is going to impact us this week when we get to first quarter results. But we make that up. I mean we don't let our area folks say, well, weather impacts me, therefore, I'm going to be coming in under my budget. But it did impact volume a bit. As you see with the numbers, it didn't impact the overall numbers. So we made it up on the EBITDA line. But when you think about volume, it did have a bit of an impact on volume. MSW was a bit soft and much of that was a result of -- the 2 lines of business that are most impacted negatively by weather are MSW and the industrial line of business. And -- so those were clearly impacted by the weather in early December. I suspect that they'll be impacted this week, too. So that would be my answer that may have caused a little bit of softness there, but it doesn't impact the EBITDA line. John Morris: The only thing I'd add on there, Jim, is residential is the one that sticks out. It's been negative for a number of quarters. And I would tell you, while we see that starting to turn into more of a growth engine in 2026, when you look at 2025, we finished the year at high teens on the EBITDA margin side and over 20% for the quarter on residential, which has always been a high watermark for us. So I kind of look at the volume attrition there a little bit different than I would the other pieces of volume. But again, I think it's important we see that -- we see the teams pivoting from using that as shrinking the greatness to now growing to even better margins as we go forward in that particular line of business. James Fish: Well, I think it's been mentioned today, Faiza, but also if it hasn't, we should reiterate the fact that on the volume line, when you look at 2026, we have 50 basis points headwind on volume from that fire volume that we got last year on the West Coast. The tough part about that is that we don't -- look, unfortunately, natural disasters seem to be happening fairly regularly, but we don't forecast them for obvious reasons. So right now, we don't have anything built in. We have asked our field operations to figure out how to make up that. That's a tough makeup because it was a pretty big headwind on volume, also a big headwind on EBITDA, $82 million was the number from last year on the EBITDA line. So when you look at -- whether you look at volume, whether you look at EBITDA, you may say, well, gosh, a lot of the reports were saying a bit soft on guidance. Keep in mind that, that's why I pointed out that 7.4% EBITDA growth, if you take out that onetime impact from the fires. Unfortunately, these things do happen. So something else may happen. It may not be as big. Hopefully, it's not. Hopefully, we don't have anything this year. But if we do, we have the assets, the geographic coverage, the people, we have all of that to take care of our customers. Faiza Alwy: Yes. Understood. Makes sense. And then I was going to ask about just the margin guide for next year. And I was hoping there are a few moving pieces, in particular, with the wildfires and also, I guess, the roll-in of the sustainability projects. So maybe you can help us a little bit around the quarterly cadence of margins at a high level and how to think about that. David Reed: Sure. I'll give you some of the components. This is David. I'd be remiss if I didn't talk just about the records that was mentioned previously, both in the quarter of 31.3% and for the full year of 30.1%, which I do think is a testament to how our team members focus and dedicate on this throughout the year. But as we look to 2026, we're calling for our fourth consecutive year of EBITDA margin expansion of 30 basis points at the midpoint. But as Jim just alluded to, 50 basis points on an adjusted basis. The biggest contributor to that is going to be from our collection and disposal business. So as we execute our pricing programs, while continuing our strategies around operational excellence and leveraging our network, that's a big piece. We also have some business mix, as we've alluded to, continued shedding of some lower-margin residential business relative to our volume growth in the landfill line of business. And then on sustainability, there's about 30 basis points collectively of benefit in '26 in terms of the bridge as we bring new plants online. We've got 4 recycling facilities and 6 RNG facilities coming online in 2026. There is a modest decline in recycling commodity prices year-over-year that will have a minimal impact on margin. And then Healthcare Solutions, as we've been discussing, will contribute to margin expansion overall for the year as we capitalize on our value capture opportunities, execute our pricing plan, continue our cross-sell efforts, even though that will show up most likely in the C&D business and then continue our progress on lowering our cost structure. And then in terms of cadence throughout the year, it's, call it, 47% in the first half, 53% on the back half in terms of mix, but that's in line with our historical averages. Operator: Our next question coming from the line of Adam Bubes with Goldman Sachs. Adam Bubes: Just had one more follow-up on margins, really impressive in the quarter. And I think if you just compare your 4Q margin prior exit rates to where you typically ended the next year, it would sort of imply that this 4Q exit rate points to potential for better than 30 basis points of margin expansion in 2026. So just wondering out of the 230 basis points of margin expansion in this fourth quarter, how much of that expansion was maybe more one-off? I know you called out the outsized RIN sales that were going to happen this quarter. David Reed: I think for the most part, these are sustained initiatives that we've been executing on, and it just highlights our focus on disciplined cost management. And so we're just seeing it come to fruition. I think as Jim alluded to, with the volume, some of it which we can't control, like just the ability of the business to flex accordingly in the environment that we're operating in, it allows us to maintain and sustain that margin going forward. So for most of it, I think we can carry that forward versus a number of one-offs that was idiosyncratic to the quarter. James Fish: So I'm probably going to make his point for him here, but one thing we haven't really talked too much about is the fact that if you look at our core price for next year, 5.6%, it's a 250 basis point delta, and we typically have gotten this question, so we haven't gotten yet today, but a 250 basis point delta to our forecasted cost inflation. I don't know how that measures up historically, but it's got to be one of the bigger ones for us. So I'm kind of making your point for you. But still, we do think that 30 basis points is reasonable considering the 20 basis points of headwind from the fire volumes. So that's where we came out. Adam Bubes: Terrific. And then on the landfill gas side, can you just update us on voluntary offtake discussions? I think eventually 50% of your production will go into voluntary markets. So what's your confidence level that, that 50% will be absorbed by those markets? And how are those discussions going? Tara Hemmer: We're confident that we'll be able to absorb that in the voluntary market. While the U.S. market right now is a bit softer than it had been, there are other markets that are strong. If you look at Canada, the U.K. and some other international markets, we're able to tap into those as well. And then still in dialogue with some larger utility companies across the U.S. as their public utility commissions pass their rule-making that, that should free up more of the voluntary market in the future. Operator: Our next question coming from the line of Noah Kaye with Oppenheimer. Noah Kaye: I'm sorry to beat the margin math, hopefully not to death here, but just I'm a little confused. So the walk here is 50 bps on an adjusted basis ex wildfires. But I think you said that sustainability was maybe 30 bps benefit in the bridge. And then I think just with the synergies capture on health care and the pricing, there has to be another 10, 20 bps or so, at least. So what am I missing here? Because it seems like collection and disposal is going to be positive based off of what Jim and Dave just said. Just trying to understand what moving pieces there are that we're not accounting for. David Reed: Yes. There's some normalization of certain expenses in corporate and other that we've baked into the guide. Those may or may not materialize, but just we felt prudent just based on how we finished the year to adjust for that. There's also some technology costs that show up in there that are for the benefit of other parts of the organization. And so that's offsetting some of the points that you're highlighting. Noah Kaye: Okay. That's helpful. And then just a quick one on the recycling outlook. The basket was $62 a ton in 4Q, and I think we're kind of maybe at or slightly below that. Maybe you can update us. But just the thought around the $70 per ton outlook for '26, can you help us understand that? Tara Hemmer: So 2026, the way to look at it is the first half, second half story. And so exiting 2025 at $62 a ton, what we're anticipating for the first half is in that $60 to $65 range and then ramping in the back half of the year. Why is that? Well, what we're starting to see is a little bit of green shoots on the fiber side. The headlines previously were that a lot of capacity had been taken out of the U.S. market, which is true. That was more inefficient mill capacity. But the larger mills that remain are going to be looking for material, some of the cloud around tariffs has been lifted. So we're anticipating that OCC prices should bounce back a bit in the back half of the year. We're not expecting any material movement on plastic pricing moving forward. Operator: Our next question coming from the line of James Schumm with TD Cowen. James Schumm: For WM Healthcare, can you give us the revenue split between document destruction and medical waste? And then maybe give some color on document destruction profitability and whether you see this as a core business for you going forward? John Morris: So James, I think the answer to your question is about 2/3, 1/3 between health care and the document destruction business. And then sorry, could you repeat the second part of the question? James Schumm: Yes, sure. Just in terms of like the profitability in document destruction, any color there? I think you talked about in the past that maybe you had an advantage here with your recycling business, maybe you got better paper pricing. But do you see this as a core business going forward? John Morris: Yes. I mean, first, to start on the recycling side. I mean, it's interesting. Both of those businesses are collection, disposal and/or processing businesses, right? And I think you heard some of that commentary from us earlier. So from that perspective, it lays nicely over whether it's on the [ SID side ] or on the health care side to what we see as some of our core competencies. The commodity side of it, I mean, Tara spoke to what we're going to see from a commodity side and probably some more green shoots on the fiber side into '26, which certainly benefit that business. And then when you look at the health care side, it is a collection and disposal and processing business. And Jim gave a good bit of commentary on where we're at. I would tell you that the integration into the areas, which has just occurred over the last, call it, 120 days, I think it's going to be a great platform for us to continue to drive some real expansion in margins now that our field leadership teams have sort of a full purview of the business at the local level, which not dissimilar to the WM core business, there's a lot of elements of this from an operating perspective that are local. So we're excited about what we're hearing from the teams. And Jim mentioned, we just had our quarterly business reviews last week and got a lot of good commentary and a lot of positive commentary on where that business is going. James Schumm: Okay. Great. And then Jim kind of touched on this, but collection and disposal core price in 2026 is expected to be like 5.6% at the midpoint, which seems very conservative off of 2025 6.3% level. So just curious like what was the customer churn number in Q4? And what do you see is the right number for churn? What do you [indiscernible]. John Morris: Yes, we see that obviously bounce around a little bit quarter-to-quarter for a litany of different reasons, but we've talked about churn being in and around that 10% range, and we're still bouncing around in that range, although it varies from quarter-to-quarter. And you've heard us comment at times, it's been as low as 8% and change. It's been a little bit as high as 11%. But when you stretch the tape out, that 10-ish percent churn number is kind of what we anchor on. In terms of the price side, when we think about core price and yield and the conversion, obviously, that number has bounced around. It's been the high 50s to high 60s. But I think what I would point to is when we break it down by line of business and the margin profile of those businesses, what you're seeing is our operating expense under 59% in Q4, under 60% for the full year. So that's showing that we're making progress on the middle of the P&L. And then we look at that relative to customer lifetime value and what's the long-term perspective on pricing that we should take with each of those individual customer segments. And I think you're seeing it translate to all-time high margins. I mean the collection and disposal business was 39%, which I think that's an all-time high as well. James Fish: Maybe one last point here on pricing, James. As you mentioned that you thought maybe 5%, 6% kind of conservative. Keep in mind that as CPI or some of these indexes come down, we've talked about this many times, but there is a lag in those index-based price increases that we can take largely on the resi side of the business, but sometimes on other lines of business as well. And so that lag can be up to 6 months. And so we do expect that as CPI has come down throughout 2025 that we will see a bit of a lag there that will negatively impact 2026 pricing. So hence, the 5.6% as opposed to something in the 6s for 2025. But as John just said, look, we're certainly making up for that on the margin line. Operator: Our next question coming from the line of Jerry Revich with Wells Fargo Securities. Jerry Revich: John, I'm wondering if we could just go back to your prepared remarks. You mentioned some benefits from connected trucks and other tech. Can you just give us an update? Are you folks seeing an acceleration in terms of the savings that you're seeing from logistics management? And obviously, you had the session with Caterpillar at the Consumer Electronics Show. Is -- are the returns from your tech investments accelerating as we head into this year? John Morris: Yes. I think, Jerry, starting with connected truck, we've had that technology on all our commercial fleet for some time now. We've actually expanded that to the automated components of our residential business. So we still see that there's runway there. So we'll continue to build on that. And I think to your point about the -- I mentioned connected landfill and in particular, the heavy equipment side, we see plenty of opportunity that we're starting to unpack with this connected landfill. There was a good bit of detail laid out at Investor Day about what that pathway looked like going forward. So if you think sort of late middle innings on some of the connected truck elements that you mentioned, I'd say we're in the early innings on the post-collection side and see a lot of opportunity to drive cost out of that part of the business as well. Jerry Revich: Okay. Super. And then from a margin standpoint, just really impressive performance over the course of '25 even as recycling commodity prices got worse over the course of the year. David, I just want to make sure I'm not missing anything heading into the first quarter because normal seasonality and the accounting change implies that you're going to be at roughly, I don't know, 30.5% margins in the first quarter, which is typically your seasonally weakest margin quarter. So I just want to make sure there are no moving pieces off of the really strong run rate that you folks have achieved as the year unfolded last year. John Morris: Yes. I'm kind of thinking accretion aside, Jerry, to keep this kind of same-store sales. But you're right, Q1 is usually one of our softer quarters. And I don't know off the top of my head whether that's the right number or not. It feels a little bit high to me. I think it's a little lower than that, but we could circle back with you to confirm. Jerry Revich: Well, nice performance with the margin revisions consistently in '25. Operator: Our next question coming from the line of Konark Gupta with Scotiabank. Konark Gupta: Just maybe one question on the top line. For the full year, I guess, you guys are expecting about 5% at the midpoint. Just looking at the puts and takes on the quarterly side, you have probably Stericycle is more like a second half story, Jim, I think you said. And then second quarter, you're expecting or seeing maybe tough comps from the wildfire last year. How should we think about the growth cadence for the year by quarter? I mean, especially in terms of how the volumes kind of shake out on the C&D side. David Reed: Yes. I mean it's pretty balanced over the year, but you do see more of a pickup in the second half of the year. So call it, kind of below -- 5% or below in the first half and then above that in the second half in terms of the revenue bridge across the year. And the Q2, to your point, is the toughest comp with the wildfire volumes. Konark Gupta: And then volumes, do you expect that to be more evenly spread out throughout the year? Or it's going to be more skewed to the second half too? John Morris: I think the one area that will stick out as we mentioned, our residential volume has been negative 4-plus percent [ print ], and we see that ratably declining. And by the end of the year, we should be right around 2%, maybe a little bit south of that in Q4. So that will be a clear tailwind to volume in the second half of the year. Operator: Our next question coming from the line of Seth Weber with BNP Paribas. Seth Weber: Just wanted to go back to the health care cross-selling opportunity. I think on the third quarter call, you guys mentioned that it's largely been focused on small and medium-sized customers. I wanted to see if that's still the case or if you're getting any better traction with the large hospital networks at this point. James Fish: I think this ultimately is going to end up being more of a large customer opportunity for us. We -- what we've heard from our folks on the sales side is when they're going out and talking to the decision-makers at these customers, typically these large customers, it ends up being the same decision-maker on solid waste as it is on health care waste. So that's a positive for us. And the fact that we feel very good about the services that we have now on both sides, that ends up being good for us. I do think it's going to be more of our -- we've stratified our customers, the As through Fs by size. And so you can imagine the As, Bs and Cs are the bigger ones. I think this is going to be more of an A,B,C thing than it is a D,E,F thing. Seth Weber: Got it. Okay. And then kind of related question, just can you update us on your national accounts business just across the whole company? It's been sort of low double-digit CAGR for the last few years. Is that still kind of running at that -- improving at that same level in 2025? James Fish: I mean, look, I would tell you, national accounts has been one of our real success stories. And both on the volume side, but also on the price side. I think we've done well with getting price increases based on really differentiated service and differentiated data and analytics that we provide our customers. So we're really pleased with the results of national accounts. I mean, gosh, I would tell you a decade ago, national accounts was kind of a mess for us. And today, it is one of our success stories. Operator: Our next question coming from the line of Shlomo Rosenbaum with Stifel. Shlomo Rosenbaum: I want to jump back to what you started kind of the questionings with -- on the call just in terms of the healthy economy, and you said that it's -- things are looking, you say, not cautiously optimistic, just optimistic. Can you give us -- just delve in a little bit more into some of the -- like the metrics on that, the service interval trends, what are you seeing on scale report on some of the mature routes? And then on residential also, scale reports on the trucks that are coming through, how is the temp roll-off activity doing and prices and pulls? If you can just go through some of that, then I have one follow-up. James Fish: Yes. So as we look at what might be considered leading indicators because we are kind of at the back end of the cycle, so -- of the business cycle. But we do have some business that tends to be leading indicators. I would argue that the special waste stream is kind of a leading indicator for us because while those jobs have to be done, companies have some discretion as to when they have to be done. And the pipeline, as we talk to our sales team, is good on the special waste stream. So that's a bit of a leading indicator for us that -- and what we're hearing from them is that those jobs, and we heard it from our area folks last week that those jobs are starting to manifest themselves. So that is one of the indicators that we do look at. The roll-off line of business as well, although a portion of roll-off, the permanent roll-off is kind of more analogous to our commercial business. So I'm not sure that's so much a leading as a lagging indicator. But you mentioned temp roll-off and temp roll-off has been pretty good for us. The C&D business, if I look at C&D, and that's been one that has been -- has really bounced around over the years. And C&D for the year was -- what's that, 3.4%. And if I looked at last year, for the year last year, it was a negative number last year. It was bounced around in '23 and '22 as well for some reasons related to the pandemic. But I think C&D is somewhat of a leading indicator as well if you think about the -- about homebuilding. So it's a tough one because I'm trying to read some of the tea leaves that are kind of macro. And as I look at GDP, it looks like it could be strengthening. I don't know. I guess what I would tell you is the business performs well, whether in good times or in bad. And I'm feeling, I guess, a bit more optimistic than maybe I have in the past. Shlomo Rosenbaum: Okay. Great. And then just I wanted to follow up a little bit more just on a question that was -- excuse me, the comment that was made last quarter in terms of suspending kind of the pricing initiatives in the Healthcare Solutions area that would be expected to be done by the end of the first quarter of this year. Are you still on track for that? I mean, obviously, from your commentary, it looks like pricing is going to pick up this year based on your discussion of 4.2%. But is it a matter of like really hitting that end of the first quarter, we're done with those issues that we're having that was preventing the pricing? Or is that going to extend a little bit further? Or have you already started it? James Fish: Yes. So here's what I would say about last quarter's comment. I mean that was not a universal comment. I mean, some customers, yes, we had -- some customers we had suspended price increases. But the large majority of our customers are getting price increases. But as I said earlier, it was really being diluted by these credit memos. And so we believe that those credit memos, which are really just a tool to try and clean up some of these past due receivables, those credit memos, we believe, peaked this quarter or last quarter, I should say, Q4. And those start on a nice downward trend, which ends up being a tailwind for us as we think about the whole year of 2026 versus 2025. So pricing, look, we have, I think, a fantastic price team, and they are definitely looking at the opportunities that are in front of us. But a lot of those opportunities are not so much a price execution as it is just less dilution to the overall gross number. Operator: Our next question comes from the line of Tobey Sommer with Truist. Tobey Sommer: From a capital deployment perspective, are you shifting broadly to share repurchase? Or as you look into '27, '28 sort of a longer period of time, you're supposed to take in about -- produce about $12 billion in free cash over that 3-year period. How do you see it shaking out between acquisitions in the core, acquisitions and investments outside the core and repurchase? David Reed: Sure, sure. Yes. I mean as we alluded to in the last quarter and also with our December announcement on some of our shareholder returns, we do view 2026 as a year of harvest and a balanced capital allocation program. But to your point, the beauty of our business is that it does generate a lot of excess cash flow. And you can expect a pretty balanced approach going forward. We do want to continue to return capital to shareholders. So you should expect that our share repurchase program is not a onetime event in 2026. We'll continue it going forward, but it's going to be governed by kind of what opportunities we have in terms of investment opportunities, both organically and also inorganically. But the key word here, I think, is balanced from a shareholder perspective, and that's what you should expect. Tobey Sommer: And then I'm curious what you're hearing from health care customers about their sort of tolerance for price increase, particularly this year given various declines in federal funding ranging from the exchange subsidies to Medicaid cuts that may come in a year that could pressure hospital margins? James Fish: I guess I would just say I haven't heard anybody say there's an intolerance for price increases. So if that's a good sign, then -- that's what I've heard. John Morris: I think with the handful of customers I've visited with, I would tell you that I think what's encouraging is the fact that when you combine what were WM kind of core services with the ability to integrate those with the additional health care services, I think the value proposition is something that's really resonating with the customers, especially the ones that Jim was referring to earlier. These big hospital networks, we sit here in Houston, obviously, one of the centers of the universe, if you will, on that front. And when you walk in the door with a comprehensive set of capabilities that these combined organizations have now, I think there's a value proposition that is not going to be matched out there. James Fish: Yes. I think these As and Bs that we've talked about As and even Cs, this is going to end up looking like they're similar in so many respects to our big national accounts on the legacy side. So it's going to be -- it's a negotiation that they have a contract. It's going to be a negotiation on price, what's the price increase going to be. And a lot of that ends up on how much they appreciate the differentiated service offering. So I think that's -- going forward, I don't think it will look much different than what we see with other big national accounts. Tobey Sommer: Appreciate that. What are you seeing in the hazardous waste business? Is that industrial optimism that you kind of mentioned already comparable? John Morris: I think probably our special waste line that we've all commented on is probably a good spot to look. And we've said our pipeline is strong. Our results would demonstrate that through 2025. And I think going into 2026, we haven't seen any indications that that's going to solve. And that's probably the one barometer that I would point to that's probably most closely aligned with your question. Operator: Our next question coming from the line of William Grippin with Barclays. William Grippin: I just wanted to come back to some of the incremental disclosure you gave on the sustainability business. So you gave us the parts to kind of get to sort of your $700 million implied sustainability growth EBITDA in '27. Obviously, a little below the target you gave at prior Analyst Days. But if I adjust for this sort of lower recycled commodity price environment based on your sensitivity, it implies that was maybe $150 million EBITDA headwind. And so sort of ex out the commodity headwind, it feels like maybe this business is actually performing well ahead of your initial expectations. Is that a fair characterization? Tara Hemmer: We're really pleased with how the recycling business is performing, absolutely. I think the number that you rattled off was really more for the aggregate of our recycling business versus the $700 million number relates to the growth projects of recycling and renewable energy. But the comment still stands. We've been very pleased with the investments that we've made in automation and everything that we expected and then some is being delivered coming out of those automation investments, whether it's higher throughput at those facilities, whether it's higher price points on the commodities that we sell, whether it's labor, which was huge for us and has been over a 30% improvement. So really pleased with those investments. William Grippin: Appreciate that. And just the follow-up here. You gave the sustainability growth EBITDA breakout or contribution for the 2026 guide, I think, $235 million to $255 million. Have you broken that out between recycling and RNG? Tara Hemmer: We have not. But the way to think about it, including the royalty, it's about 60% renewable energy, 40% recycling. Operator: Our next question will come from the line of Tami Zakaria with JPMorgan. Tami Zakaria: So the sustainability EBITDA growth of $235 million to $255 million, can you help us with the cadence of this as we think about 1Q versus the rest of the year? Tara Hemmer: You're going to -- a similar story, the way to think about it first half, second half. So you're going to have more of a ramp in the second half than the first half when you have the carryover effect of what we brought online in the back half of 2025, and then we're bringing new projects online 3 in the first half of 2026. So you'll see a bigger impact in the second half than the first half. Tami Zakaria: So for modeling purposes, is 40-60 first half versus back half is a good proxy? Tara Hemmer: I think Ed can get back to you on that -- on some of the modeling questions. Operator: Our next question will come from the line of Kevin Chiang with CIBC. Alexander Augimeri: It's Alexander on for Kevin here. So I believe the EPA is set to finalize the renewal fuel blending rules in Q1. I was wondering if you could share any thoughts or insights into potential changes they could make to the volume obligations from their original proposal. Tara Hemmer: Sure. Yes. We had -- we're hoping that they issue it in Q1. We were hoping it would come out in late Q4, but the government shutdown delayed that a bit. What we've seen is pretty much the market has priced in the current RVO. And if anything, we're cautiously optimistic, maybe there might be some changes around the edges that could be constructive for pricing. But we're not anticipating anything dramatic coming out of the RVO. I think that's the most important point. And we've really seen stability in RIN pricing, which is the most important thing for our business, and our team has done a great job in navigating selling our RINs ratably over time. Operator: Our last question in queue coming from the line of Stephanie Moore with Jefferies. Stephanie Benjamin Moore: I wanted to follow up on a prior question that was just asked on capital allocation priorities. I mean I appreciate the commentary regarding keeping a balanced approach. But I also think as we think about 2027 and 2028, just the shared cash flow that's going to be kind of spun off from this business, especially with the RNG investments coming through, you should be back to your targeted leverage this year. So as you think about that balance and maybe looking specifically at the M&A component, you're going to have, again, a lot of optionality. So as you think about that optionality, any areas that are particularly interesting as you think about the next couple of years? James Fish: I mean I think as far as M&A goes, and then David can comment more on the capital allocation piece or the share repurchase and dividend, but those are kind of dividends kind of set. But M&A, look, I guess what I would say, and John can reiterate here, there's still plenty of good strategic acquisition opportunities out there. I wouldn't expect to see us kind of stray outside of that. We have used typically $100 million to $200 million as our estimate for acquisitions throughout the year, and that's the number we have baked in for this year, that range. So it could be at the high end of that range. But I think for the next few years, that's the number I would -- if I were modeling, that's the number I would use is kind of $100 million to $200 million in acquisitions. And then, David, dividend, hard to say what the increase is going to be, but dividends and capital allocation are going to make up the rest because really, the balance sheet, I think, you would say is in good shape. David Reed: Yes. The balance sheet is in great shape. I think the one thing just to your point about now that we have the share repurchase program is going to start back up this quarter. Obviously, we look at acquiring our own shares versus if we're looking at larger opportunities, we have a very biased view on kind of what the value of our company is. And so that's -- I think you're going to see us to continue our share repurchase program just from that point alone. But we're very disciplined in terms of our pricing approach to acquisitions. Operator: And I'm showing no further questions in the queue. I will now turn the call back over to Mr. Jim Fish, WM CEO, for any closing remarks. James Fish: All right. We had a 15-minute closing remark plan. But in light of time, I'll just say thank you all for your great questions today, and we will talk to you next quarter. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Good morning, and welcome to the Origin Bancorp, Inc. Fourth Quarter 2025 Earnings Call. My name is David, and I'll be your Evercall coordinator. The format of the call includes prepared remarks from the company followed by a question and answer session. [Operator Instructions]. I would now like to turn the conference call over to Chris Reigelman, Director of Investor Relations. Please go ahead. Chris Reigelman: Good morning, and thank you for joining us today. We issued our earnings press release yesterday afternoon, a copy of which is available on our website, along with the slide presentation that we will refer to during this call. Please refer to Page 2 of our slide presentation, which includes our safe harbor statements regarding forward-looking statements and use of non-GAAP financial measures. For those of you joining by the phone, please note the slide presentation is available on our website at ir.origin.bank. Please also note that our safe harbor statements are available on Page 7 of our earnings release filed with the SEC yesterday. All comments made during today's call are subject to the safe harbor statements in our slide presentation and earnings release. I'm joined this morning by Origin Bancorp's Chairman, President and CEO, Drake Mills; President and CEO of Origin Bank, Lance Hall; our Chief Financial Officer, Wally Wallace; Chief Risk Officer, Jim Crotwell; Chief Accounting Officer, Steve Brolly; and our Chief Credit and Banking Officer, Preston Moore. After the presentation, we'll be happy to address any questions you may have. Drake, the call is yours. Drake Mills: Thanks, Chris, and thanks for being with us this morning. This time last year on our call, we introduced Optimize Origin. As we outlined, Optimize Origin was more than a project, it was more than a point in time. It represented an evolution for our company and how we connect our award-winning culture with our drive for elite financial performance. Our short-term goal was for a 1% or greater ROA run rate by the fourth quarter of 2025. We accomplished this goal. While I am pleased with our results, I'm not surprised how our team delivered. We remain laser-focused on our ultimate goal of delivering a top quartile ROA. Origin has a tremendous amount of momentum as we enter this new year. I'm proud of the progress that we've made and extremely optimistic about our future. My optimism is based on 3 primary themes. First, our team continues to execute on Optimize Origin. Second, we continue to capitalize on the disruption in our markets created by recent M&A activity. And third, we have no barrier to growth as we have properly prepared to pass $10 billion in assets. Our teams and our markets are ready. Now I'll turn it over to Lance and the team. Martin Hall: Thanks, Drake, and good morning. As Drake mentioned, we have a deep sense of optimism for Origin as we enter 2026, and that is felt throughout our entire company. I'm proud of the passion and discipline our team showed in 2025 and the aspirational belief we share together in what we can be as a company. My confidence in what we accomplished is based on our team's unrelenting focus and execution surrounding Optimize. This past year, we achieved 20% ownership of Argent Financial, consolidated banking centers, restructured the way we deliver mortgages to the market and reduced FTEs by nearly 7%. NII was up 10.2%. Total revenue, excluding notable items, was up 8.8% and noninterest expense, excluding notables, was down 0.7%. I've said before on our previous calls that I felt our production has been masked by planned reductions due to our client selection process and by payoff and paydown pressures. Even with these dynamics and a data-driven strategic reduction in our production team, loan originations increased approximately $500 million or 37% year-over-year and loan and swap fees increased 57% over the same period. Our continued execution of Optimize Origin is critical to our success. At its core, Optimize is about simplifying how we work, sharpening execution, eliminating friction and freeing up our teams to spend more time creating value for our clients. Optimize will continue to guide how we improve performance, strengthen accountability and invest intentionally for the future. In late 2024 and 2025, our efforts were primarily focused on balance sheet management and expense reduction. In 2026, we are intensifying our focus on the client delivery model and opportunities for additional revenue growth. As Drake mentioned, the disruption in our markets is a tremendous opportunity for us. Just over the past few months, we've added more than 10 production bankers in Houston and Dallas-Fort Worth and see additional opportunities ahead. This investment and disruption is a major strategic focus for us in 2026. Our guidance assumes we will invest roughly $10 million in new bankers and banking teams throughout our markets this year. These investments are on top of continued investments we're making across the organization that should drive continued efficiencies and growth as we strive for our ultimate top quartile ROA target. We feel strongly that the current environment presents unprecedented opportunity for Origin. We are poised to take advantage of it. Now I'll turn it over to Jim. Jim Crotwell: Thanks, Lance. I am pleased to report sound credit metrics for the quarter. Total past dues at year-end came in at 0.96% of total loans, reflecting no change from the prior quarter. Past dues 30 to 89 days came in at 0.19%, a moderate increase from 0.1% as of 9/30 and compares favorably to a level of 0.24% reported as of the prior year-end. Net charge-offs for the quarter were $3.2 million, which were in line with expectations and represent a 0.17% annualized charge-off rate for the quarter. During the quarter, nonperforming assets declined from 1.18% to 1.07% at year-end, an approximately $7 million reduction. We did experience a slight increase in total classifieds, increasing from 1.84% of total loans to 1.92%, an increase of $9.3 million, driven primarily by the downgrade of 4 relationships, partially offset by a reduction in 5 relationships. For the quarter, our allowance for credit losses increased $523,000 to $96.8 million. On a percentage basis, our allowance remained stable at 1.34% of total loans net of mortgage warehouse compared to 1.35% for the prior quarter. As in recent quarters, we did not experience any significant changes in our CECL model assumptions with the actual increase this quarter primarily driven by loan growth. Lastly, as to total ADC and CRE, we continue to have ample capacity to meet the needs of our clients and grow this segment of our portfolio, reflecting funding to total risk-based capital of 47% for ADC and 236% for CRE. We continue to be pleased with the sound credit performance of our portfolio. I'll now turn it over to Wally. William Wallace: Thanks, Jim, and good morning, everyone. Turning to the financial highlights. In Q4, we reported diluted earnings per share of $0.95. We also reported net income of $29.5 million, which drives a run rate return on average assets of 1.19%, well above the targeted 1% plus run rate that we outlined as our near-term target last January. As you can see on Slide 25, the combined financial impact of notable items during the quarter equated to net expense of $1.7 million, equivalent to $0.04 in EPS pressure. On a pretax pre-provision basis, we reported $40.6 million in Q4. Excluding $1.6 million in net expense from notable items in Q4 and $7.9 million of net revenue in Q3, pretax pre-provision earnings increased to $42.2 million from $39.9 million and annualized pretax pre-provision ROA increased to 1.7% from 1.63%. On the balance sheet side, loans grew 1.8% sequentially and 1.1% when excluding mortgage warehouse. Total deposits declined 0.3% during the quarter. However, on the last day of the year, we sold $215 million in interest-bearing deposits. These deposits were repurchased 2 days later. Excluding the sale, deposits would have increased 2.3% during the quarter. Also, while noninterest-bearing deposits declined 1.0% sequentially, they increased 5.3% on an average basis and ended the quarter at 23% of total deposits after adjusting to include the $215 million in deposits sold and then repurchased. Moving forward, we're currently targeting loan and deposit growth in the mid- to high single digits for the year. We remain optimistic that momentum will continue to build, especially as we capitalize on M&A-driven disruption in our markets. And our expectation is for loan growth to be more weighted to the second half of the year. Turning to the income statement. Net interest margin expanded 8 basis points during the quarter to 3.73%, ahead of our expectations. Moving forward, we expect slight margin compression in Q1 due to timing differences in loan versus deposit repricing following the recent Fed rate cuts. By Q4, we currently anticipate NIM in the 3.70% to 3.80% range with current bias to the higher end. Our outlook includes 25 basis point Fed rate cuts in March and June. Combined with our balance sheet growth expectations, this results in expected net interest income growth in the mid- to high single digits for both the full year and Q4 over Q4. Shifting to noninterest income. We reported $16.7 million in Q4. Excluding $483,000 in net benefits from notable items in Q4 and $9 million in net benefits in Q3, noninterest income declined to $16.3 million from $17.1 million due largely to a reduction in swap fee income and normal seasonality in our insurance segment. Moving forward, we anticipate full year noninterest income growth in the mid- to high single digits with Q4 over Q4 growth in the low to mid-single digits when excluding notable items. We reported noninterest expense of $62.8 million in Q4. Excluding $1.3 million in expense from notable items in Q4 and $1 million in Q3, noninterest expense increased to $61.5 million from $61.1 million. Moving forward, as both Drake and Lance mentioned, we believe there is a significant opportunity facing Origin as a result of M&A-driven disruption across our footprint. Given the magnitude of this potential opportunity, we felt the best strategic decision we could make for the long-term benefit of our shareholders is to invest in the production side of our business. As a result, our expense outlook is for mid-single-digit growth, both for the full year and on a Q4-over-Q4 basis after excluding notable items. Combined with our revenue growth outlook, the end result is the expectation that we will achieve a run rate ROA of at least 1.15% in Q4 and a pretax pre-provision run rate ROA in excess of 1.72%. Lastly, turning to capital. We note that Q4 tangible book value grew sequentially to $35.04, the 13th consecutive quarter of growth. And the TCE ratio ended the quarter at 11.3%, up from 10.9% in Q3. During 2025, we redeemed roughly $145 million in sub debt and repurchased roughly $16 million worth of our common stock, all while maintaining regulatory capital ratios above levels considered well capitalized, as shown on Slide 24 of our investor presentation. As such, we continue to have capital flexibility. With that, I will now turn it back to Drake. Drake Mills: Thanks, Wally. As we close out 2025, I want to reiterate how proud I am of our team and the results we delivered throughout the year. The initial steps we have taken with optimize Origin have made us a stronger, more resilient and more efficient company. We are entering 2026 with significant momentum, a stronger earnings profile and a sharper focus on our employees, customers, communities and shareholders. I believe there is more opportunity before us than at any other time in my career. Origin is officially on the offensive. Thank you for being on the call. We'll open it up for questions. Operator: [Operator Instructions]. Our first question comes from Matt from Stephens. Matt Olney: I guess I think it was Lance's comments that the bank has already taken advantage of some market disruption with some recent new hires. I think Lance said it was about 10 producers in the footprint. It's great to hear. As far as the expense guidance that you provided, any more color about how many producers this implies that you're targeting for the year? Is it those 10? Or do you expect additional hires? I'm just trying to appreciate any volatility we could see in the expense line item from new producer hires or other items in the expense base? Martin Hall: Yes. Matt, thanks for the question. I'll take part of this and maybe Wally want to jump in on part of this. No, we have a lot of dry powder in that $10 million to be able to hire on top of that $10 million plus. Those are some that we've done in the last couple of months, some here in the recently kind of in the last 30 days. But I can tell you, it's a fun time for us right now. We're having very strategic conversations in every one of our markets with bankers and banking teams. This is the opportunity for us to really leverage our award-winning culture and our geographic model and kind of build from an organic perspective. So that $10 million that we're talking about, I couldn't tell you if that's another 15 or 20 bankers or what it's going to be specifically, but it's kind of a little bit of a war chest to allow us to accomplish both things we want to accomplish, which is have a nice steady ROA build and at the same time, to invest in future revenue by taking advantage of this disruption. So it's a great spot for us to be in. William Wallace: Yes. And Matt, maybe I'll just provide a little bit more color specifically on sort of the expense load and how we're thinking about it to help you all out. So look, we have the 10 hires that started late in the fourth quarter or even some were starting early this quarter, January 1 of this year. We also will have our merit increases and cost of living adjustments that kick in, in the first quarter. And then we also have the full impact of payroll taxes that come back in, in the first quarter. On top of that, if you noticed in the press release when we discussed our fourth quarter noninterest expense, we talked about some increase driven by technology contract renegotiation expense. From time to time, we partner with another party or third parties that will help us renegotiate some of our larger technology contracts. And as part of Optimize, we turned over every stone and took a look at all of our contracts, and we partnered with the firm to help us with some of our larger ones. We completed one of those during the fourth quarter, and we anticipate seeing the benefits of that negotiation beginning to impact the expense run rate this year. However, we are also in the process of renegotiating an even larger one that we are in the late stages of, and we're anticipating that we will finish that negotiation during the first quarter. When we finish one of these negotiations, there is a sizable upfront expense that gets booked and then you get to see the run rate benefit after that. So to kind of put that all into numbers, I would say maybe we think about a $64 million expense run rate, plus or minus $1 million the first quarter with the -- assuming we close this negotiation in the first quarter and book that fee, it would be on the higher end of that range. And then you'd see the benefits in the second, third and fourth quarter bringing us down at the low end of the range. And then as we layer on hires, we'll build that expense back up. So think about $64 million and then you all can try to guess as good as we can as to when we'll hire, but we're actively in discussions, and we anticipate that we will continue to be looking for new people to have discussions with as the year progresses, just given this disruption. So that was a lot of words, but hopefully, that helps you all just kind of think about the expenses in your models. Matt Olney: Yes, Wally, that was perfect. Very helpful. Thanks for kind of going through all that stuff. Makes sense. And maybe just one point of clarification for Lance. As far as the new hires as it relates to the loan growth guidance this year, any of those new hires you expect to impact the loan growth guidance in '26? Or is that more of a 2027 impact? Martin Hall: Yes. And Wally you may want to correct me. I think the vast majority of what we put into budget was at the back half or Q4. I mean, as we make these hires, they have nonsolicitation, noncompete language. There's timing around that. So anything that got put in for this year was very much in the back half. William Wallace: Yes. I would just add, Matt, that the equation for us is how do we balance our desire to improve our profitability run rate while also taking advantage of what looks to be almost a generational opportunity from potential disruption. So known hires, people that we have hired and have started, we budgeted, like Lance said, that there would be impact really, really back-end loaded given the time it takes to get on board and then to start communicating with customers and building new relationships and impacting our balance sheet. And then unknown hires, it's hard to budget them. So we would anticipate that a lot of the dry powder that Lance referenced would be impacting the 2027 loan growth run rate. So hopefully, we can continue to see our loan growth accelerate in the coming 1, 2 to even 3 years depending on how long we can capitalize on this disruption. Matt Olney: Okay. And then I guess switching gears on the net interest margin, Wally, it sounds like the margin, I don't know, may got of itself in the fourth quarter. It sounds like the loan beta could catch up in the first quarter. Just any more clarification on the margin and what we saw in the fourth quarter and kind of more about what you mentioned in the prepared remarks about the first quarter. William Wallace: Yes. So thanks, Matt. We do get some timing differential. Our bankers have been very disciplined, and we are anticipating how we're going to move deposit costs before Fed moves. And the cuts that we got in the fourth quarter, we moved deposits on day 1. For the floating rate loans, those loans don't reprice until their next billing cycle. So if somebody got their bill right before the Fed cuts and then they cut, it would be 30 days before we see the impact of that on the loan pricing. So we've already got the benefit of the deposit reset starting to flow through the numbers, but the loan pricing will come down on a slight lag. So that results in a little bit of pressure in the first quarter. But we still have the tailwinds from assets repricing. In 2026, we've got about $150 million or so of securities that will roll off and that we will replace. We're picking up right now about 50 to 75 basis points on spread on those. And then we've got $350 million to $400 million of loans maturing in 2026. The average yield on those is about 4.8%. And right now, new yields are in the kind of low to mid-6s. So we're picking up some decent spread on those as well. So net-net, we do anticipate after the first quarter that you'd see margin expand back up to what we provided on the outlook slide, that 3.75 range, plus or minus 5 basis points. Operator: Our next question comes from Michael from Raymond James Financial. Michael Rose: Maybe just following up on Matt's question just around the incremental hires this year. Yes, I think we would agree that there's a lot of potential opportunity here, another deal announced yesterday. What types of lenders -- I assume most of these are lenders are you trying to hire? Any change? And I assume most of them maybe would be targeted in Texas, but there's clearly been some disruption in other areas of your footprint. Maybe if you can just give us some details on kind of what you're looking for? And would you expect that pace of hiring to kind of persist through the year with the potential for more in 2027? Or is this -- and I'm trying to get to the point of like does the expense growth potentially slow as we move into 2027 as you get more positive operating leverage from the plans for this year? Martin Hall: Yes, this is Lance. Yes, very much so. So the strategic identification of kind of bankers that are going to be really effective in our model really are C&I focused with also kind of a focus on deposits and treasury. So of the 11-ish that we've hired so far, it's been, I'm going to say, 2 private bankers, 3 treasury management officers and the rest are C&I lenders. And I think that will be kind of the mix as we continue to grow as we're balancing really strong core deposit growth along with this loan opportunity. Yes, at the volume of the conversations we're having, I think this is going to be a consistent opportunity for the foreseeable future. I do think operating leverage will continue to enhance for us through this because it's a unique combination right now of our organic pipeline just from the business that we have is really strong and growing. One of the things we talked about in the last couple of quarters was I really felt like I was seeing really strong originations that was getting masked by some of the credits that we were pushing out as well as sort of unusual payoffs and paydowns. It was interesting to watch this quarter kind of get back to normal. We saw the highest origination level that we've seen in over 2 years as well as the paydowns and payoffs drop to the lowest level in 2 years. And then looking at what our pipeline is for the next 30 days, like there's a real ramp-up of demand and loan opportunity at what I think are the really disciplined pricing levels. And so I'm very optimistic without the hires of our ability to get that upper single-digit growth, mid- to high single-digit growth and then just sort of gets the accelerator with these new hires that we have targeted. So really, really optimistic around that. Drake Mills: Michael, this is Drake. I also want to -- as you ask about '27 and trying to understand about positive operating leverage, I've been extremely proud of Lance and this bank team because as we bring these hires on, especially as we focus on our ROA hurdles, they are doing an excellent job of continuing to cut out expense out of the organization to cover up some of the costs that we have of bringing these new people in. So it's just not -- we're not sitting here resting our laurels as far as expense management. We're reducing those expenses as we bring these people on. So it somewhat neutralizes that in '27. Martin Hall: Yes. Maybe a data point or 2, Drake, that's a good point. Kind of going back to the beginning of Optimize, we've now reduced our commercial banking team by almost 25%, and that was pushing out portfolios that we just didn't think were going to be the right mix for us or the ability to kind of grow ROA at the level that we needed it done. And it wasn't necessarily to cut expense. It was really to reinvest into better producers, better revenue streams. We're seeing that. Just last year, the average ROA of our bankers' portfolios increased by 26 bps. And so the work around ROA and the data that Wally and his team are doing is really paying dividends for helping us make better decisions on future revenue growth. Michael Rose: Very helpful color. And maybe just the follow-up here would be -- when I look at current consensus, I'm not saying it's right, but it does show that ROA kind of stagnates in '27. But I think what I'm hearing today is you guys are going to continue to invest, reap those benefits, maybe some of the technology costs come off here, sustainably higher loan growth. I know the peer hurdle has moved to get into that top quartile as well. So it seems like to kind of get there, you're going to have to do more in '27. Is that the way that we should all kind of conceptually think about it? And then I guess the last piece of that, sorry for so many questions would be the capital build here is fairly meaningful. Why not lean into the buyback a little bit more as well? Drake Mills: Well, first off, as we look into '27, we are going to stay focused on where that peer ROA is and what it takes to get in the upper quartile. And to do that, Optimize Origin, as I said in my opening comments, isn't a project. This is a continuance of how we focus on the profitability and the overall culture of this company. So we will continue to look at fine-tuning. We haven't talked at all about third-party management on some of these expenses and projects that we have that are still in the pipeline that I think are going to create significant revenue opportunities, but also to enhance as we continue to model things that work and don't work and reduce the expenses on those things that are not. So I'm pretty -- I've got a bullish outlook on '27 is continuing to ramp up ROA and not stagnate. So through that, when you start talking about capital deployment, we do see a significant opportunity with this dislocation in these markets. And we think that growth is going to come at a faster pace than what we are planning at this point just because of the upset in the markets. And what happened yesterday is going to continue to help us in Texas, but it's across our footprint. I've been very pleased with what's going on in Louisiana. So first off, our organic growth story and strategy is in play, and we think it's really going to accelerate. I love capital, but the reality of it is, I think buybacks are a part of our life today. It makes sense for us. It creates strong shareholder value. But we'll also be looking at dividends, and I think you'll see some opportunities there for us to deploy some capital as we go forward. So we're going to stay focused on 20% of our earnings through going out in dividends. And I think buybacks are here for a while. Operator: Our next question comes from Woody from KBW. Wood Lay: I wanted to just follow up on the disruption. And obviously, it should be a boon for the hiring front. But do you feel the impact of that on the loan competition side? Or is competition as intense as ever? Martin Hall: Yes. Woody, this is Lance. Good question. We were actually talking about that this morning. I would say it is highly competitive, but not irrational is the way I would say it. I think the competitors have been good. I mean, we're starting to see some tighter margins around SOFR quotes, primarily in the urban markets. On the opposite side, the main competition on the deposit side, some of the smaller community banks. But I don't feel that it's irrational at this point. And I feel like there's still discipline and there's still opportunity to kind of keep growing margin and ROA. Drake Mills: And I love what Lance said because internally, this is about profitable growth. We are looking at total relationships and the market opportunities we have give us the opportunity to be extremely disciplined through this process. So it's not about total growth. I think we can sit here and grow 15%, 20%. But when we look at our ROA hurdles and what it takes to make a relationship profitable to the point that it accelerates that, that's where our focus is. And I'm really pleased that we have these opportunities and can stay disciplined. Wood Lay: Got it. And then on the deposit side, I mean, you all have been very successful in lowering deposit costs during this current easing cycle. Are we at the point yet where incremental cuts, it gets a little more difficult to lower deposit rates? Or do you think that you can continue these deposit betas? Martin Hall: Yes, I'll let Wally speak to the betas, but I'll just tell you, anecdotally, I feel like we still have opportunity. I think the back half of last year, I think we saw some of the benefit and the power of the rural deposit base we have in North Louisiana. We spend a lot of time talking about Texas as our sort of driving force and rightfully so. I mean, we grew like loan originations 36% year-over-year and 75% of that was in Texas. But if you step back, we actually grew deposits 14% in Louisiana at our lowest deposit price point across our footprint. So Louisiana continues to pay huge dividends, and that's a big piece of getting our total deposit cost down. So I think there's still opportunity for us to push on that. William Wallace: Yes. Woody, I would just add, when you think about our deposit betas, we -- in our outlook and internally, when we think about how to model net interest margin or net interest income, we're still using our historical beta assumptions in the model, though we have been beating that so far. It does just -- it does feel like at some point, it's going to get harder to beat that beta. But it is an area of focus for us. We think it's an area of opportunity for us. So hopefully, we can continue to exceed our own expectations on the deposit beta side of the equation. Wood Lay: That's helpful color. And then just last for me. As I think about like the top end of the range for the net interest margin versus the bottom end, does it really come down to loan growth where if growth is stronger, you all might be on the lower end of that range. And if it's lighter, you all might be at the top. Is that the right way to think about it? William Wallace: I think that's a fair way to word it, Woody. We don't know how promotional acquiring banks are going to be, and that could put pressure to loan spreads. We are putting some of that in our modeling. But if those pressures increase, then yes, that could put us towards the lower end. And that equation is also true on the deposit side of the equation. So we're just trying to -- it's a wide range and we get it, but we're just trying to solve for the fact that we just don't know how banks are going to act until we see it. So we'll continue to update you from quarter-to-quarter. But right now, even with some pressures on spreads on both sides of the equation, our bias is towards the higher end of that range, but that could come down if the pressure intensifies. Operator: Our next question comes from Stephen from Piper Sandler. Stephen Scouten: Not to beat a dead horse on the new hire conversation, but you talked about it being a generational opportunity. So I think it's worth continuing. Can you talk about maybe how you think about the earn-back period or like a breakeven period on these new hires, just how long it takes them once they get past these noncompetes and what have you? And then just how you compete for these folks? Because obviously, everyone -- every bank we talk to is talking about this generational opportunity and the industry is in a great spot, right? Everybody seems to have capital and want to grow. So how do you become the bank that these people want to come to? Drake Mills: Well, first off, I think we're so focused on C&I, owner-occupied CRE and those lenders, they want to be in a shop that does C&I good and it supports the markets. Also, I think we have very good representation in all of our markets. I think about Nate in the Southeast and that has deep relationships with these teams that have worked with them at some point in time. They have respect for our presidents in our markets. And I think the relationship, the culture, the C&I drive and how we manage our teams is certainly gives us somewhat of a competitive advantage. Through this, we have been pretty focused on 12- to 15-month earnback or profitability levels timing, I should say, on these teams. And where Nate and his team in the Southeast took 18 months, they are now profitable. That was in an environment with higher interest rates and tough to move some credits until maturity. So we're in a different environment. We like the environment we're in, and we think that we can pick and choose the right people that fit our culture, that fit our philosophies when it comes to lending and are in the markets and the industries that we want to lend into. So I think overall, that gives us a very strong competitive advantage to be successful. Martin Hall: Yes. I might would add just -- I love this opportunity more than I like M&A just because we can really use data to really drive and what type of clients do we want inside of our portfolio, and you can do that kind of from a low-risk environment and identifying and targeting teams. This is where our culture shines. I mean when you're named one of the best banks in America to work for repeatedly and then you combine that with our geographic model, which C&I bankers really like to be a part of that you have an entrepreneurial attitude, not in a siloed line of business, you get to bank your clients. And so if we can offer a good model, an entrepreneurial organization, somebody that allows them to bank the clients they want to bank from a C&I perspective, really good treasury management tools that allow them to kind of go up market, I think it creates a competitive advantage for Origin. Stephen Scouten: Yes, that's really good. And Lance, you touched on something that I wanted to hit, and it's like is the use of data. And it seems like a lot of the progress has been aided by really intentional and sophisticated use of data. I'm curious how that has helped shape the composition of your loan growth and kind of what you're focused on and maybe how that shifted from a couple of years ago, whether it's risk-adjusted returns, loan sizes, loan type and just kind of how this Optimized Origin process has changed the focus of the bank as you move forward and how you lend. Martin Hall: Yes. I'm so glad you asked that question. I mean that has kind of become the driving force of what we do. And I give Wally and his team all the credit. I mean, we're -- honestly, we're just a different company than we were 2.5 years ago because of our access to meaningful and actionable data, spend tremendous amount of time digging into portfolio data, banker profitability, client profitability, product profitability. You've seen what we've done with branches. It's just kind of obsessing now over finding ROA enhancement opportunities through the use of data. Our ability now to kind of design like what a top performer banker looks like for us inside of our model using data. And then the flip side is kind of what the bottom performing bankers look like and then how do you coach from that from a data perspective? Or how do you know it's time to kind of push out and reinvest. So I actually kind of can't give Wally them enough credit for what they've done for us. It helps drive type of deposit clients we want, our investments in treasury, the loan mix. I mean there's just so much there that is -- we're making decisions in a different way than we have kind of over my history here because of what's at our fingertips. Stephen Scouten: Yes, that's fantastic. And then I guess last for me. Obviously, net charge-offs came back to like a more normalized level here this quarter. I'm sure NPLs are still a bit more elevated than you guys would like. With everything going on, all the positives, is there anything that can be done there to migrate some of the credit -- the lingering credit issues maybe down a bit quicker? Or how do you think about the path for nonperformers from here? Jim Crotwell: This is Jim. Yes, when Lance spoke to client selection move out, it's really shifting more toward those loans that are criticized in this quarter, the $45 million, 75% of that was in the criticized area. And so that really is our focus. So I'm very pleased with the progress we made on nonperforming for the quarter, and we see some reduction there. We've always had some good news early on this quarter. And that is really our focus to really drive those metrics down, particularly as it relates to nonperforming. So I feel good where we are in the direction of what I'm seeing that we can accomplish in '26. Operator: Our next caller is Gary from D.A. Davidson. Gary Tenner: I had a couple of questions. One, just moving over to the fee side for a minute. Just curious about the swap activity in the quarter, obviously down quite a bit. And I think you had kind of flagged that it would be down, but pretty minimal in the quarter. So just wondering if there was anything unusual behind that. I would have thought with the expected and actual rate cuts that it would have been a little more active. Unknown Executive: Yes. No, I actually just think it was extraordinary in the third quarter, to be honest with you. I think it kind of came back and normalized a little bit. A little hard to budget for the -- I mean we actually had -- I think our swap and loan fees were up 59% kind of year-over-year. We had a great -- we expect really good volumes around that this year, but maybe not quite to the same level we had last year. So I think it was more about the third quarter being really high. Gary Tenner: Okay. And then you had noted securities cash flow is about $150 million. If loan growth comes in a bit stronger, is there room to work the securities portfolio down a bit more and use some of those cash flows to fund loan growth? Or is the base case assumption that it's fully reinvested in the securities portfolio? William Wallace: Yes. Gary, we have worked very hard over the past 2 to 3 years to work the securities portfolio down to a reasonable portion of the balance sheet. And we define that as kind of the 11% to 12% range, which is where it's at right now. So we anticipate that we will keep the securities portfolio where it is relative to assets. So if loan growth accelerates, then you'd actually see the securities portfolio build accordingly. So no, there's not -- we don't anticipate that there's any room for a shift out of securities into loans. Now I would note, though, that we do have a lot of liquidity right now. Some of that is seasonal due to public funds seasonality and tax season, et cetera. So there could be some opportunity as we deploy liquidity into the loan portfolio that's not currently in the securities portfolio for some benefit there. Martin Hall: Yes. And then maybe also, we did a really good job of growing core deposits last year, which allowed us the luxury of replacing all of our broker deposits. I think at this point, correct, Wally, we have no broker deposits. William Wallace: Correct. That's exactly right. We're in a good shape from a liquidity perspective, Drake. Operator: This concludes the Q&A. Handing back to Drake Mills for any final remarks. Drake Mills: Thank you. As we look forward to 2026, we are blessed with many positives. Margin expansion, treasury management revenue growth, fee revenue growth, expense management, pipeline growth, strong loan growth outlook, deposit noninterest-bearing growth. Partners in Argent, 20% has been a big hit for us. Southeast market hit profitability in Q3, which is a big move for us. Our mortgage group has a positive contribution now. We have strong teams and strong dislocation in our markets. So due to Optimize our geographic footprint, we feel we're positioned to be balanced and disciplined. I think that is critical as we move forward to consistently build ROA while also investing in our long-term growth and shareholder value. We are so focused on how do we manage and create greater shareholder value. It's taking commitment and focus to put Origin in a position of offense. I look forward to a very rewarding 2026. Thank you for being on the call, and thank you for your support. Operator: This concludes today's call. Thank you, and have a great day.
Operator: Ladies and gentlemen, welcome, and thank you for joining Eurofins 2025 Full Year Results. Please note that this call is being recorded and will be -- will later be available for replay on the Eurofins Investor Relations website. [Operator Instructions] During this call, Eurofins management may make forward-looking statements, including, but not limited to, statements with respect to outlook and the related assumptions. Management will also discuss alternative performance measures such as organic growth and EBITDA, which are defined in the footnotes of our press releases. Actual results may differ materially from objectives discussed. Risks and uncertainties that may affect Eurofins' future results include, but are not limited to, those described in the Risk Factors section of the most recent Eurofins' annual and half year reports. Please also read the disclaimer on Page 2 of this presentation, subject to which this call and Q&A session are made. I would now like to turn the conference over to Dr. Gilles Martin, Eurofins' CEO. Please go ahead. Gilles Martin: Thank you, Andrew, and hello, everybody, and thank you for joining our full year 2025 results call. I will keep -- we have a long slide show, but I will not go through every slide. I have to give apologies for Laurent Lebras, our CFO, who is not well today. So I will not go in great detail through the financial slide and leave time for questions. If I start on Page 5, or the Slide 2. I'm happy to report on a strong year 2025, where we achieved all our objectives or exceeded [Technical Difficulty] Eurofins, as you know, is every 5 years defining a plan for the next 5 years and sharing with investors what we are trying to do, what we will do in the next 5 years. We just completed year 3 of that 5-year plan, where we are building a truly global network, fully digital network of laboratories organized in a hub-and-spoke structure. So we get the benefits of scale in our large hub laboratories. And we have a network of local laboratories to collect samples close to our clients, serve our clients in their country, their language and yet be able in the large laboratories to implement automation, artificial intelligence and all the things that make our services much more unique and faster and more reliable than what others do and we do. So this is continuing to proceed at pace. I'm happy to report that I can confirm we should be done by 2027. There's been massive investments. And we start to see some of the benefits of that in our operating leverage, which has continued to improve every year. It improved well in 2025. Overall, our margins -- reported margins and our adjusted margins continue to improve year-on-year. Our EPS has shown a remarkable growth, 24%. And I think it's just the beginning because we still have heavy investment, heavy OpEx investment, especially in our deployment of digital solutions, development of digital solutions, which should give us significant [Technical Difficulty] and the cost of which will go down. We have generated before those investments to buy our sites because we prefer to own our sites. This is linked to the long-term view that we have. We think over the long term, although they provide a lower immediate return on capital deployed over the long term, we're going to use them forever. It's a great benefit to have them because we can expand on those sites. But before those investments, we have generated more than EUR 1 billion of free cash flow to the firm. So our group is starting to generate serious cash and it's just the beginning of that. And if I move to Page 6, the nice thing is that is accelerating in the second half. Organic growth is still not where it will be, we think, when -- and we'll talk about that later, but it's still accelerating quarter-on-quarter and half year-on-half year. Our EPS growth in the second half even reached 30%, which is quite remarkable. And our free cash flow has grown also much faster in the second half than in the first half. On our investment program on Page 7, you see that we are starting to be done. We still have massive IT investments that post 2027 should be less. And more importantly, we should get the benefit of that. We're still adding some start-ups, but you see the investment has started. We've done the peak of it, so it's starting to be less. So all of that is running according to plan. We still will add a few large and very efficient sites to our network over the next 2 years. They are being constructed right now, and we think the delivery will take place over the next 24 months, more or less for in our current perimeter that should take what we need in our program. On Page 8, we provide a bridge on the evolution of margin. And you can see we've had a nice underlying operating leverage. As we had flagged, we have some dilution from the acquisition for a very low amount as compared to the profits we think we can generate in 2 or 3 years of the network of clinical laboratories of Synlab in Spain. We are merging it with our network, and we're taking a lot of cost out. We've had a lot of exceptional costs for that. And that should -- the first phase should be completed by the middle of next year. We think we will create significant value from this combination. But nonetheless, short term, it has been dilutive, especially in the second half. First half, we only had 3 months. Second half, we had 6 months. We have a bit of an impact from the FX because we make more profits in North America, although we want to improve profits in Europe as we finalize this IT program and site consolidation. So a good improvement of margin, good drop-through on Page 9. If you see the trend, well, the COVID peak is well behind us, but we are catching up. Our revenues now are over the peak revenues from COVID. Our margin is catching up. It's -- and I think we are very confident in exceeding 24% margin in EBITDA -- adjusted EBITDA in 2027. And considering the benefit of that beyond 2027, I think there is some room to, at some point, maybe achieve or get close to the margins we had during COVID. So that's also encouraging. On the -- if you see -- if we look at the CAGR, we've had since 2019, 8% revenues CAGR, 35% CAGR of free cash flow to shareholders. So -- and that's ultimately the most important thing, while we still carry huge amounts of investments. And I think those investments, once we have built our network of labs, we have them for the next 20 or 30 years. So the growth of the EPS and the cash flow per share should be for quite some time over proportional to our total revenue growth. On the financial numbers on Page 11, you have a breakdown. I think I will go back to that as part of the question and answers. Main point is our profits are going in the right direction, are growing, growing faster than revenues and the EPS is growing also faster than revenues. We took the opportunities for us, the fact that our share price is massively undervalued is actually an opportunity, and we took advantage of that opportunity to acquire a lot of shares last year, which is even further boosting our EPS. And the impact of that, once we hit in 2027, our target -- margin targets and cash flow targets will be compounded. On Page 12, you have a bridge of our revenue evolution. We generated EUR 250 million of organic growth. Of course, it has been a bit diluted by the FX impact. And we have a sequential increase quarter-on-quarter of growth. And I think that will continue because now the comps that were strong in some areas, I can talk about it a bit later, will not be there next year as we enter -- or this year as we start 2026. On the Page 13, we give a bit more breakdown by area. I think all our areas are doing well. Life areas are doing well. Food & Feed and Environment are growing both in Europe, North America and Asia. BioPharma, and I'll come to that on the next slide, is starting to recover. It is still being soft, it is still being far from what we think we can achieve long term. Diagnostics could do a little bit better, but it's starting to show in many areas, some recovery. Q4, of course, didn't get the negative base effect of tariff reductions in France. Consumer. Consumer has been hit because consumer and technology includes some material science testing, microscopy, et cetera. This had a big boost in 2024 from the -- a lot of tools companies were looking at potential stricter export restrictions, both from Europe and North America to China. And there was a lot of anticipated buying of tools from our clients in 2024 that gave us a bit of boost on that in 2024, which is not -- has not recurred in 2025, but now we think '25 has hit a plateau and we should grow from there. But that explains the only 2.3% growth in Consumer & Technology. Consumer was better than that. On BioPharma. And here, we have, I think, the last year was a mixed picture. The bulk of it is our BioPharma product testing, where Eurofins is a global leader, and that has continued to do well, mid-single digits. We have done at times better, close to double digit or double digit on that. There is some potential upwards. And we have a good outlook for next year. We are adding a lot of capacity where we will be adding -- expanding our big site in Lancaster, expanding our site in the Netherlands. So we'll have more capacity coming online in the next couple of years. So there is some upside potential on BioPharma product testing, but the growth has stayed solid -- quite solid during the time where BioPharma is reevaluating its pipelines, hasn't been affected like Discovery. In Discovery, this is, we think, plateauing now. It's still a little bit down in the second half of the year. Genomics is still hurting from cuts in research fundings. But again, we think we're hitting now a plateau and we can grow from there. Agroscience is part of the ancillary activities, and that is still down significantly. So we have made significant efforts to cut our footprint. There has been massive restructuring for the size of that business, significant restructuring. That's also part of our SDI. We've closed a number of field stations to basically fit our capacity to the demand. There could be at some point upside when the agrochemical companies, Agroscience companies and the seed company have more visibility on regulations to get their products approved, especially in Europe. So we keep that activity where we are a global leader, but that has suffered. And between Genomics and Agroscience that explains a large part of the overall softness of BioPharma. Otherwise, BioPharma will be at the same level of growth as our Life activity -- area of activity. So our CDMO did well in the first half of the year in the U.S. because we -- or in Canada because we filled a tranche that got completed at the end of the year before. It's a bit less in the last quarter because now it's full, and we're going to have a next tranche coming up online in the next, I think, 24 months. CDMO was a bit softer in Europe. It was a bit more on smaller biologics clients, but we think this will pick up in the next few quarters, too. So that's for the ancillary activities for BioPharma. We have, of course, in BioPharma, some clinical works, large contracts and our clients are positive. on the start of those programs. And of course, that would switch completely the growth of the ancillary activities. If we look at the -- especially Central Laboratory, Bioanalysis, we do think that some point in '27, we will have -- we should have a significant boost from those activities. That's also hurting our profits because we keep capacity that is in excess of what we have as volume right now because studies should start relatively soon. We have significant demand from clients. So we're optimistic on that. And in any case, the -- we're now at a baseline where we don't think that would go down anymore and affect our BioPharma growth anymore in 2026. On Page 15, you've got a split of the margins. So the margins are growing everywhere, especially in the rest of the world. The rest of the world is catching up with U.S. margin. Europe has not been improving as much as we wanted. We've had an impact, of course, in Europe of the reimbursement cuts in clinical diagnostic in France that occurred in 2024 that affected the comparable with 2025. We've got the dilution from Synlab. We've got a number of other things. We think we have a big upside in Europe to increase the margins and make them move much closer to U.S. margins, which will also reduce the FX impact on the translational results and margin. So we're optimistic over the next 2 years to significantly increase the margins in Europe. Another thing that we do is described on Page 16. So we have labs that are well integrated, where we have deployed our IT solutions, where we -- that have been in the group for a long time. And then we have a number of start-ups that we launched over the next few -- the last few years. The peak start-up investment is behind us and the start-ups of the peak start-up years are starting to be profitable. As I mentioned earlier, we are opening fewer start-ups now. They have a smaller impact on our results. So that's part of our nonmature scope. On that scope, we also have companies like Synlab that we just bought and we are restructuring. And what is interesting to see is the impact of that nonmature scope on our overall results is starting to be less and less -- it's -- we have a target that SDI at EBITDA level will be less than 0.5% of our revenues, and we think we will achieve that by 2027 as planned. Anyway, even in 2025, the impact on the group EBITDA is starting to be negligible at 2.7%. But we will continue to show it separately and our reported results and the mature scope result will converge. It's nice to note that our mature scope is already achieving the 24% margin we are targeting for 2027. So overall, very encouraging results. On Page 17, you see that we are self-financing all our investments, including our M&A in -- with EUR 150 million left after that. And we've had, of course, in 2015, the purchase of our -- of the related party buildings. I'll come to that in a minute. But -- and that was an exceptional one-off investment. We spent EUR 540 million to buy back our own shares. And from next year, our cash flow should be such that we will have a lot of headroom for our cash flow to finance further share repurchase, for example, building repurchase is done. We won't have to spend money on that. So we can have a very compounding -- very well compounding model where with our cash flow, we can continue to do M&A, finance not only our CapEx, but our CapEx will be less. So we'll have more room for M&A financing and even more room for returning to shareholders and preferably through share buybacks as long as our share price remains so seriously undervalued in our opinion. On Page 18, you see that our teams are starting to do a better job in managing net working capital. We've got a good result this year in managing net working capital. And there is still potential of improving things further. We're not -- certainly not best-in-class there, but we're making progress, and we think we can do more. On funding on Page 19, we've continued our prudent financing management. We are well funded for the next few years. Our leverage is very reasonable considering our cash flow. Also, our EBITDA will increase over the next 2 years, we believe. So that will naturally bring the leverage down. We will generate some cash. So we're confident on maintaining our leverage between the 1.5 to 2.5 multiple range that we have set for ourselves as an objective. On Page 21, I illustrate some of the new sites that came online. We can talk about that. On Page 22, we can have a summary of our footprint. We have a quite large lab footprint. We are very far along in building our -- and completing our hub-and-spoke laboratory network in Europe and North America, especially. We still will have opportunities in Southeast Asia and Asia generally for the next 10 years or 20 years, also a little bit in Latin America. We can still add a few locations in North America. We're not -- we don't have 100% coverage yet, but the impact of what we need compared to what we have is -- will be very modest past 2027. And now we own most of our big sites. And what is planned for the next couple of years will mean that by 2027, we will own our big sites, and we usually have land next to that existing building so that if the demand increases for those hubs, we don't have to move. We don't have to lose all the investments we did in those buildings, which was our life for the last 10 years as we had to consolidate a lot of acquisitions that were not -- where we found them, they were not necessarily where they should be, and they didn't necessarily have the focus that we wanted or that was optimal for best efficiency. Now we have that footprint, and that will stay, and we can just incrementally add capacity on the same site as we need. So we're quite pleased about the progress. That was a 10 years program. Now we own what we need to own. On Page 23, some discussions on return on capital employed. I think that would be more for one-on-one meetings for those of you who are interested. But obviously, we have a mix of assets on our balance sheet. We have the labs that have grown organically and that have a very high return on capital employed. We have the lab that we acquired. And until 2018, we built Eurofins through a lot of acquisitions. So we incurred goodwill. And of course, that provides lower return on capital. We have a substantial amount of our capital on our balance sheet, which is those buildings that we own that have a book value of EUR 1.3 billion. Probably if we were to do a sale and leaseback, it would be more like EUR 2 billion or more. And that has, of course, a lower return. So we give on Page 23, an analysis of the returns of our business as we can see it. But it confirms that the business we run has a very high return on capital employed. And if we deploy additional capital, especially if we deploy it organically, we're looking at very significant returns. On Page 24, it covers the start-ups that we've made over the last few years and peak start-ups of '22, '23 as a whole are starting to be profitable. So we have -- and that can only amplify going forward. So we are very satisfied with what we have built and the impact it should have on our performance, our service to clients and financial results over the next 2 years and later. On Page 25, we give a list of some of the acquisitions we did. So we continue to be active. We think we also should add about EUR 250 million of revenues next year from acquisitions at reasonable multiple. That means a lot of small bolt-on acquisitions, maybe not the bigger ones that would be sold at a much higher multiple. But the world is big enough, and we have enough opportunities. We continue to be innovative. Our labs invent a lot of new tests and new capabilities. That's on Page 26, and I will not go through all of them. You probably have heard of the baby food -- latest baby food contamination with cereulide, which could be caused by Bacillus toxin. This is not a test that people were doing routinely most of the time. It normally doesn't happen. So -- but when the crisis started, we developed the test very quickly. We developed a test that's actually more sensitive than what was available before in the market because most of those things come from encapsulated in this specific contamination, it comes from oil that is added to vitamins or that is added in the form of oil encapsulated. And measuring it, you have to break the encapsulation to get to the full amount and the true amount. So we make a nice breakthrough here in developing within a very short time when the crisis started, the right test and the most sensitive test in the market, we believe. But we can go deeper on that if some of you are interested in Q&A. Page 28. We basically, we can only confirm that our objectives for 2027 are realistic. We think we will exceed them. The plans for CapEx are unchanged. And BioPharma will pick up in the next few quarters, we believe. So we're still confident that we can revert to the typical organic growth we've had for decades of 6.5%, just to give a number, but higher mid-single digits, mid- to high single digits. And we are building the network for that. And also the efficiencies and quality of service we are building should enable us to grow significantly faster than our competitors and than the market. On Page 29, we give some ideas about the returns that we are generating. So we were -- we are pleased to have returned EUR 1.5 billion to shareholders since 2021. So not only are we quite profitable, but we returned a lot of cash to our shareholders already, although we are still building the house, we return a lot. And we built Eurofins for a lot of acquisition until 2018, which caused us to incur a lot of goodwill on our balance sheet. But since then, we bought some companies, but much less. And if you look at the return on capital -- on the incremental capital we've added since then, after this big M&A phase, and you see that even including the goodwill, we already have 23% return on the incremental capital, which shows that we are reasonable in what we pay for acquisitions. We create value from our acquisition and our stock of businesses continue to improve. So we're very satisfied about the performance of 2025. We're very optimistic about what we think we will generate over the next 2 years and especially beyond. In fact, I think we are building something that's going to be quite extraordinary in our markets, more and more focused. We've been also reviewing our portfolio, shedding a few small things. So over the next 2 years, we'll continue to do that to be a true leader in our industry, to the most innovative in our industry. I don't have time to talk about it now because it's a result presentation, but we're investing a lot in new technologies, in AI, in automation to create real competitive advantage, a real differentiation in the speed and quality of our service, which should make us really the partner of choice of all the multinationals around the world in the industries we are serving. And I don't think anybody else is doing the type of investments we're doing. So I'm very positive and optimistic as to our performance post 2027 when we are done building that. When we are building that, this causes a lot of disruption to service when you deploy new IT solutions the last 2 years where we started deploying heavily new IT solutions. We've had a lot of disruption to service to clients. This is not the best when you change the digital tools in the company to show the best performance to clients. But this is now more and more working, and we see -- we're going to see the back end of that. And then we see the opposite, much better performance, faster performance, and that should help us also in growth and gaining market share post 2027 and where we have in the countries where we are done already, already in '26 and '27. So that's my introduction for today. And sorry for the very quick speed of my speech and presentation. Now I'm happy to answer questions, and [ Busi ] is here too, if we have some financial questions that I don't know the answer of. Operator: [Operator Instructions] Our first question is coming from Tom Burlton with BNP Paribas. Thomas Burlton: I've got a couple just on BioPharma to kick off and then one on capital allocation. So on BioPharma, specifically within ancillary activities and the Central Lab, Bioanalysis business, you referenced these awards. Is there anything you're able to give us in terms of additional details on sort of how big, anything slightly more granular about phasing and so forth? Because I was originally expecting some of these to start coming through in sort of mid-2025, and it feels like they got pushed to the right, I guess, because of client decisioning and things like that. And in your opening remarks, you talked about anticipating potentially a significant sort of boost in demand. But you said by 2027, and then you went on to say that some of those could ramp up quite soon. So I'm just trying to understand the timing there and what's going on? Because it feels like that when it does come through, it could be quite a big driver to Biopharma and then to group organic growth. The second one, still within BioPharma, just on the discovery part of the business. It looked like through the back end of last year, we've seen a bit of a pickup in terms of the biotech funding. And I think that only really accelerated to kind of through Q4. We don't have the kind of longer run, I guess, data on your discovery business by quarter. How would you think about the sort of normal lead lag time as to when that should flow through to your business, your network and we really start sort of seeing it in numbers? Just still trying to gauge the sort of, I guess, the cadence of BioPharma growth as we go through 2026. And then just on capital allocation, keen to understand kind of how you're thinking about buybacks. So you mentioned towards the end of your remarks, you've been very -- you've been active in buying back shares and returning cash to shareholders and the share price has developed, I guess. You've got fairly fixed targets in terms of your added M&A revenues and your leverage is, I guess, within the target range. Would you expect buybacks to be a kind of ongoing feature, maybe not at the levels they were in 2025, but how should we think about kind of ongoing return of cash and whether you'll be kind of pragmatic or consistent about that? Gilles Martin: Thanks a lot, Tom. On BioPharma, yes, Central Lab and Bioanalysis, we have some fairly large contracts. And our best guess now maybe would be H2 -- that we are talking about would be H2 2026 for start of that. It's always difficult to time. They have to recruit patients, et cetera. So that's our best guess as we can see. What is clear is the comp has eased now. So going forward, we don't expect anywhere those revenues going down. And if you do the math, if you have a negative 20% or negative 30%, even on a small part of the scope, that has a big impact on the average growth of that scope. So that -- we don't think we're going to have any negative, especially not of that magnitude going forward, and that should have an impact on the overall growth of BioPharma this year. And in the second half, hopefully, if we get those programs to kick in, it could become quite substantial. And well, maybe if I said 2027, I think overall, BioPharma, even our core BioPharma product testing could grow more than the mid-single digits where it is now. And that could also increase. When would that be? That's what maybe I said '27. But overall, BioPharma, I don't see why BioPharma as a whole shouldn't grow faster than life. It has been the case for decade. And this -- we've had phases like this again in 2012, where the pharma industry was reevaluating pipelines and so on. The industry was a bit soft for a couple of years, and then we've had a decade of much faster growth. So I think that will return. And why will it return? Because simply, the research is providing so many new products that are so powerful that it's just worth it for the pharma industry to spend money to develop those drugs because they will make a lot of profit with it. Even at lower reimbursement, they will make a lot of profits. Discovery, yes the lag time, that goes from company to company, project to project, but it's not immediate indeed before a project starts. What is it 6 months, 12 months to get things to flow through depending on the project and the products in actual work for even the coding, it takes 2, 3 months to design a study to design a project. It's not something that you buy off a catalog. All those studies for BioPharma, they are bespoke and they take time to define. It's like you build a house, you need to get the plans, get the plans approved before you can start building it. Capital allocation. Well, if you look at -- we're an active buyer in the market, and we also have our own assets that sometimes we get approached by people who would like to buy some of our potentially noncore assets. So we know what those assets are worth. If you look, ALS is trading at 15x EBITDA, UL is trading at 19 or 20x EBITDA. A lot of transactions are in that range between 15 and 20. Even with the recent rerating, our stock is trading at 10x. So obviously, if I have extra capital to deploy, it's a no-brainer to buy back our shares. I know what I buy. I know the potential of the profit increase of what I buy. I don't have to do -- we don't have to do a due diligence on it. We know what we're buying. And so once we've done the M&A, we think it will be accretive, and we think we can get our return over our hurdle rates. And if we have extra possibilities, we are going to continue to do buybacks. And I think we will generate a lot of cash. And actually, we might buy even more this year as we bought last year. Of course, that will depend on how the market view our share and share price, et cetera. But in spite of the recent good run of our shares, on those metrics, if you just look like the multiples of, that people pay for assets in the market, either public assets or private assets, we have -- we're anywhere between 30% and 60%, 70% undervalued. And in the capital allocation policy that our Board follows and we talk about, buying back our shares appears very attractive at the moment. To us, we're insiders. So we -- maybe if you're an outsider, there are other considerations that apply. As an insider, we will continue the buybacks. Operator: Our next question is coming from Suhasini Varanasi with Goldman Sachs. Suhasini Varanasi: A few from me, please. So you mentioned the cereulide testing that you had launched in January. Have you seen increased demand for that testing given the recalls seen in the market? And is it possible to quantify the proportion of benefit to revenues? That's the first one. Second one is on the margins. Your reported EBITDA margins have seen very strong underlying improvement in 2025. Can you perhaps provide some color on the scale of the expansion that you expect in 2026 and maybe the key risks around this. FX, obviously, is a little bit of a risk. We can't quantify that. Synlab, maybe the drag is a little bit less than last year. Or maybe additional M&A? Just some color around that would be helpful. Thank you. And I think in your prepared remarks, you had indicated something around EBITDA margins could potentially return to peak COVID levels beyond '27. Just wanted to understand -- get some clarity on that. And is it the medium-term target potentially beyond '27? Gilles Martin: Yes. cereulide, it is just starting. We don't know how big this crisis will be, how many charges, how many lots were affected. I'm not sure it will become a routine test because that was apparently caused by a contamination from contaminated oil from China. So hopefully, that will stop and be put under control. So we -- and considering the size of Eurofins, for something like that to become material, it would have to be a really massive, massive global recall of all the milk in the market. So we don't expect any impact -- any material impact on our revenues. But still, it's good for our clients to know that when there is something like that, we are there and we have the most sensitive methods, much more sensitive than the ISO method. So if they want to check their supplies, we can do that for them very well. Yes, we've gone on the advice of many of our investors and potentially analysts, we've gone away from giving specific margin targets. And some companies do that. We've done it for 2027, and we stick to that because they were there and we believe in it. And hopefully, we can do better than that. So for this year, what we've said we will improve. And as you say, some of the factors that you mentioned will play a role. FX, we don't exactly know what it will be. M&A, we don't exactly know. We have a number of start-ups. We have to see exactly how fast they ramp, new buildings when they come online, et cetera. So what we can say is we think we will improve. We think we'll achieve or do better than the 24% margin next year in '27. I can't be more specific this year. What is clear is we have massive investment in IT that we hope to largely complete this year. So that should help definitely next year. How fast all those programs get deployed, all those software gets deployed, how fast do they get -- do we start to accrue the benefits of it is also a little bit difficult to plan quarter-by-quarter. And what I said about margin, maybe don't get too excited too quickly. But it has always been the case that our best scopes have -- EBITDA margin in excess of 30%. The whole of Eurofins will never be there, but there's no reason why 24% should be a cap. Of course, we will talk about that once we complete that period. And depending on our perimeters then on potential M&A, we might do then, et cetera, we'll try to set objectives beyond 2027 when we publish 2027 results. But all things being equal, staying in our market, staying in our current perimeter, there's no reason why we shouldn't go beyond that because every year, we're improving. And there's a very long -- if I look at what we plan to achieve this year, there's a very long list of things we are doing that will improve our results substantially. And if on top of that, BioPharma starts to pick up a bit, it could be even more faster and more meaningful. Operator: Our next question is coming from Delphine Le Louet with Bernstein. Delphine Le Louet: A couple of questions on my side and a bit of a clarification regarding the infant baby formula product and how big that is actually today into the food business. And sticking with the food business with a broader vision, where are you taking the most market share? Or where have you been taking the most of the market share over the course of '25 when it comes to segments or region into that field? And second question, dealing with the CapEx envelope for next year and probably the year after in the range of EUR 400 million. I was wondering how much of that is dedicated to the regular, let's say, IT ongoing and to the IT transformation you're coming to a close now. Can you detail that a bit more, please? Gilles Martin: Thank you. It's really hard to say where we gain share or where we don't. I think we gained share, especially in the markets where we are strong in North America. I think we continue to gain share in the many European countries we do too. And this baby formula testing, this test is not something we were doing in the past. By the way, we just developed the test, but it's not going to be a huge market, a huge -- I hope so for the milk industry. Although from time to time, there are issues in the milk industry, and there were issues in North America and a lot of recalls in North America. We helped our clients a lot to go through the shortages to help them mitigate the shortages of the milk powder in North America over the last few years. So this is -- we work -- what we do is essential. People forget it, but there are segments of the population who are very fragile. And when they eat contaminated food, it can be fatal and especially babies. And we also test a lot of supplements, sport supplements. If you put not enough or too much vitamin in certain products, it can be toxic. It's not only the bacteriological contaminants. So this is more like a reminder of you can't stop testing food. If you stop testing food, bad things happen. And actually, it shows maybe nobody could have guessed that, that would happen. But it shows you have to have very broad testing programs because even if a contamination hasn't happened in 5 years, it doesn't mean it won't happen again. And if you have a brand that is valuable, you don't want to be the one whose products are contaminated. I think that's maybe one of the many wake-up calls. It's not because you haven't had a problem with your products in the last 5 years that you won't have one tomorrow. So testing is important. It's like having a fire detector, maybe you haven't had a fire in 20 years, but you best [Technical Difficulty] detector in your house or in your [Technical Difficulty] that can still happen. On the [Technical Difficulty] Operator: Apologies ladies and gentlemen. We have appeared to have lost our speaker line. One moment, please, while we try to get them back. Once again, apologies, ladies and gentlemen, we are trying to get the speaker line back in, one moment, please. Okay. Ladies and gentlemen, we have just heard from the speakers. They are trying to reconnect. So please hold, they would be with us momentarily. Okay. Ladies and gentlemen, I believe they will be with us in one moment. Once again, apologies for the slight delay in getting our speakers reconnected, but they will be with us shortly. Okay. I believe we have our speakers back with us. Gilles Martin: Thank you. Sorry, everybody. I don't know what happened with the telephone line. So I was answering the answer -- the question on IT CapEx and indeed, maybe EUR 50 million of the IT CapEx is linked to this development of new IT solutions for digitalizing our full network of laboratories. I think we can take the next question. Operator: Our next question is coming from Remi Grenu with Morgan Stanley. Remi Grenu: Just one last question remaining on my side. I think there's been press coverage around the potential divestment of part of your consumer and tech product testing business. So can you maybe tell us how you're thinking about that division in the context of the perimeter of the company? And if overall divestments are still very much on the table as you flagged on previous call and how we should think about you going into 2026? Gilles Martin: Thank you. Well, we get a lot of inbound calls. There are things businesses that we look from inside what we like, what we don't like. As I mentioned, there are smaller businesses in Clinical Diagnostics last year that we closed or sold in countries where we had no path to become market leader. We like our consumer product testing. We like our material science testing, although material science was softer in '25, we see a great potential with all the AI chips and the memories now that are in great demand and the needs for tools that's going to pick up. So we like that division. We like consumer products, and we'll never part with certain elements of it. They are very close to the core of our business of medical device and testing for life, et cetera. But we do get inbounds. And then we are -- when our boards get inbound, we have a duty to look at it because, of course, we get very attractive offers sometimes, extremely attractive compared to our current valuation. And so we have to look at it. What comes out of those reviews, we never can know, and we'll look at it. But I'm running a company as a CEO, but also as a member of the Board, I'm a capital allocator, and we have to look where we put our shareholders' capital to work. We have no limitation. We're not limited by the amount of capital we have to invest in our core sector, but maybe there might be at some point, M&A opportunities in our core area of business that are larger that we want to take on. And then maybe it's worth to have an active review of the value of all our assets. That's all I can say about that. Operator: Our next question is coming from Allen Wells with Jefferies. Allen Wells: A couple from me, please. Firstly, just maybe a financial question. I just wanted to understand some of the moving parts on the free cash flow for the business. Obviously, solid reported number, but it does include another working capital inflow in Q4 and obviously, year-on-year reduction in CapEx. I just wondered how you guys are thinking about the sustainability, particularly of those two variables as we move back towards the ambition of a mid-single-digit growth level business. Maybe you can talk a little bit about the drivers of that working capital movement because I think it's the second year in a row you've had an inflow at the full year? And likewise, on the CapEx side, it sounds like you expect similar levels of CapEx in 2026 versus 2025 or maybe even slightly lower. Can that level of CapEx support an acceleration in growth up to the kind of 6.5%? That's my first question. And secondly, just a follow-up question on [Technical Difficulty] net-debt-to-EBITDA towards the upper end of your, I guess, preferred range. You talked about the potential to do more buyback of shares in 2026. But if I assume a similar CapEx and M&A trends, it doesn't look like that will be self-funded at least on my back of the envelope calculation says. So are you happy to run net-debt-to-EBITDA up towards the top or even above the top end of that range? Gilles Martin: Very much. Yes. Well, we did a good job in working capital this year. And of course, that is finite. We're not going to get very big negative net working capital. I think we might still have a little bit of room over the next 2 or 3 years to be better at collection. We're not as good as maybe we should be at collection. And so -- but that's always a fight, of course, with our clients who want to pay later. And we -- but they don't always pay on time like in any business. So I think we can be better at getting our clients to pay on time. And we're kind of kind to many suppliers. So we pay maybe a bit too fast. So I think I couldn't tell how fast net working capital will be improving, and it can maybe 1 year be a bit less good and so on. So that element, I think it was a good year of EUR 40 million or EUR 50 million this year and last year will not be a gain of EUR 50 million every year forever, obviously. I think long term, we can do a little bit better. That's what I can say on the net working capital. On CapEx, I think we have a high CapEx at the moment. Our maintenance CapEx is 2% or 3%. And with that, we can grow mid-single digit. And so with CapEx at EUR 400 million ex investment in own sites, we have headroom. We didn't quite spend the EUR 400 million in the last couple of years in '24 and '25. So we're a little bit below in '24 and '25. But we are confident our EBITDA will increase. If you run the numbers, we don't want to give a number, but if you put 24% of whatever revenues you model based on M&A, et cetera, you're getting close to EUR 2 billion or around EUR 2 billion of EBITDA. And if the free cash flow conversion is over 50% -- significantly over 50%, that's a lot of cash to use for buybacks and M&A. So we have headroom -- and as we talked about assets, when we look at certain assets that could give even more headroom. But we cannot predict the future. A lot of those things look at what we could buy for M&A. I don't know what is going to come our way at a value where we find we can get a good return. That is definitely very hard to plan. And the same thing, are we going to keep all our assets or maybe some marginal ones we will dispose of for very high multiples. We did it already for the -- what is it called our software testing business and media testing business. I think we sold it for 18x EBITDA because we've got a really good offer. This is -- there's a bit of opportunism on that level of capital management depending on our own M&A opportunities and the level of our share price. So net-debt-to-EBITDA, on the other hand, we don't want to exceed the 2.5x. That's clear. And I think overall, if you look at all the cash flow we should be generating this year and next year, unless our share price would be very depressed for that period, we should rather move down than up on the net-debt-to-EBITDA multiple. Allen Wells: Can I ask one kind of additional question? Just looking at the numbers around Europe as well. We know obviously that growth accelerated in Q4 to 5%. That was on a slightly easier comp. It looks like a chunk of that improvement was the diagnostics business, which we know there was a bit of comp effect. Was there any contribution in that Diagnostics business from the organic growth in Synlab or maybe what's the organic contribution from Synlab in there? Because obviously, I know that you account for the organic growth from day 1. Gilles Martin: I think it was 0 in Synlab. It's negative actually because we are shedding some contracts that were loss-making. So... Allen Wells: Just the Diagnostics, the underlying Diagnostics business coming back, nothing from Synlab? Gilles Martin: And I think also Synlab is part of M&A. And so it's -- so no, Synlab is not-- another thing, I think looking at figures after the comma in organic growth per quarter and trying to analyze changes that post-comma changes on organic growth quarter-to-quarter is not really meaningful. It can be one contract, it can be just when something finishes, the contract finishes, doesn't finish. I wouldn't extrapolate too much, especially if you look at it at smaller slices like one activity in one continent. Operator: We will take our final question today from François Digard with Kepler Cheuvreux. François Digard: I will -- maybe just a follow-up on cereulide analysis. Could you share with us how quickly you were able to roll out these tests? You shared already that the commercial implication is limited, but it's interesting to understand how you have processed through that, the first question. The second question is on BIOSECURE Act in the U.S. Do you expect it to be a tailwind for you? Or could your France, European nationality in state prove to be a disadvantage in the U.S.? Gilles Martin: Well, we have several labs around the world doing this test at the moment, and some are still setting it up, and they are cooperating to exchange method because that could be also an issue for clinical diagnostics in human health. I don't know if you heard, but in some countries, even the government labs didn't have a proper test to test the stool of the babies that were affected. So I don't know the exact minute how many of our labs are actually doing it. But when it all started, I think within a week, there was a test running at one of our labs. And maybe we might have had a lab that was already able to do it, but was not performing the test routinely because the demand was not there. And BIOSECURE Act, I don't know that it will have any impact. I mean I'm not sure I've heard from anyone in our company that would have an impact one way or another. No, we do our own testing locally in every country. So we have local companies that do testing in Europe, others do -- are based in China, the local testing in China, local companies in the U.S. doing testing in the U.S. I have to conclude -- sorry operator. Yes, I have to conclude and thank everybody for joining our call. It was a long presentation. I apologize, but I tried to give some color from the management perspective on our numbers. I will be happy to meet some of you in London and for other meetings over the next couple of weeks and later during the year. Thanks a lot for your support, and have a great day. Goodbye. Operator: Thank you, Dr. Martin. Ladies and gentlemen, the floor -- sorry, the call is now concluded, and you may disconnect your lines. And we thank you for joining us, and have a pleasant day.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Celestica Q4 2025 Financial Results and Conference Call. [Operator Instructions] I will now hand the conference over to Matthew Pallotta, Head of Investor Relations. Please go ahead. Matthew Pallotta: Good morning, and thank you for joining us on Celestica's Q4 2025 Financial Results Conference Call. On the call today, we have Rob Mionis, President and Chief Executive Officer; and Mandeep Chawla, Chief Financial Officer. Please note that during the course of this call, we will make forward-looking statements, including statements relating to the future performance of Celestica, our business outlook, guidance for the first quarter of 2026, our 2026 annual outlook and anticipated trends in our industry and their anticipated impact on our business. These are based on management's current expectations, forecasts and assumptions including that there are no material changes to tariffs or trade restrictions compared to what is in effect as of January 28. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and their potential impact on our results cannot be reliably predicted at this time. For identification and discussion of the material assumptions, risks and uncertainties, please refer to our public filings with the SEC and on SEDAR+ as well as the Investor Relations section on our website. We undertake no obligation to update these forward-looking statements unless expressly required to do so by law. In addition, during this call, we will refer to various non-GAAP financial measures. We have included in our earnings release, found in the Investor Relations section of our website, a discussion of those non-GAAP financial measures and a reconciliation to the most comparable GAAP measures. Unless otherwise specified, all references to dollars on this call are to U.S. dollars. All per share information is based on diluted shares outstanding and all references to comparative figures are a year-over-year comparison. Let me now turn the call over to Rob. Robert Mionis: Thank you, Matt, and good morning, everyone, and thank you for joining us on today's call. We delivered very strong results in the fourth quarter, driven primarily by growth in our CCS segment across both our communications and enterprise end markets. This led to revenue and adjusted EPS both exceeding the high end of our guidance ranges, while adjusted operating margin of 7.7%, once again marked the strongest performance in company history. I'd like to briefly review our performance for this past fiscal year. Overall, 2025 was another exceptional year for the company. For the full year, we achieved revenue of $12.4 billion and adjusted EPS of $6.05 representing growth of 28% and 56% year-over-year, respectively. Our adjusted operating margin of 7.5% marked the second consecutive year of 100 basis points improvement, driven by growth in AI-related demand for data center technologies, strong operational execution and improved operating leverage. We surpassed our annual outlook for each of our key financial metrics, further building on our positive momentum generated over the last several years. Looking back, our financial results reflect a consistent progression marked by a sustained annual improvement across revenue, adjusted operating margin and adjusted EPS. As we look ahead, we anticipate the strong momentum to continue with revenue growth expected to accelerate in 2026. Furthermore, our optimism continues to strengthen regarding the significant pipeline of growth opportunities that lie ahead for our businesses, particularly in our CCS segment, which we believe will sustain this growth trajectory in 2027. Before I provide an update on an annual outlook for each of our businesses, I would like to hand the call over to Mandeep to discuss our financial performance during the quarter and our guidance for the first quarter of 2026. Mandeep, over to you. Mandeep Chawla: Thank you, Rob, and good morning, everyone. In the fourth quarter, revenue of $3.65 billion was up 44% and above the high end of our guidance range, driven by a very strong demand in our CCS segment. Our non-GAAP operating margin was 7.7%, up 90 basis points driven by strong margin improvement in both of our segments. Our adjusted earnings per share was $1.89 in the fourth quarter, exceeding the high end of our guidance range and an increase of $0.78 or 70%. Moving on to some additional metrics. Adjusted gross margin was 11.3%, up 30 basis points, driven by higher volumes and stronger productivity. Our adjusted effective tax rate for the quarter was 19% and lastly, as a result of strong profitability and disciplined working capital management, we achieved adjusted ROIC of 43%, up 14 percentage points versus the prior year. Moving on to our segment performance. Revenue in our ATS segment for the quarter was $795 million, 1% lower and in line with our guidance of a low single-digit percentage decline. The decline in revenue was driven by lower volumes in our Capital Equipment business and previously communicated portfolio reshaping in our A&D business, partly offset by stronger demand in our other end markets. Our ATS segment accounted for 22% of total company revenue in the fourth quarter. Revenue in our CCS segment was $2.86 billion, up 64%, driven by very solid growth in both our communications and enterprise end markets. The CCS segment accounted for 78% of total company revenue in the fourth quarter. Revenue in our communications end market increased by 79%, above our guidance of a high 60s percentage growth, primarily driven by strong demand and ramping programs for 800G networking switches across our largest hyperscaler customers. Our enterprise end market revenue was higher by 33%, which was above our guidance of a low 20s percentage increase driven by the acceleration in the ramping of a next-generation AI/ML compute program with a large hyperscaler customer. Our HPS business generated revenue of $1.4 billion in the fourth quarter, representing growth of 72% and accounted for 38% of total company revenue. The strong growth was driven by ramping volumes in 800G switch programs with multiple hyperscaler customers. Moving on to segment margins. ATS segment margin in the quarter was 5.3%, up 70 basis points, primarily driven by improved profitability in our A&D business. CCS segment margin in the fourth quarter was 8.4%, an improvement of 50 basis points, driven by strong operating leverage. During the fourth quarter, we had 3 customers that each accounted for at least 10% of total revenue, representing 36%, 15% and 12% of revenue, respectively. For the full year 2025, we also had 3 customers that accounted for at least 10% of revenues at 32%, 14% and 12% of revenue, respectively. Moving on to working capital. At the end of the fourth quarter, our inventory balance was $2.19 billion, a sequential increase of $141 million and higher by $427 million compared to the prior year, as we support continuing revenue growth in our CCS segment. Cash cycle days during the fourth quarter were 61, an improvement of 8 days versus the prior year and was 4 days better sequentially. Turning to cash flows. In the fourth quarter, we generated $156 million of free cash flow, resulting in total annual adjusted free cash flow of $458 million in 2025, which was an increase of $152 million compared to the full year in 2024 and above our most recent annual outlook of $425 million. Our capital expenditures for the fourth quarter were $95 million or 2.6% of revenue bringing our total capital expenditures in 2025 to $201 million or 1.6% of revenue. Since we last spoke at our Investor and Analyst Day in October, we have continued our discussions with key customers in our CCS segment in order to align on long-term capacity planning. As a result of these discussions, we are meaningfully increasing the scale and scope of our capital investment plans in 2026 and 2027 in order to build out the revenue-enabling capacity required to support the strengthening demand we see ahead. We now anticipate that our capital expenditures for 2026 will be approximately $1 billion or 6% of our current annual revenue outlook. Importantly, we anticipate to be able to fully support this increase in capital expenditures through operating cash flow. The investments we are making in new capacity, which we expect will come online throughout 2026 and 2027 are a response to record bookings, accelerating growth in the scale of our existing engagements and meaningfully improved long-term demand visibility with our hyperscaler customers. We view our investments in new capacity as highly strategic aligning our global footprint with a multiyear capacity road maps of our key customers in support of their large-scale investments in data center infrastructure and AI capabilities. These investments will include a combination of capacity additions at our larger sites, new customer-driven investments in the United States and upgrades to manufacturing capabilities, including investments in power. We are undertaking significant new investments in Texas in support of growing customer demand for U.S. capabilities in the areas of R&D, manufacturing and advanced assembly. At both our Richardson campus and new site in Fort Worth, we are adding a total of over 700,000 square feet of footprint, with expanded power availability. This incremental capacity is expected to come online in 2027. Also, in order to facilitate greater engagement on R&D and design, we plan to establish a new HPS design center in Austin. Our CapEx plans also include large-scale investments in our manufacturing capacity and capabilities across the rest of our global network. In Thailand, we continue to add new capacity to support very strong demand from multiple customers. We are adding over 1 million square feet in additional footprint with upgrades, including expanded power availability, advanced liquid cooling manufacturing and testing capabilities. We expect this new capacity to come online towards the end of 2026 and into 2027. Elsewhere in our network, we are upgrading and retooling sites to add new manufacturing lines in locations such as Mexico and Japan in support of customer demand for greater geographic diversification. Allowing them the flexibility and optionality to derisk their global supply chains within our network. We are also excited to announce our plans to establish a new HPS design center in Taiwan. Overall, we are very encouraged by the strong alignment and close collaboration on capacity planning we have with our customers, which underpins our confidence in making these investments. Turning to our balance sheet and capital allocation. At the end of the quarter, our cash balance was $596 million. Our gross debt was $724 million resulting in a net debt position of $128 million. We had no draw outstanding on our revolver at the end of the quarter, leaving us with approximately $1.3 billion in available liquidity. Our gross debt to non-GAAP trailing 12-month adjusted EBITDA leverage ratio was 0.7 turns, an improvement of 0.1 turns sequentially and 0.3 turns versus the prior year period. As of December 31, we were in compliance with all financial covenants under our credit agreement. During the fourth quarter, we received regulatory approval to launch our new normal course issuer bid, which permits us to, at our discretion, purchase up to approximately 5% of our public flow until November 2, 2026. We will continue to be opportunistic towards share repurchases as our approach remains unchanged. During the quarter, we repurchased approximately 132,000 shares under our normal course issuer bid for $36 million. For 2025, our repurchases totaled 1.36 million shares at a cost of $151 million or an average cost of approximately $111 per share. Now moving on to our guidance for the first quarter of 2026. First quarter revenue is projected to be between $3.85 billion and $4.15 billion, representing growth of 51% at the midpoint. Adjusted earnings per share are anticipated to be between $1.95 and $2.15 representing an increase of $0.85 at the midpoint or 71% growth compared to the prior year. Assuming the achievement of the midpoint of our revenue and adjusted EPS guidance ranges, our non-GAAP operating margin for the first quarter is expected to be 7.8%, representing an increase of 70 basis points. We expect our adjusted effective tax rate for the first quarter to be approximately 21%. Finally, let's review our revenue outlook for each of our end markets. In our ATS segment, we anticipate revenue to be down in the low single-digit percentage range as growth in our HealthTech and industrial businesses are being offset by market-related softness in our Capital Equipment business and portfolio reshaping in our A&D business. In our CCS segment, we anticipate revenue in our communications end market to grow in the low 60s percentage range, primarily driven by ongoing ramps in multiple 800G programs with our hyperscaler customers. In our enterprise end market, we expect a very strong growth in the 100 high-teens percentage range, supported by the progression of a next-generation AI/ML hyperscaler compute program. With that, I will now turn the call back over to Rob for an update on our 2026 annual financial outlook and to provide additional color on the latest developments in our business. Robert Mionis: Thank you, Mandeep. Given the strengthening demand forecast across our portfolio, we are raising our 2026 annual financial outlook. We are increasing our revenue outlook to $17 billion and raising our adjusted EPS outlook to $8.75, representing year-over-year growth of 37% and 45%, respectively. This represents our high confidence view for 2026, which we will continue to refine and update as the year progresses. We are also maintaining our free cash flow outlook of $500 million. This demonstrates the inherent cash-generating power of our business, allowing us to organically fund a significant increase in capital investments while continuing to generate cash to fund other investment opportunities. Since our Investor and Analyst Day this past October, the velocity and scale of awarded programs and growth opportunities for Celestica continues to expand. As Mandeep discussed, we have responded by significantly increasing our capital investment plans in order to grow our global footprint in alignment with our customers' multiyear requirements. These investments are intended to provide us with the necessary scale to support the accelerated growth we anticipate in 2026 and which we believe will be sustained in 2027. In undertaking these investments, we have closely collaborated on demand planning with our largest customers, which has informed our decisions on the location, capabilities and scale of the new capacity we are developing. These investments are targeted to strategically support our customer base and their program-specific requirements over the long term. On this note, we are proud of our decade-long partnership with Google and are excited to continue supporting the acceleration of leading AI data center architecture. Celestica remains closely aligned with Google on the development of complex data center hardware and systems. As a preferred manufacturing partner for Google's Tensor processing unit, or TPU systems, Celestica is committed to making long-term investments in both capacity and capabilities both in the United States and across our global footprint, which includes our planned investments to expand manufacturing capacity in 2026 and 2027. These investments are designed to support the scaling of production for current and future generations of Google's custom silicon TPU systems as well as leading-edge networking technologies. Based on our latest outlook, we anticipate full year revenue growth of approximately 50% in our CCS segment, supported by strong demand and new program ramps across both end markets. In communications, demand from hyperscalers is driving strong volumes for our 800G programs, while 400G remains highly resilient. We continue to expect mass production for our first 1.6T switching programs to begin ramping in the latter part of the year. Over the past 90 days, we have continued to add to our pipeline of newly won business in networking, adding to an already robust view of demand into 2027. We are pleased to announce that we have secured the design and manufacturing award for the 1.6T networking switch platform with a third hyperscaler customer. This HPS engagement is expected to ramp production beginning in 2027 with design work already underway. This new program award, along with strengthening demand forecast from our largest customers and a significant funnel of opportunities gives us confidence and optimism regarding the growth trajectory of our networking businesses. In our enterprise end market, demand signals remain solid. As anticipated, we saw a meaningful ramp in our next-generation AI/ML compute program with a hyperscaler customer during the fourth quarter, and we continue to expect that volumes will accelerate into 2026. Looking towards 2027, we continue to anticipate strong demand from our hyperscaler and digital native customers, driven by ramps in next-gen AI/ML compute programs. Now moving on to our ATS segment. We are maintaining our outlook for revenues to remain approximately flat to up in the mid-single-digit percentage range for the full year 2026, consistent with the targets we shared at our Investor and Analyst Day in October. We continue to expect growth in our Industrial and HealthTech business, supported primarily by the ramping of new programs. We anticipate this growth will be at least partially moderated by lower volumes in our Capital Equipment business in the near term. As we progress through 2026, we anticipate overall ATS revenues to be higher in the second half of the year, led by a recovery in Capital Equipment volumes as broader market growth tailwinds come into effect. We also expect year-over-year growth to improve as we lap the impact from the strategic portfolio reshaping activities we undertook in A&D during the first half of 2025. Overall, we expect 2026 to be another year of transformational progress in the growth and evolution of our business. We are experiencing an unprecedented level of demand supported by the sustained large-scale multiyear investments from our largest data center customers. We believe our company is uniquely positioned as a critical enabler of the AI/ML revolution, helping to solve the most difficult challenges in the data center from advanced liquid cooling solutions throughout the rack to the transition to next-generation networking platforms. It's our ability to deliver these complex system-level solutions that allows us to win new mandates and solidify our leadership in the technologies of tomorrow. Today, our team is intently focused on our operational execution as we scale our global footprint to meet this growing demand. With that, I will now turn the call back to the operator to begin the Q&A session. Operator: [Operator Instructions] And your first question comes from the line of Ruplu Bhattacharya from Bank of America. Ruplu Bhattacharya: So it looks like you've taken up both the top line and the bottom line guide for fiscal '26. If we take the midpoint of the guidance literally, then there seems to be a slowdown coming in fiscal second half and also some loss of operating leverage. I mean the revenue guidance is 51% year-on-year for fiscal 1Q, but the full year is 37%, so implying some slower growth in the remaining 3 quarters. Likewise, in EPS it's 71% for the first quarter, but full year is 45%. So EPS is definitely growing faster than revenue and there is leverage in the model, but it looks like some operating leverage decline in the remaining 3 quarters. So can you just clarify for us, is there something specific that's causing this slowdown? Or should investors just chalk this up to conservatism in the guide? Mandeep Chawla: First of all, welcome back. We're always very happy to work with you. So thank you for the coverage. Yes, look, we're very confident on our 2026 outlook. And as we said in our commentary and Rob mentioned, it's our high confidence view. Our customer forecasts right now for 2026 are higher than the $17 billion that we are guiding and what's also really nice to see right now is that the demand outlook with our customers is actually extending beyond sometimes our typical fourth quarter outlook. Similar to past outlooks that we've had, Ruplu, we're taking a pretty pragmatic view. Our views on next quarter and the quarter after that are typically going to be very much dialed in and we're going to share with you what that visibility exactly looks like. But when we look beyond the 2 quarters, we're just being pragmatic. We're focusing on securing supply. We have no concerns at this time, but we just want to make sure that the supply base can also ramp as fast as we are ramping, and then we take into account the macro uncertainties, which, as you know, there's a lot of them. But as we go through the year, we are working towards a higher number, and we'll look to be updating the numbers as we go. Ruplu Bhattacharya: Okay. If I can ask a quick follow-up. I want to ask about risk management. So you obviously have a lot of opportunity in both your white box switching business and the custom ASIC server business. One thing you mentioned is you're increasing CapEx to fund the growth. Can I ask if you're concerned about any potential funding for future AI-related projects? And is there any risk to programs materializing? And have you taken that into account? And also, you've kept free cash flow at $500 million. Given that CapEx is going up and you're probably going to need more working capital to support revenue growth, can you just tell us like -- is there a risk to the story here? And what is giving you confidence to maintain the free cash flow guide? And again, congrats on the quarter. Robert Mionis: I'll start off, I'll let Mandeep finish up. With respect to programs materializing, the build-out that we're doing is based on both businesses. We had a record bookings year in 2025 and we're really just building out to support those bookings. So there's very little risk in those programs materializing. They have been in the development cycle right now, and we're doing proof of concepts with respect to validation testing and they're well underway to ramping in 2026. In terms of risks to the entire story, Mandeep talked about it. We view it more as uncontrollable, like geopolitical risks. There's always an opportunity of tightening supply chain. But frankly, our suppliers realize now that we have a lot of leverage these days given our scale. And we're also a design agent, which is giving us some leverage in the supply chain. We also have a lot of opportunities, as Mandeep mentioned. Demand continues to well outstrip our ability to provide it in the very short term. We have very strong demand from networking with respect to 400G, 800G and 1.6T ramps that are happening later on this year. And on top of this, we have some very strong demand for AI/ML compute. And within the enterprise market, we're also seeing signs of very significant growth. So overall, we see more opportunities than risk at this time. Mandeep Chawla: I'll talk about cash generation. And look, we're very comfortable with our ability to invest. And frankly, we're willing to invest even more as we go through the year. That's what's in front of us. We think we'll generate at least $500 million of free cash flow this year. That's after paying for $1 billion of CapEx. I know that those on the call already are aware of this. We generated positive free cash flow every quarter for almost 7 years now. And it's because we are very focused on generating strong positive free cash flow every quarter. And so with the growth plans that we have in front of us, we don't see that being a risk. And this is even going beyond the fact that we have an incredibly healthy balance sheet. And so we think that we can fund these with cash generation and not have to even use the balance sheet. Thanks for your questions. Operator: Your next question comes from the line of Samik Chatterjee with JPMorgan. Samik Chatterjee: Maybe if I can start with the CapEx investment and the ramp here, I know you provided us an update at the Investor Day and you mentioned that activity really ramped with customers again since then and engagement did ramp. I'm trying to think like when you are sort of going ahead and doing this investment, should we think about this as something that drives revenue in 2027 itself? Or are these sort of programs as well as the ramp sort of more to address customer demand in 2028, 2029. Just trying to get a sense of what kind of program visibility customers are giving you already to drive this significant investment from you? Just trying to get a sense of that? And I have a follow-up. Robert Mionis: Samik, yes, the capacity that -- the CapEx that we're investing in now, as I mentioned earlier, is based on booked business. With respect to 2026, we do have the capacity to grow beyond our current high confidence outlook. So the investments we're making are enabling additional capacity for 2027 and 2028 based on booked business. Now as we continue to win in the marketplace, we'll further evaluate our capacity expansion plans, and then there will be an opportunity to expand our revenue outlook for '27 into '28. But right now, the investments we're making in '26, which also will have a follow-on effect into '27 is really just on the backlog of business that we have right now. Samik Chatterjee: Got it. Okay. And then maybe for the follow-up, the outlook that you're sharing for CCS to maintain these sort of strong growth rates into 2027. Just wondering, does that sort of incorporate the digital native customer and the ramp with that customer? -- And any updates in terms of over the last sort of 90 days, anything -- any updates in relation to your timing or sort of how you think about the magnitude of that ramp in 2027? Mandeep Chawla: Yes, Samik. So we are seeing accelerating growth happening within CCS. If you go back to our commentary from 3 months ago versus today, 3 months ago, we were saying that when you break down the numbers that CCS would be growing by about $3.5 billion in '26. And then when we put a 40% growth rate on that, it was implying about a $5 billion of CCS growth in 2027. We're now updating those numbers and going off of a higher base. So now what we're implying is that 2026, CCS will grow probably closer to $4.5 billion, so about $1 billion higher than what we talked about 3 months ago. And because we're saying that we're seeing very strong trajectory continuing, we're now seeing CCS grow close to $7 billion in 2027 and that's off of a higher base. And so the demand outlook is very robust. Your question on the digital native customer, that continues to progress just as we would have expected it to. We still expect it to be a meaningful contribution in 2027. We are actively working on the design aspects of the program. And we do believe that, that program will still ramp into the '27, and that's included in the numbers that we're sharing. Operator: [Operator Instructions] Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Thanos Moschopoulos: Can you speak to how we should think about the margin trajectory? Just given the mix shift dynamic where you've got some enterprise becoming the larger part of CCS mix, would that imply that there might be some compression in CCS margins as the year progresses and into '27? Or are there offsets to that? Mandeep Chawla: Yes, we're seeing tremendous amount of growth happening right now in enterprise. We are really pleased with the trajectory that we are -- that's already underway. You saw that we had a very nice growth number in the fourth quarter, and that's accelerating as we go into Q1. We expect that program to continue to grow all through 2026. And then just as a reminder, we've already won the next generation of that program. And so we would expect those programs to actually ramp into 2027. So our outlook for enterprise continues to be very healthy. We are seeing very strong operating leverage. And so we don't necessarily expect a large mix headwind, if you will, from growing of the enterprise business. We do make more money on networking in general. But with the leverage that we're getting and the very disciplined cost management, we still think that the enterprise business is going to be able to generate very strong profitability. And so for that reason, it's embedded in our numbers. 2026, we're giving an outlook right now where margins expand by 30 basis points. And what I would just say is that that's our -- that's the floor of our expectation. We would be looking to do better than that hopefully. Robert Mionis: I would also add, Thanos, that networking is also very strong in 2026 and going into 2027. In 2026, we see 400G very resilient, the 800G very strong and we see 1.6T ramping in the back half of the year. So we have all 3 major programs running concurrently, which is helping the operating leverage and also helping the mix. Operator: Your next question comes from the line of Michael Ng with Goldman Sachs. Michael Ng: Great. My question is just around the CapEx. Encouraging to hear about all the visibility your partners are giving you. I wanted to ask whether the capital intensity in the business has changed at all? Or does the $1 billion CapEx support 2% to 2.5% revenue over time, kind of implying a path to $40 billion to $50 billion of revenue over time. Is that a fair way to think about it? Or has the capital intensity in the business changed at all? Mandeep Chawla: Michael, I'm not going to help you back into that number, but I completely understand the way that you look at it. What I would say is that we have in the last number of years been investing the majority of our CapEx dollars into growth CapEx. We spent probably $70 million to $80 million on maintenance and that's not going to change very much. And so as a percentage of revenue, we expect that our maintenance CapEx is going to be very predictable and not a huge driver. And so therefore, the delta is really on growth CapEx. To the point that Rob has made, we are making this sizable investment to tie to programs that we've already won that are going to be generating, we believe, material revenue in 2027 and 2028. Should those wins continue, and we would expect that they would, we have no hesitation in increasing our CapEx. But you almost want to think of it almost like at a project level. We are building -- we're making these investments to support specific wins at this time. At a certain point, we would expect the CapEx to moderate because, again, the vast majority of it is growth. And so when we get back to a maintenance level, we would be back to what we would normally expect. Operator: Your next question comes from the line of Karl Ackerman from BNP Paribas. Karl Ackerman: So I know you have deep engagements on the 400-gig and 800-gig switch programs, but could you speak to the opportunity you have to address multi-rack scale-up XPU networks, such as optical circuit switches and co-packaged optics-based switches perhaps in terms of the breadth of customer engagements. Robert Mionis: Yes, sure. So we see increasing activity and increasing R&D expenditures. Some of it's a little premature to talk about now, but to do more AI/ML and networking integrated -- fully integrated systems, both supporting scale-up and scale-out fabrics. Based on a proof point with our digital native and some other early engagements that we have with other providers, we see this as a major growth driver for our business moving forward. As these AI models continue to grow and GPU to GPU interconnects become more and more important, scale-up will be as much as an opportunity as scale-out. So we see this as a major growth opportunity for us. And we're well underway in capturing a lot of that -- those growth opportunities and we hope to have more to share with you in coming months. Mandeep Chawla: Karl, what I would just add to Rob's comment is that when you look at the 1.6T wins that we've already had to date, they are both being used for scale-up and scale-out. And with the funnel of opportunities that we have in front of us that diversification continues, and we would expect that we would continue to grow in that area. In addition, I think to the question that you raised on co-packaged optics, we are starting to see conversations with our customers increase in this area. We still believe that in terms of mass adoption, it's going to be more towards 3.2T, which are programs that we're working on in our R&D group. But we haven't seen customers looking for mass adoption of CPO as of yet. And so that's pretty similar to what we said a few months ago. Operator: Your next question comes from the line of Tim Long with Barclays. Timothy Long: I did want to just talk about a few comments on the call you guys made about new programs and new program wins. Could you talk a little bit about kind of -- you talked about some strong backlog and visibility and wins as well as, obviously, the capacity expansions. You obviously got a lot of large switching and AI/ML and digital native rack wins. Can you talk about the outlook for the next few years. What we should expect to see from newer programs where they could be centered? Would this more be around new switching customers or new applications or use cases from some of the existing customers? Anything you could give us on that would be helpful. Robert Mionis: Yes. The visibility, Tim, that we're seeing with our customers at this stage is unprecedented. We're certainly into '27 and many customers were talking into 2028. Our customers now are viewing us less as a supply chain partner and more as a technology leader. And part of that process is aligning on our technology road maps, which is informing our investment decisions. And these investment decisions are enabling and informing all the future products moving forward. And those products are more in the lines of a fully integrated rack systems supporting in scale-up and scale-out. Also staying on the leading edge of switching 3.2T samples are due in probably towards the end of 2026 and we're already starting to work on that. Mandeep alluded to some of the proof of concepts that we have co-packaged optics. So where it's only going to be ready for when that hits down the 3.2 cycle as well. So broadly speaking, our portfolio is getting broader and deeper with our customers moving forward. Operator: Your next question comes from the line from David Vogt with UBS. David Vogt: So I have a question about sort of the scope of work and the economics of the digital native customer. Can you kind of update us on where we stand in terms of what that relationship looks like as we go into '26 into '27? And then Mandeep, on the CapEx numbers, that $1 billion, can you help us parse through how much of that CapEx is tied to sort of the existing customer base and the expansion of programs and projects with your largest customers versus incremental customers like the [ DNC ] or any other incremental customers that you see in the pipeline for '26, '27? Robert Mionis: Yes, I'll start off. With respect to the digital native customer, we have a very tight engineering-driven relationship with our customer. In 2026. So we're going to be shipping them largely samples and getting ready for the ramp that should be starting in the early parts of 2027. At this stage of the game, the program is on track, and we're just getting ready for the ramp working with them and the silicon provider and all the ecosystem partners, but it's -- the relationships is a solid relationship. Mandeep Chawla: Yes. And just to add on to that in terms of question for CapEx and how it's kind of being allocated. So geographically, now you're aware of how we're allocating it. We're putting in significant investments in areas like Thailand, Richardson, Texas as well as Fort Worth. And it's really to support multiple customers. And so we are largely investing in programs that we've won across the major hyperscalers. Those are very -- we have a high confidence view to work with these customers sometimes for well over a decade. But with our digital native customer, we are willing to make investments as well. And so some of the investment is going towards enabling the ramp in 2027. But I would say the vast majority of the expenditures are tied to programs with our hyperscalers. Operator: Your next question comes from the line of Paul Treiber with RBC Capital Markets. Paul Treiber: Just a question, just in light of the new program win momentum that you're seeing, can you speak to how the returns and expected returns on those programs compare against existing programs? And really, what I'm going to add is also, are you seeing competition changing the returns on new programs versus what you saw in the past? Mandeep Chawla: Yes. Paul, I'll take the first part of the question, and I'll let Rob talk about the competitive intensity that's happening in the marketplace. Look, the approach that we take when we make investments with our customers is really a holistic view. We look at it on a global basis. We want to ensure that we're generating strong profitability. But more importantly, we want to make sure we're supporting our customers in the geographies that they need. And so we will look at investments at the customer level on a global basis. But of course, we want to ensure that specific investments tie out on their own as well. I know you know this, which is we're a very ROIC-driven company. We're focused on strong profitability, but just as much we're focused on a very disciplined level of investment. And so we'll make sure that business cases hold. And so from a returns perspective, what I would just say is that we continue to focus on expanding our ROIC. We continue to focus on expanding our margins while generating very strong top line growth. And so those are always factors whenever we're looking at business cases. Robert Mionis: In terms of competitive intensity, and I would say as time goes on, the programs that we're bidding on and winning are becoming more and more complex. In many cases, some of the business that we decided not to play the pricing game on in 2025 have come back to us in 2026 because others could not execute on it. So when we look at our competitive moat, we have some fantastic engineering to be able to design these complex products. But even more so a very few of our competition can produce these products at scale. And when you combine those 2 together, it's really giving us a lot of tailwinds in '26 and also moving into 2027. That combination is proving to be very powerful for us. Operator: Your next question comes from the line of Ruben Roy with Stifel. Ruben Roy: Rob, maybe you could follow up where you left off there, and I had a question on the 1.6T win, the new win at a new hyperscaler. Are you seeing a shift towards HPS design-led solutions and away from cost plus? You've got the design center that you talked about in Austin. Just wondering if that's something that's happening as you move towards these more complex switching technologies and how you see that playing out from a margin perspective as you think about 2027, '28 time frame? Robert Mionis: Yes. Certainly, thanks for the question. 1.6T and even as we move into 3.2T, the complexity that's required, the engineering complexity that's required on these things is moving more towards HPS engagements. So on the networking side, we see that increasing over time. And the density and the complexity is only going to increase at every node. On the AI/ML compute side, we like to play really on the HPS and JDM design-oriented AI/ML compute. And we also see as that gets more and more sophisticated, more opportunity for us to play in that area, and we have several projects in the pipeline to improve those engagements on the HPS side as well. Operator: Your next question comes from the line of Steven Fox with Fox Advisors. Steven Fox: First of all, congratulations on reaching a point where people are complaining about 37% growth. I thought that was great. In terms of my question, there's been a bunch of confusion around with your largest customer, how the supply chain works on those AI/ML compute programs and where you are sort of positioned versus their other suppliers? Is there any -- can you just sort of clarify how you're playing there? What kind of competition you see? And then it looks like you're also expanding directly to support some more programs on that. So anything on that would be helpful. Robert Mionis: Certainly. I would chalk this up, you can't believe everything you read. What I can emphatically say is that our partnership with Google has never been stronger or more integrated. We have absolutely no indication there are new entrants into that market. As you know, these are very complex products to manufacture, especially at scale. And we have been doing it for a very long time with this family of products. As a preferred partner with Google on these leading edge compute programs. We have a joint commitment to each other moving forward, not just for the current generation, but for future generations of their TPUs. And we've been supporting this technology for generations and we hope to continue to do so going well into the future, which is warranting a portion of the investments moving forward. And I would also add that the capacity expansion that we're making certainly is in support of Google, but it's also in support of growth from other hyperscalers and digital native support. Operator: Your next question comes from the line of John Shao with TD Cowen. John Shao: So within your guidance, how much do you bake in a price increase of key components or materials? At this point, are you still comfortable with the supply chain? Do you think this is going to be any source of potential margin compression given right now, we're getting this inflationary environment in the supply chain? Mandeep Chawla: Yes. So we factored in inflation and pricing into the numbers that we've already shared. Just as a reminder to everyone on the call, when we have networking, we have it on a turnkey basis, which is our typical approach, meaning it includes the silicon, where on the compute side, it typically does not. And so where there is a lot of price inflation, it's happening on the silicon side. So you're not going to necessarily see our growth in our enterprise numbers being driven by that. On the networking side, we're growing in terms of overall volume. But yes, there is inflation happening at the silicon side, which we're able to pass on to our customers. And so are we seeing margin compression? No, not right now. But if silicon becomes a much larger part of the bill of materials, then perhaps it will, but that's not in our line of sight at this time. But there is a little bit of contribution in our revenue growth year-over-year coming from just the fact that ASPs are going up, but the vast majority of the growth is due to units. Operator: Your next question comes from the line of Todd Coupland with CIBC. Thomas Ingham: I wanted to ask about the 1.6 programs in the second half of the year. And at this point, what are the range of outcomes and gating factors for those programs to start to ramp this year? Just talk about that a little bit. Robert Mionis: Yes. We have 10 active 1.6T programs in the pipeline right now. And 5 of them will start ramping in the back half of the year and certainly into 2027. And several -- the balance of them are in the development pipeline and will be ramping later in '27 into '28. The gating factors really is just completing the development cycle as planned and things are on track. Silicon is on track. So I just think it's business as usual in terms of supporting our customers' ramps. Mandeep Chawla: Todd, if I could maybe add to that. When we look at our -- the overall switching demand that's out there right now, what we're really encouraged by is there's been a tremendous amount of growth happening in 800G that happened in 2025, and that's continued in 2026 and 400G continues to hold. So 400G will be a strong contributor in 2026. 800 will continue to grow. And then you got 1.6 coming on as well towards the end of the year. And so the dynamic that's really been playing out in the last couple of years is that the next-generation technology is not necessarily cannibalizing the previous generation. And so this is one of the reasons that we have a lot of optimism on the networking space exiting '26 even and going into '27. Operator: Your next question comes from the line of Atif Malik from Citi. Atif Malik: We got a couple of questions from investors on this yesterday. In your press release, you called out Google TPUs as a preferred manufacturing partner versus sole source. Is that a new disclosure? And then just as a follow-up, if some of your hyperscalers were to adopt more TPUs, do they all go through you guys? Or there are other entities like Broadcom and others that can participate in the TPU rack [ trade ] business? Robert Mionis: On the first one, Atif, no, I don't think it's a new disclosure. We're not sole sourced or single sourced on the TPU programs nor have we -- frankly, nor I think we've ever said that. For [ BCP ] purposes, most, if not all of our hyperscaler customers remain a second source. But we are a primary source for them on TPU programs and continue to do so. With Google and with all of our hyperscalers, share is largely awarded on performance. Our performance has been very strong. And as a result, they make the decisions accordingly. Mandeep Chawla: And then to the question that you were raising about as Google's TPU gets adopted beyond just Google itself, how does that play out. Right now, our view is that those -- that increased level of demand for their types of products will flow through their supply chain. And as their preferred manufacturing partner, we would expect to be able to support them with that. And so right now, it's wonderful to see that their product is being adopted in the marketplace, and we do expect to be able to support them with that growth. Operator: Your final question comes from the line of Robert Young with Canaccord Genuity. Robert Young: On the third hyperscaler, 1.6 win, how was this one? Was it an extension of 800? Was it tied to your Tomahawk ASIC experience. And, like, is it part of a rack integration with another outside vendor? Or is that being done by the hyperscaler? Just some context around that? And then if you could also talk about how you expect operating margins to evolve as you move into 1.6 terabytes programs and how that might differ between -- I think you have 2 full rack and then 2 stand-alone if I understand the large programs. Now how would the margin structure differ and evolve? Robert Mionis: Rob. Yes, on the third 1.6T, so with this hyperscaler, we were predominant share on the 400G. We were predominant share and one on 800G, and this is just an extension of going to the 1.6T. The engagement started with a design win that we're happy with the performance with this switch. It's based on the 400 and 800. And we were awarded the mass production for this switch as well. Mandeep Chawla: Yes. And then in terms of the margins, Rob, what I would just say is that we approach our switching portfolio in a similar way even as we go into the next generation, we typically make more money during the ramping and the development cycle of a program. And then as it gets to mass production, we try to offset that pricing with operating leverage. And so we do expect 1.6 programs to be as profitable as we've seen on some of our past switching programs. One interesting dynamic, though, is that more and more of our switching portfolio should be moving towards HPS. We have some of our switching portfolio today in EMS. And just typically as we embed more of our engineering, that leads to better pricing. And so we are happy with the way that the margin profiles look like for 1.6 products. Robert Young: And is there any context on between the full rack deployment and stand-alone? Mandeep Chawla: Yes, it's integrated. And so we take a look holistically when we are doing this for our customers. As you mentioned, it's integrated. So there's 1.6 switches, but then there's also compute and then there's the integration activities, so we do testing for them. And then at certain points, we may be able to do services as well. If you look at it on a holistic basis, and we ensure that the value that we're bringing on the switching side, which has the most engineering that we have is getting captured in overall price. Operator: There are no further questions at this time. So I will now turn the call back to Rob Mionis, CEO, for closing remarks. Robert Mionis: Thank you. And thank you again for joining us this morning. 2025 was an exceptional year for Celestica, characterized by record financial results. We're excited to build on this momentum in '26 and as we raise our annual revenue outlook to $17 billion. The strategic investments we are making provide us with the capacity to support our customers' multiyear AI road maps and our deep partnership with industry leaders like Google and our expanding global footprint in Texas and Asia reinforces our confidence that our growth trajectory will be sustained into 2027 and beyond. We look forward to updating you on our continued progress next quarter, and thank you again for joining the call. Operator: This concludes today's call. Thank you all for attending. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the STMicroelectronics Full Year 2025 Earnings Release Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Jerome Ramel, EVP, Corporate Development and Integrated External Communications. Please go ahead, sir. Jerome Ramel: Thank you, Maura, and thank you, everyone, for joining our fourth quarter and full year 2025 financial results call. Hosting the call today is Jean-Marc Chery, ST President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, President and CFO; and Marco Cassis, President, Analog, Power and Discrete, MEMS and Sensor Group and Head of ST Microelectronics Strategy, System Research and Application and Innovation Office. This live webcast and presentation materials can be accessed on ST Investor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST results to differ materially from management's expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning and also in ST's most recent regulatory filings for a full description of these risk factors. Also to ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to one question and a brief follow-up. Now I'd like to turn the call over to Jean-Marc Chery, ST President and CEO. Jean-Marc Chery: Thank you, Jerome. Good morning, everyone, and thank you for joining ST for our Q4 and full year 2025 earnings conference call. I will start with an overview of the fourth quarter and the full year 2025, including business dynamics, and I will hand over to Lorenzo for the detailed financial overview. I will then comment on the outlook and conclude before answering your questions. So, starting with Q4. We delivered revenues at $3.33 billion, above the midpoint of our business outlook range, driven by higher revenues in Personal Electronics and to a lesser extent in Communication Equipment and Computer Peripheral and Industrial, while Automotive was below expectations. Gross margin of 35.2% was also above the midpoint of our business outlook range, mainly due to better product mix. Excluding impairment, restructuring charges and other related phaseout costs, diluted earnings per share was $0.11, including certain negative one-time tax expenses impact of $0.18 per share. Q4 revenue marked the return to year-over-year growth. During the quarter, we further worked down inventories, both in our balance sheet and in distribution, and we generated a positive $257 million free cash flow. Looking at the full year 2025. Net revenues decreased 11.1% to $11.8 billion, mainly driven by a strong decrease in Automotive and to a lesser extent, in Industrial, while Personal Electronics and Communication Equipment and Computer Peripheral both grew. Gross margin was 33.9%, down from 39.3% in full year 2024. Excluding impairment, restructuring charges and other related phaseout costs, diluted earnings per share was $0.53. We invested $1.79 billion in net CapEx, while generating free cash flow of $265 million. Let's now discuss our business dynamics during Q4. In Automotive, during the quarter, we grew revenues 3% sequentially. Year-over-year revenues declined, but with continued improvement in the trend. Automotive design momentum progressed with design wins across both electric and traditional vehicle domains for applications such as onboard chargers, DC-DC converters, powertrain and vehicle control electronics. These included design wins for power semiconductors, smart power devices, automotive microcontrollers, analog and sensors. These awards supported by engagements with various OEMs and Tier 1 ecosystems, strengthen our position as a key supplier to the automotive industry. Regarding the acquisition of NXP's MEMS sensor business, the transaction we announced in July is still expected to close in H1 2026. In Industrial, revenues were better than expected, showing increases of 5% sequentially and 5% year-over-year. Importantly, inventories in distribution further decreased and are now normalizing. In Industrial, our portfolio of microcontrollers, sensing technologies and analog and power devices is strongly positioned to support industrial transformation trends and the need of physical AI. During the quarter, we saw design wins across industrial automation and robotics, building automation, power systems, health care and home appliances. In November, we held our STM32 Summit where we announced several key innovations, including the first microcontroller built on the 18-nanometer process, a next-generation wireless microcontrollers and an updated suite of edge AI software tools. Personal Electronics, fourth quarter revenues were above our expectations, down 2% sequentially, reflecting the seasonality of our engaged customer programs. During the quarter, we strengthened our position in mobile platform and connected consumer devices, both with our engaged customer programs as well as our open market offering for devices such as our sensors, secure solutions and power management products. Revenues for communication equipment and computer peripherals were up 23% sequentially, better than expected. In AI and data center infrastructure, we continue to reinforce our position supporting the increasing demand for higher power density and energy efficiency. During the quarter, we secured multiple design wins for silicon and silicon carbide-based power solutions, supporting next-generation AI compute architectures. We also continue to work with customers to bring our silicon photonics technology to the market. The strong momentum in optical connectivity technologies for data centers also contributed to a significant rise in demand for our high-performance microcontroller used in pluggable optics. The low-earth orbit satellite business based on our BiCMOS and panel level packaging technologies continued to progress during the quarter with shipments ramping to our second largest customer. Moving to sustainability. We remain on track for our key 2027 commitments. Carbon neutrality in all direct and indirect emissions from Scope 1 and 2 and focusing on product transportation, business travel and employee commuting emissions for Scope 3 and 100% renewable energy sourcing. A major milestone this year was the launch of Singapore's largest industrial district cooling system at our Ang Mo Kio facilities in Q4. We also continue to maintain our strong presence in the major sustainability indices where we were honored to be recognized in the Time world's most sustainable companies list for the second consecutive year. Now over to Lorenzo, who will present our key financial figures. Lorenzo Grandi: Thank you, Jean-Marc, and good morning, everyone. Let's have a detailed review of the fourth quarter. Starting with revenues on a year-over-year basis by reportable segment. Analog products, MEMS and sensor grew 7.5%, mainly due to Imaging. Power and Discrete products decreased by 31.6%. Embedded Processing revenues were up 1% to 2% with higher revenues in general purpose and automotive microcontrollers, offsetting declines in connected security and custom processing products. RF and optical communication grew 22.9%. By end market, communication equipment and computer peripheral and personal electronics both grew by about 17%. Industrial grew by about 5%, while automotive decreased by about 15%. Year-over-year, sales increased 0.6% to OEM and decreased 0.7% to distribution. On a sequential basis, Power and Discrete was the only segment to decrease by 3.9%. All the other segments grew, led by RF and optical communication up 30.5%, while Embedded Processing and Analog products, MEMS and sensor were up, respectively, 3.9% and 1.1%. By end market, sequential growth was led by communication equipment and computer peripherals, up 23%. Industrial was up 5% and automotive was up 3%, while Personal electronics declined 2%. Turning now to profitability. Gross profit in the fourth quarter was $1.17 billion, decreasing 6.5% on a year-over-year basis. Gross margin was 35.2%, decreasing 250 basis points year-over-year, mainly due to lower manufacturing efficiencies and to a lesser extent, negative currency effect and lower level of capacity reservation fees. On a sequential basis, gross margin improved by 200 basis points. Q4 gross margin included about 50 basis points of negative impact resulting from a nonrecurring cost related to our manufacturing reshipping program. In the next few quarters, we expect a similar negative impact on gross margin from the just mentioned nonrecurring costs. Total net operating expenses, excluding restructuring, amounted to $906 million in the fourth quarter, slightly increasing year-over-year due to unfavorable currency effect. They were slightly better than expected, reflecting our continued cost discipline and the initial benefit from our cost savings initiative. For the first quarter 2026, we expect net OpEx to stand at about $860 million, decreasing quarter-on-quarter. As a reminder, these amounts are net of other income and expenses and exclude the restructuring. In the fourth quarter, we reported $125 million operating income, which included $141 million for impairment, restructuring charges and other related phaseout costs. These charges are related to the execution of the previously announced company-wide program to reshape our manufacturing footprint and resize our global cost base. Excluding the nonrecurring items, Q4 non-U.S. GAAP operating margin was 8%, with Analog product MEMS and Sensor at 16.2%, Power and Discrete negative 30.2% Embedded Processing at 19.2% and RF and Optical Communication at 23.4%. Fourth quarter 2025 net loss was $30 million, including certain onetime noncash income tax expenses of $163 million compared to a net income of $341 million in the year ago quarter. Diluted earnings per share was negative $0.03 compared to $0.37 of last year. Excluding the previously mentioned nonrecurring item related to the impairment, restructuring charges and other related phaseout costs, non-U.S. GAAP net income stood at $100 million and non-U.S. GAAP diluted earnings per share stood at $0.11, including certain negative onetime tax expenses impacting of $0.8 per share. Looking now at our full year 2025 financial performance. Net revenue decreased 11.1% to $11.8 billion. In terms of revenue by end market, Automotive represents about 39% of our total 2025 revenues. Personal Electronics about 25%; Industrial, about 21% and Communication and Computer Peripheral about 15%. By customer channel, sales to OEMs and distribution represent 72% and 28%, respectively, of total revenue in 2025. By region of customer region, 43% of our 2025 revenues were from the Americas, 31% from Asia Pacific and 26% from EMEA. Gross margin decreased to 33.9% for 2025 compared to 39.3% for 2024, mainly due to lower manufacturing efficiencies and to a lesser extent, the price and mix, lower level of capacity reservation fees, negative currency effect and higher unused capacity charges. Operating income stood at $175 million compared to $1.68 billion in 2024. Excluding $376 million for impairment, restructuring charges and other related phaseout costs, non-U.S. GAAP operating margin was 4.7%. On a reported basis, net income was $166 million and EPS was $0.18. On a non-U.S. GAAP basis, they stood respectively at $486 million and $0.53. Net cash from operating activities totaled $2.15 billion compared to $2.97 billion in 2024. Net CapEx expenditure was $1.79 billion in 2025, in line with our revised expectation and lower than the $2.5 billion of 2024. Free cash flow was $265 million positive in 2025 compared to the $288 million positive of the previous year. Inventory at the end of the year was $3.14 billion compared to the $3.17 billion at the end of the third quarter and $2.79 billion one year ago. Days sales of inventory at quarter end were 130 days, slightly better than our expectation compared to the 135 days for the previous quarter and 122 days in the year ago quarter. Cash dividends paid to stockholders in 2025 totaled $321 million. In addition, during 2025, ST executed share buybacks totaling $367 million. ST maintained its financial strength with a net financial position that remains solid at $2.79 billion as at end of December 2025, reflecting total liquidity of $4.92 billion and total financial debt of $2.13 billion. Now back to Jean-Marc, who will comment on our outlook. Jean-Marc Chery: Thank you, Lorenzo. Now let's move to our business outlook for Q1 2026. We are expecting Q1 '26 revenues at $3.04 billion, a decrease of 8.7% sequentially, plus or minus 350 basis points. We expect our gross margin to be about 33.7%, plus or minus 200 basis points, including about 220 basis points of unused capacity charges. This business outlook does not include any impact for potential further changes to global tariffs compared to the current situation. In terms of net CapEx for 2026, we plan to invest about $2.2 billion to support capacity addition for selected growth drivers like those for cloud optical interconnect and our manufacturing reshaping plan. To conclude, 2025 turned out to be a challenging year for the end market we serve, characterized by continued inventory correction in automotive and industrial, in particular, the first part of the year. The second half was better with gradual improvement of the revenue trend and a return to a year-on-year growth in the fourth quarter. We are entering '26 with a better visibility than entering '25 with the inventory correction in distribution progressively improving. Beyond the evidence of a cycle recovery, ST will benefit from the following company-specific growth drivers. In automotive, we see solid momentum in our engaged customer programs in ADAS, where we expect to grow this year and in the coming years. In silicon carbide power devices, following a significant contraction in 2025, we anticipate a return to revenue growth in 2026 with revenues projected to recover to 2024 levels by 2027. In sensors, we see strong demand, both in MEMS and imaging sensor and our planned acquisition of NXP MEMS business will strengthen our leading position across the automotive and industrial segment. In industrial, in general purpose MCUs, building on market share gains 2025 and a road map of new product launch for 2026, we are on track to return to our historical market share of about 23% by 2027. In Personal Electronics, where we continue to see strong momentum in our engaged customer programs in sensors and analog, we should keep on benefiting from increased silicon content in 2026 and beyond. In communication equipment, computer peripheral, in data centers, including cloud, optical interconnect and power and analog for AI servers and data centers, with the current market dynamic, we believe we can deliver $1 billion revenue before 2030 with already USD 500 million in 2026. In low-earth orbit satellites, we are expanding our customer base, and we anticipate continued revenue growth as low earth orbit constellation projects expand globally and penetrate new applications such as direct-to-cell constellation. Lastly, ST is uniquely positioned to address human wind robotics through our broad portfolio, spanning MCUs, MEMS, optical sensors, GNSS and power management. We are already generating revenues through engagements with major OEMs, and we estimate our current addressable bill of material at about $600 per system. Thank you, and we are now ready to answer your questions. Operator: [Operator Instructions] Our first question comes from Francois Bouvignies from UBS. Francois-Xavier Bouvignies: My first question maybe for Jean-Marc, I wanted to come back to what you said about the outlook. I mean, if we look at your revenue guidance down 8.7% quarter-on-quarter, this is below seasonal -- better than seasonal, sorry, of minus 11%. And if we take into account less days, it's actually significantly above seasonal. So, I was wondering, I mean, this is looking quite interesting. And if we compare to other peers like TI yesterday or ADI and Microchip, you see a number of your peers talking about above seasonal. I mean what's your view on the trajectory from here? Do you think this above seasonal trend can carry on a little bit? Or we shouldn't get carried away like we did in the last two years where we have many fall starts? Do you see like a very genuine evidence of a cycle recovery from here? Jean-Marc Chery: Well, we will not guide for 2026 today, clearly, but we are confident in our ability to grow organically for next year. But it's clear that we enter in a better and healthier situation compared to '25. If you remember last quarter, okay, I already shared with you that we were seeing a backlog that were reading during the quarter better than the usual seasonality. And today, with the visibility we have on Q2 that generally speaking, okay, is plus, let's say, low mid-single digit, but we absolutely see no reason that we will not be at least capable to deliver it. More important, I think, beyond the cycle is to share with you that we see for the company some specific growth driver. First of all, in automotive, clearly, we will have the sensor. And at a certain moment, when we will complete the acquisition of NXP, of course, it will bring additional revenues. This is obvious. But we see also positive momentum on ADAS ASICs and the silicon carbide after last year that was pretty challenging. Well, in industrial, clearly, the dynamic is really strong, thanks to the inventory correction gone, but more important is our portfolio. So we have done a tremendous effort in introduction of new products in '25 and '26, and this will contribute beyond the cycle. For Personal Electronics, our engaged customer program, you know that we have the visibility, okay? So I confirm to you. So we confirm that it will support us beyond the cycle. And last but not the least, data center. But clearly, in 2026, cloud optical interconnect, so means both photonics ICs and analog mix signal by CMOS ICs plus our high-performance general purpose microcontroller will contribute because you know that the connectivity engine of the server will move to optical one. So this will be certainly an acceleration. And as well, we will start to contribute to the power supply unit and to the server from the green to the processor. Last but not the least, beyond the cycle in '26, we see also low earth orbit satellite communication with our engaged customer program, so with our ASICs really positive. This will be a bit offset by the capacity fee reservation. But all in all, I confirm really our confidence level to grow organically in 2026 and because we have, let's say, significant growth driver beyond the cycle of the market. Francois-Xavier Bouvignies: Very clear. And yes, maybe on the gross margin side, I mean, with it, I mean, obviously, it's a concern for the market. You delivered the guidance is in line on the gross margin, but 33.7%. But when I look at the consensus, it has 35.6% of gross margin for the year. So it would assume a recovery from here. So with the top line that you described nicely, should we see as well an improvement of gross margin from the level in Q1? Lorenzo Grandi: Maybe I take this one, Jean-Marc, about the gross margin. But today, of course, the gross margin will depend on the evolution of the revenue in the course of the year. As explained by Jean-Marc, we expect, let's say, to increase. But the gross margin today that we see in Q1, we believe is clearly the lowest point in the year, this expectation of 33.7%. So we will see some increase. This increase is also driven by the fact that we expect to have constantly reduction in our unloading charges during the year. So we expect some mild increase for the second quarter and then a more significant increase also driven by the seasonality of the revenues in the second half of the year. Yes, at this stage, we can say that the expectation for us is to have increase in our gross margin all over the year. Operator: The next question comes from Andrew Gardiner from Citi. Andrew Gardiner: I was interested, Jean-Marc, in digging a bit deeper into the automotive space. Clearly, your largest end market and the one where we're still seeing the most difficulty in terms of getting through the bottom of this cycle. There's a number of sort of end market data points out there that are, I suppose, still causing investors' questions in terms of the health of the market, tariff threats back and forth admittedly, but also not helping. I'm just wondering how -- can you give us a bit more detail in terms of how you're seeing your customers behave? Do you think inventory is absolutely at a bottom in terms of the automotive channel and at the OEMs and the Tier 1s. What kind of confidence do you have as we look into the future quarters that we can return to stronger demand trends? Jean-Marc Chery: Well, first of all, clearly, when we see our Q4 revenue in automotive, it was slightly below our expectation and mainly, in fact, driven by the pulling from inventory a little bit lower than expected from some Tier 1 means that the automotive market for, let's say, legacy application, clearly is pretty soft. Inventory correction is certainly gone, but there is a kind of a softness of this kind of application. What will be positive on automotive is clearly what is around, let's say, the electronic architecture, the new software-defined electronic architecture calling for more complex MPU, MCUs definitively. So this will be an important growth driver. But we know that the electrical powertrain will be still an important driver. But here, it is more the competition landscape that changed completely compared a few years ago because you see that out of, let's say, more than 30 million vehicles produced in China, more than half are battery based compared to America, where it is more marginal in terms of production. And in Europe, it is below 1/3. So here, it's more a question of the competition is in China. So you know that in China is more complex to compete. But the powertrain electronics, the demand is there. So, all in all, I think the automotive market based on 90 million, 92 million, 93 million vehicles out of which 17 million to 18 million vehicle battery based and similar number in hybrid is still changing in terms of mix as well from the car classification is more middle end or premium car, even this car now embed some electronics. So the market is not yet stable. So that's the reason why we have to be, let's say, cautious to adapt ourselves. But we see a different situation compared entering in '25, where we faced very strong inventory correction in Q1 last year, if you remember, from our main customer, this will not be repeated. It is more, let's say, a progressive stabilization of the market in terms of mix of car electrical hybrid thermal combustion engine and mix of car between high premium, premium and middle class and mix between China, APAC, Europe and Asia. So this is something we have to, of course, closely monitor and adapt ourselves with our supply chain. So this is how we see the automotive market. Andrew Gardiner: Just a quick follow-up, given you mentioned China at length there. How is the partnership with Sanan progressing? Is that going as you anticipated? Is it helping your competitiveness in that market? Or is it still too early? Jean-Marc Chery: No. Clearly, so we will start to ramp up the facilities now, okay? We have modernized. We know exactly the efficiency of this fab. And clearly, it will be a key success factor in our capability to compete on the Chinese market. Operator: The next question comes from Joshua Buchalter from TD Cowen. Joshua Buchalter: I actually wanted to drill into the Personal Electronics segment a little bit more. I think there's some concerns of disruption or even pull-ins in the short term due to higher memory costs. It came in better in the quarter. Maybe you could walk through what the drivers you're seeing are there and if you're seeing any changes in order pattern. And I believe you called out higher silicon content in 2026. Was that referring to expectations for your largest customer this year? Jean-Marc Chery: Yes, you know that our revenue are mainly driven by our biggest customer and more on the high-end kind of product, which are, in some extent, less sensitive to the memory price. So, at this stage, with the visibility we have, first of all, we don't see significant impact detected by us. And I confirm that we expect to keep growing in personal electronics driven by our main customer in 2026, thanks to our increased device based on silicon and not module content increase in '26. So far, PE will be a growth driver for us in '26. Joshua Buchalter: And then I think the last couple of quarters, you've been kind enough to give us your book-to-bill ratios in auto and industrial. It seems like things are getting better on the industrial side in particular. Can you update us, I guess, on those metrics and whether you're mostly done with the channel inventory clearing on the industrial side? Congrats on the solid results. Jean-Marc Chery: No. In Industrial, the book-to-bill was well above parity. Clearly. Also, beyond your question, I can tell you that the POS were growing, let's say, between low teens, mid-teens, which is a good news. So we continue to decrease our inventory. But on automotive is the book-to-bill is a little bit more complex because we have some few key customers that are putting order in one shot for six months. So the book-to-bill must be, let's say, assessed on one-year moving average or six months moving average. So corrected from this, let's say, abnormal, let's say, process, the book-to-bill was parity on automotive. Operator: The next question comes from Stephane Houri from ODDO BHF. Stephane Houri: I just wanted to come back a bit on the scenario for the year, and I know you're not guiding. But historically, you've been saying that the second half is like 15% above the first, that's normal seasonality. And then on the top of that, you may have some specific programs. With the sting point you guide on Q1 and we look at -- when I look at the consensus for the full year, it seems to be banking on something lower than that because of the starting point in Q1. So can you just confirm that you see now that the inventory correction is done normal seasonality throughout the year and maybe give some comments about the adds of some customer engage program? Jean-Marc Chery: No. On the inventory correction, what we communicated, okay, I and Lorenzo and myself is to say by end of Q2, we believe we will be hold the excess of inventory. And this today, I can confirm -- it's already the case for many product family. We are still here and there some pockets of excess inventory versus what we see. But looking at the current dynamic, POS, POP by end of Q2, this will go. So now it's sure that in H2, we will be exposed directly to the end demand. Now about again, what we consider engaged customer program be the cycle, let's say, we can split I have to say. One is the usual personal electronics, and why we say it's cycle is because silicon content increase, okay? So we have the visibility with the current visibility we have, okay? So this will help us to grow the cycle of personal electronics and assuming our main customer will perform in market share really well performed in 2025, okay? So this will drive our growth. Moving to communication equipment and computer peripheral, well, communication equipment. Communication equipment, it is clear that for the lower or satellite communication is an important driver because thanks to our capability to supply and compete, our growth is driven by our largest customer in this field of activity. And as we see is pretty successful. And certainly this year, will be another demonstration of the success. Now since two quarters, we are supporting our second largest customer that is growing as well. So it is clearly beyond the cycle. So this will be a significant growth driver beyond the cycle for ST. Last but not the least is AI data center. You know AI data center, okay, we were, let's say, a bit delay for what call the device addressing the power station we are in, let's say, process to close the gap and offer solution to our customers. But clearly, we will be at of the business dynamic, it is the optical engine or the cloud optical interconnect. So its photonics ICs, MOCs and high performance general microcontroller. And this will contribute to the growth of ST significantly in 2023. Then moving to the more, let's say, traditional market focus we have, so automotive industrial. For ADAS, ASIC, last year was a challenging one because we saw some inventory correction on, let's say, some legacy ASIC. But this year, okay, clearly, with the visibility we have, this will be a booster of growth. Finally, our SiC MOSFET, about the difficult year of '25 will grow again. And I can confirm to you that up to now in Q1, we have a good book-to-bill on silicon carbide that is very encouraging. And definitely, our sensor contribution with the acquisition of NXP MEMS plus the existing imaging sensor, existing MEMS we have. And I am very pleased that beyond the inventory correction done on general purpose microcontroller, the proliferation of our new products are really paying back very well. And I am really confident that in '27, we come back to our historical market share and '26 will be an important step to demonstrate it. So this is actually in a few words how we can describe '26. Stephane Houri: I have a small follow-up on the gross margin comments. I think last quarter, you said that you think you would end up Q4 2026 above the level of Q4 2025 in gross margin. Do you still feel confident with what you see developing the mix, the underloading charges, et cetera, et cetera? Lorenzo Grandi: Yes. Yes, I confirm that at this stage, the expectation is that Q4 this year '26 should be better than Q4 '25. Operator: The next question comes from Domenico Ghilotti from Equita. Domenico Ghilotti: A couple of questions. The first is on the unloaded charges. You are guiding for a significant drop in Q1. trying to understand despite the lower sales, I'm trying to understand if you see this number at the bottom and if you are already benefiting from, say, the efficiency plan that you carried out. And second is some color on, if you can, on the second client in low earth orbit. So should we assume that it is a significant number or just starting entrance of new clients or an add-on, but not particularly relevant? Lorenzo Grandi: Maybe I'll take the one of the unused charges. Yes, unused charges are declining in the first quarter. There are -- the reason -- the main ingredient of the declining in this quarter is the fact that, as you know, we are progressing with our programs to reshaping our manufacturing infrastructure. This program is progressively reducing our capacity in 6-inch for silicon carbide, 150-millimeter for silicon carbide and 200-millimeter for silicon. And we start, let's say, to move ahead on this plan. So this is, if you want, is something that is mechanical. At the end, the capacity is reduced. We are now moving our product on the existing capacity on one side, 8-inch for the silicon carbide and the 300-millimeter for the silicon. So that's why we see the level of unused capacity, notwithstanding that the revenue are lower in respect to the previous quarter to reduce. This trend will continue. Unused capacity will not disappear in the year, but will significantly reduce in the year and will be one driver for our improvement in the gross margin in the course of 2026. Jean-Marc Chery: About the second question, yes, it's significant. If not, we will not mention. But I can just confirm you to number in Q4, our CCP segment grew sequentially 23% and year-over-year 22%. Definitively, it is linked to the low or satellite business we have, and it is driven both by our first customer and then by the second one. So at 22%, 23% growth sequential and year-over-year, so you can conclude it is significant. Operator: The next question comes from Sandeep Deshpande from JPMorgan. Sandeep Deshpande: My question is about your fab loading into the current quarter. Given what is happening with the gross margin in the current quarter, how is the fab loading going through in the quarter? And how is the mix shifting overall in terms of the gross margin? Because you have a revenue decline, but the gross margin is declining. So are you reducing your fab loading this quarter? Or are you increasing your fab loading? And my follow-up question associated with that is how the mix, particularly associated with your better margin microcontroller products is shifting? Lorenzo Grandi: In the quarter, as I was saying before, the unloading charges is mainly related to the fact that we are moving out capacity, reducing capacity in certain specific fabs. where, of course, we are now moving production in different fabs, 300 millimeters, so reducing our capacity. So at the end, when you look at the level of loading, we are not overloading our production, let's say, in the quarter. Clearly, if you look the inventory and you look where it will be the dynamic of the inventory in the quarter, as usual, you know that there is this seasonality in our inventory in which in the first half, our inventory is somehow increasing and then decreasing in the second part of the year. So, at the end, what it will be the impact is that now the expectation is end the quarter Q1 in the range of 140 days of inventory compared to the 130 days where we stand today. But I repeat that this is more related, let's say, to the normal dynamic of our inventory over the year than, let's say, loading our manufacturing infrastructure in a way that is -- the impact on unloading charges is mainly related to the fact that we started with our programs to reduce capacity in some specific areas. Clearly, the impact -- the positive impact, let's say, of this in terms of gaining efficiency and so on will come probably later, as you know, in our, let's say, manufacturing infrastructure. We do expect our program to be -- to start to yield a positive impact in our -- in our manufacturing efficiency more in 2027 than this year. But one of the impact that visible is the reduced level of unloading. Together also with the expectation of growth in terms of revenues. This we will see during the year, let's say, depending on the level of growth. Sandeep Deshpande: And my follow-up question is regarding about your microcontroller business, which is if you look at the Embedded Processing segment, it grew 1.2% year-on-year. I mean, many of your peers in this market are seeing better growth at this point. So why is ST growth in a key segment for ST lagging at this point or something else happening in that division? Jean-Marc Chery: So, embedded processing segment, clearly, the growth dynamic we have on the general purpose microcontroller is, let's say, at least consistent with our peers. Why it is a little bit offset? It is offset by our automotive microcontroller because, okay, up to now, our automotive microcontroller are more the microcontroller that will be, let's say, for some model of car moving to the software-defined vehicle architecture removed clearly. And I already explained that we have done a strong effort in 2025 to rework the road map of our micro, but this will be paid back, okay, more, let's say, end of '27 and '28. For the time being, yes, we suffer on the automotive microcontroller that is, let's say, optically offsetting the real good health of the general purpose. But the general purpose microcontroller, let's say, maybe I can share with you one number, okay, for Q1, the embedded processing solution segment will grow up low 30s. So above 30% year-over-year. So you can imagine that the growth of general purpose will be really, really strong more than, let's say, the secure microcontroller are growing a little bit less because driven by the market. And okay, of course, we have some offset linked to the automotive micro. But I can confirm to you that our general purpose microcontroller are performing or overperforming the market. Jerome Ramel: Mona, I think we have time for one more question. Operator: Next question comes from Sébastien Sztabowicz from Kepler Cheuvreux. Sébastien Sztabowicz: Coming back to the transformation program, have you made any specific progress so far? And notably on the manufacturing front? And are you still on track to reach your savings ambition for the end of '27? And the second one is more on the OpEx trend. So Q1, we know where it will stand. But for the full year, where do you see OpEx trending? And how do you see the start-up costs impacting the OpEx 2023? Do you plan to accelerate a little bit further the cost-cutting actions for OpEx? Lorenzo Grandi: In terms of our reshaping programs, I would say that is progressing in line with the expectation. In the course of 2025, the main, let's say, impact was related to the savings in our OpEx that indeed, when you look at the overall are declining, notwithstanding, let's say, the negative impact of the euro dollars. So at this stage in the course of 2026, as I said, we will start, let's say, progressively to transfer some activity from -- in silicon carbide to 8-inch in silicon to the 300-millimeter. As I was saying before, is now expected to yield the benefit in our manufacturing infrastructure efficiency of this program towards the second part of 2027 and 2028. So my short answer is, yes, we are on track in respect to what we have communicated previously. So, this is the situation. In respect to the expenses of 2026, now the expectation remains substantially the same, means that at the end, at this level of exchange rate, including the impact of the hedging, we should be able to stay with a net OpEx means including other income and expenses on a low single-digit increase, something in that range, mainly driven by the fact that we will have a reduction in other income and expenses in respect to the one of 2025 due to the phaseout cost because, of course, let's say, from the one side, we reduced the capacity in our manufacturing 6-inch, 8-inch. But on the other side, we have a progressive phaseout from these steps that will be reported in this line. It's a temporary effect, but it will be there during 2026. Jerome Ramel: Thank you, Sébastien, and thank you, everyone. I think this is ending our call for this quarter. So, thanks very much all of you for being there, and we remain here at your disposal should you need any follow-up questions. Thank you. 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Operator: Ladies and gentlemen, welcome, and thank you for joining Eurofins 2025 Full Year Results. Please note that this call is being recorded and will be -- will later be available for replay on the Eurofins Investor Relations website. [Operator Instructions] During this call, Eurofins management may make forward-looking statements, including, but not limited to, statements with respect to outlook and the related assumptions. Management will also discuss alternative performance measures such as organic growth and EBITDA, which are defined in the footnotes of our press releases. Actual results may differ materially from objectives discussed. Risks and uncertainties that may affect Eurofins' future results include, but are not limited to, those described in the Risk Factors section of the most recent Eurofins' annual and half year reports. Please also read the disclaimer on Page 2 of this presentation, subject to which this call and Q&A session are made. I would now like to turn the conference over to Dr. Gilles Martin, Eurofins' CEO. Please go ahead. Gilles Martin: Thank you, Andrew, and hello, everybody, and thank you for joining our full year 2025 results call. I will keep -- we have a long slide show, but I will not go through every slide. I have to give apologies for Laurent Lebras, our CFO, who is not well today. So I will not go in great detail through the financial slide and leave time for questions. If I start on Page 5, or the Slide 2. I'm happy to report on a strong year 2025, where we achieved all our objectives or exceeded [Technical Difficulty] Eurofins, as you know, is every 5 years defining a plan for the next 5 years and sharing with investors what we are trying to do, what we will do in the next 5 years. We just completed year 3 of that 5-year plan, where we are building a truly global network, fully digital network of laboratories organized in a hub-and-spoke structure. So we get the benefits of scale in our large hub laboratories. And we have a network of local laboratories to collect samples close to our clients, serve our clients in their country, their language and yet be able in the large laboratories to implement automation, artificial intelligence and all the things that make our services much more unique and faster and more reliable than what others do and we do. So this is continuing to proceed at pace. I'm happy to report that I can confirm we should be done by 2027. There's been massive investments. And we start to see some of the benefits of that in our operating leverage, which has continued to improve every year. It improved well in 2025. Overall, our margins -- reported margins and our adjusted margins continue to improve year-on-year. Our EPS has shown a remarkable growth, 24%. And I think it's just the beginning because we still have heavy investment, heavy OpEx investment, especially in our deployment of digital solutions, development of digital solutions, which should give us significant [Technical Difficulty] and the cost of which will go down. We have generated before those investments to buy our sites because we prefer to own our sites. This is linked to the long-term view that we have. We think over the long term, although they provide a lower immediate return on capital deployed over the long term, we're going to use them forever. It's a great benefit to have them because we can expand on those sites. But before those investments, we have generated more than EUR 1 billion of free cash flow to the firm. So our group is starting to generate serious cash and it's just the beginning of that. And if I move to Page 6, the nice thing is that is accelerating in the second half. Organic growth is still not where it will be, we think, when -- and we'll talk about that later, but it's still accelerating quarter-on-quarter and half year-on-half year. Our EPS growth in the second half even reached 30%, which is quite remarkable. And our free cash flow has grown also much faster in the second half than in the first half. On our investment program on Page 7, you see that we are starting to be done. We still have massive IT investments that post 2027 should be less. And more importantly, we should get the benefit of that. We're still adding some start-ups, but you see the investment has started. We've done the peak of it, so it's starting to be less. So all of that is running according to plan. We still will add a few large and very efficient sites to our network over the next 2 years. They are being constructed right now, and we think the delivery will take place over the next 24 months, more or less for in our current perimeter that should take what we need in our program. On Page 8, we provide a bridge on the evolution of margin. And you can see we've had a nice underlying operating leverage. As we had flagged, we have some dilution from the acquisition for a very low amount as compared to the profits we think we can generate in 2 or 3 years of the network of clinical laboratories of Synlab in Spain. We are merging it with our network, and we're taking a lot of cost out. We've had a lot of exceptional costs for that. And that should -- the first phase should be completed by the middle of next year. We think we will create significant value from this combination. But nonetheless, short term, it has been dilutive, especially in the second half. First half, we only had 3 months. Second half, we had 6 months. We have a bit of an impact from the FX because we make more profits in North America, although we want to improve profits in Europe as we finalize this IT program and site consolidation. So a good improvement of margin, good drop-through on Page 9. If you see the trend, well, the COVID peak is well behind us, but we are catching up. Our revenues now are over the peak revenues from COVID. Our margin is catching up. It's -- and I think we are very confident in exceeding 24% margin in EBITDA -- adjusted EBITDA in 2027. And considering the benefit of that beyond 2027, I think there is some room to, at some point, maybe achieve or get close to the margins we had during COVID. So that's also encouraging. On the -- if you see -- if we look at the CAGR, we've had since 2019, 8% revenues CAGR, 35% CAGR of free cash flow to shareholders. So -- and that's ultimately the most important thing, while we still carry huge amounts of investments. And I think those investments, once we have built our network of labs, we have them for the next 20 or 30 years. So the growth of the EPS and the cash flow per share should be for quite some time over proportional to our total revenue growth. On the financial numbers on Page 11, you have a breakdown. I think I will go back to that as part of the question and answers. Main point is our profits are going in the right direction, are growing, growing faster than revenues and the EPS is growing also faster than revenues. We took the opportunities for us, the fact that our share price is massively undervalued is actually an opportunity, and we took advantage of that opportunity to acquire a lot of shares last year, which is even further boosting our EPS. And the impact of that, once we hit in 2027, our target -- margin targets and cash flow targets will be compounded. On Page 12, you have a bridge of our revenue evolution. We generated EUR 250 million of organic growth. Of course, it has been a bit diluted by the FX impact. And we have a sequential increase quarter-on-quarter of growth. And I think that will continue because now the comps that were strong in some areas, I can talk about it a bit later, will not be there next year as we enter -- or this year as we start 2026. On the Page 13, we give a bit more breakdown by area. I think all our areas are doing well. Life areas are doing well. Food & Feed and Environment are growing both in Europe, North America and Asia. BioPharma, and I'll come to that on the next slide, is starting to recover. It is still being soft, it is still being far from what we think we can achieve long term. Diagnostics could do a little bit better, but it's starting to show in many areas, some recovery. Q4, of course, didn't get the negative base effect of tariff reductions in France. Consumer. Consumer has been hit because consumer and technology includes some material science testing, microscopy, et cetera. This had a big boost in 2024 from the -- a lot of tools companies were looking at potential stricter export restrictions, both from Europe and North America to China. And there was a lot of anticipated buying of tools from our clients in 2024 that gave us a bit of boost on that in 2024, which is not -- has not recurred in 2025, but now we think '25 has hit a plateau and we should grow from there. But that explains the only 2.3% growth in Consumer & Technology. Consumer was better than that. On BioPharma. And here, we have, I think, the last year was a mixed picture. The bulk of it is our BioPharma product testing, where Eurofins is a global leader, and that has continued to do well, mid-single digits. We have done at times better, close to double digit or double digit on that. There is some potential upwards. And we have a good outlook for next year. We are adding a lot of capacity where we will be adding -- expanding our big site in Lancaster, expanding our site in the Netherlands. So we'll have more capacity coming online in the next couple of years. So there is some upside potential on BioPharma product testing, but the growth has stayed solid -- quite solid during the time where BioPharma is reevaluating its pipelines, hasn't been affected like Discovery. In Discovery, this is, we think, plateauing now. It's still a little bit down in the second half of the year. Genomics is still hurting from cuts in research fundings. But again, we think we're hitting now a plateau and we can grow from there. Agroscience is part of the ancillary activities, and that is still down significantly. So we have made significant efforts to cut our footprint. There has been massive restructuring for the size of that business, significant restructuring. That's also part of our SDI. We've closed a number of field stations to basically fit our capacity to the demand. There could be at some point upside when the agrochemical companies, Agroscience companies and the seed company have more visibility on regulations to get their products approved, especially in Europe. So we keep that activity where we are a global leader, but that has suffered. And between Genomics and Agroscience that explains a large part of the overall softness of BioPharma. Otherwise, BioPharma will be at the same level of growth as our Life activity -- area of activity. So our CDMO did well in the first half of the year in the U.S. because we -- or in Canada because we filled a tranche that got completed at the end of the year before. It's a bit less in the last quarter because now it's full, and we're going to have a next tranche coming up online in the next, I think, 24 months. CDMO was a bit softer in Europe. It was a bit more on smaller biologics clients, but we think this will pick up in the next few quarters, too. So that's for the ancillary activities for BioPharma. We have, of course, in BioPharma, some clinical works, large contracts and our clients are positive. on the start of those programs. And of course, that would switch completely the growth of the ancillary activities. If we look at the -- especially Central Laboratory, Bioanalysis, we do think that some point in '27, we will have -- we should have a significant boost from those activities. That's also hurting our profits because we keep capacity that is in excess of what we have as volume right now because studies should start relatively soon. We have significant demand from clients. So we're optimistic on that. And in any case, the -- we're now at a baseline where we don't think that would go down anymore and affect our BioPharma growth anymore in 2026. On Page 15, you've got a split of the margins. So the margins are growing everywhere, especially in the rest of the world. The rest of the world is catching up with U.S. margin. Europe has not been improving as much as we wanted. We've had an impact, of course, in Europe of the reimbursement cuts in clinical diagnostic in France that occurred in 2024 that affected the comparable with 2025. We've got the dilution from Synlab. We've got a number of other things. We think we have a big upside in Europe to increase the margins and make them move much closer to U.S. margins, which will also reduce the FX impact on the translational results and margin. So we're optimistic over the next 2 years to significantly increase the margins in Europe. Another thing that we do is described on Page 16. So we have labs that are well integrated, where we have deployed our IT solutions, where we -- that have been in the group for a long time. And then we have a number of start-ups that we launched over the next few -- the last few years. The peak start-up investment is behind us and the start-ups of the peak start-up years are starting to be profitable. As I mentioned earlier, we are opening fewer start-ups now. They have a smaller impact on our results. So that's part of our nonmature scope. On that scope, we also have companies like Synlab that we just bought and we are restructuring. And what is interesting to see is the impact of that nonmature scope on our overall results is starting to be less and less -- it's -- we have a target that SDI at EBITDA level will be less than 0.5% of our revenues, and we think we will achieve that by 2027 as planned. Anyway, even in 2025, the impact on the group EBITDA is starting to be negligible at 2.7%. But we will continue to show it separately and our reported results and the mature scope result will converge. It's nice to note that our mature scope is already achieving the 24% margin we are targeting for 2027. So overall, very encouraging results. On Page 17, you see that we are self-financing all our investments, including our M&A in -- with EUR 150 million left after that. And we've had, of course, in 2015, the purchase of our -- of the related party buildings. I'll come to that in a minute. But -- and that was an exceptional one-off investment. We spent EUR 540 million to buy back our own shares. And from next year, our cash flow should be such that we will have a lot of headroom for our cash flow to finance further share repurchase, for example, building repurchase is done. We won't have to spend money on that. So we can have a very compounding -- very well compounding model where with our cash flow, we can continue to do M&A, finance not only our CapEx, but our CapEx will be less. So we'll have more room for M&A financing and even more room for returning to shareholders and preferably through share buybacks as long as our share price remains so seriously undervalued in our opinion. On Page 18, you see that our teams are starting to do a better job in managing net working capital. We've got a good result this year in managing net working capital. And there is still potential of improving things further. We're not -- certainly not best-in-class there, but we're making progress, and we think we can do more. On funding on Page 19, we've continued our prudent financing management. We are well funded for the next few years. Our leverage is very reasonable considering our cash flow. Also, our EBITDA will increase over the next 2 years, we believe. So that will naturally bring the leverage down. We will generate some cash. So we're confident on maintaining our leverage between the 1.5 to 2.5 multiple range that we have set for ourselves as an objective. On Page 21, I illustrate some of the new sites that came online. We can talk about that. On Page 22, we can have a summary of our footprint. We have a quite large lab footprint. We are very far along in building our -- and completing our hub-and-spoke laboratory network in Europe and North America, especially. We still will have opportunities in Southeast Asia and Asia generally for the next 10 years or 20 years, also a little bit in Latin America. We can still add a few locations in North America. We're not -- we don't have 100% coverage yet, but the impact of what we need compared to what we have is -- will be very modest past 2027. And now we own most of our big sites. And what is planned for the next couple of years will mean that by 2027, we will own our big sites, and we usually have land next to that existing building so that if the demand increases for those hubs, we don't have to move. We don't have to lose all the investments we did in those buildings, which was our life for the last 10 years as we had to consolidate a lot of acquisitions that were not -- where we found them, they were not necessarily where they should be, and they didn't necessarily have the focus that we wanted or that was optimal for best efficiency. Now we have that footprint, and that will stay, and we can just incrementally add capacity on the same site as we need. So we're quite pleased about the progress. That was a 10 years program. Now we own what we need to own. On Page 23, some discussions on return on capital employed. I think that would be more for one-on-one meetings for those of you who are interested. But obviously, we have a mix of assets on our balance sheet. We have the labs that have grown organically and that have a very high return on capital employed. We have the lab that we acquired. And until 2018, we built Eurofins through a lot of acquisitions. So we incurred goodwill. And of course, that provides lower return on capital. We have a substantial amount of our capital on our balance sheet, which is those buildings that we own that have a book value of EUR 1.3 billion. Probably if we were to do a sale and leaseback, it would be more like EUR 2 billion or more. And that has, of course, a lower return. So we give on Page 23, an analysis of the returns of our business as we can see it. But it confirms that the business we run has a very high return on capital employed. And if we deploy additional capital, especially if we deploy it organically, we're looking at very significant returns. On Page 24, it covers the start-ups that we've made over the last few years and peak start-ups of '22, '23 as a whole are starting to be profitable. So we have -- and that can only amplify going forward. So we are very satisfied with what we have built and the impact it should have on our performance, our service to clients and financial results over the next 2 years and later. On Page 25, we give a list of some of the acquisitions we did. So we continue to be active. We think we also should add about EUR 250 million of revenues next year from acquisitions at reasonable multiple. That means a lot of small bolt-on acquisitions, maybe not the bigger ones that would be sold at a much higher multiple. But the world is big enough, and we have enough opportunities. We continue to be innovative. Our labs invent a lot of new tests and new capabilities. That's on Page 26, and I will not go through all of them. You probably have heard of the baby food -- latest baby food contamination with cereulide, which could be caused by Bacillus toxin. This is not a test that people were doing routinely most of the time. It normally doesn't happen. So -- but when the crisis started, we developed the test very quickly. We developed a test that's actually more sensitive than what was available before in the market because most of those things come from encapsulated in this specific contamination, it comes from oil that is added to vitamins or that is added in the form of oil encapsulated. And measuring it, you have to break the encapsulation to get to the full amount and the true amount. So we make a nice breakthrough here in developing within a very short time when the crisis started, the right test and the most sensitive test in the market, we believe. But we can go deeper on that if some of you are interested in Q&A. Page 28. We basically, we can only confirm that our objectives for 2027 are realistic. We think we will exceed them. The plans for CapEx are unchanged. And BioPharma will pick up in the next few quarters, we believe. So we're still confident that we can revert to the typical organic growth we've had for decades of 6.5%, just to give a number, but higher mid-single digits, mid- to high single digits. And we are building the network for that. And also the efficiencies and quality of service we are building should enable us to grow significantly faster than our competitors and than the market. On Page 29, we give some ideas about the returns that we are generating. So we were -- we are pleased to have returned EUR 1.5 billion to shareholders since 2021. So not only are we quite profitable, but we returned a lot of cash to our shareholders already, although we are still building the house, we return a lot. And we built Eurofins for a lot of acquisition until 2018, which caused us to incur a lot of goodwill on our balance sheet. But since then, we bought some companies, but much less. And if you look at the return on capital -- on the incremental capital we've added since then, after this big M&A phase, and you see that even including the goodwill, we already have 23% return on the incremental capital, which shows that we are reasonable in what we pay for acquisitions. We create value from our acquisition and our stock of businesses continue to improve. So we're very satisfied about the performance of 2025. We're very optimistic about what we think we will generate over the next 2 years and especially beyond. In fact, I think we are building something that's going to be quite extraordinary in our markets, more and more focused. We've been also reviewing our portfolio, shedding a few small things. So over the next 2 years, we'll continue to do that to be a true leader in our industry, to the most innovative in our industry. I don't have time to talk about it now because it's a result presentation, but we're investing a lot in new technologies, in AI, in automation to create real competitive advantage, a real differentiation in the speed and quality of our service, which should make us really the partner of choice of all the multinationals around the world in the industries we are serving. And I don't think anybody else is doing the type of investments we're doing. So I'm very positive and optimistic as to our performance post 2027 when we are done building that. When we are building that, this causes a lot of disruption to service when you deploy new IT solutions the last 2 years where we started deploying heavily new IT solutions. We've had a lot of disruption to service to clients. This is not the best when you change the digital tools in the company to show the best performance to clients. But this is now more and more working, and we see -- we're going to see the back end of that. And then we see the opposite, much better performance, faster performance, and that should help us also in growth and gaining market share post 2027 and where we have in the countries where we are done already, already in '26 and '27. So that's my introduction for today. And sorry for the very quick speed of my speech and presentation. Now I'm happy to answer questions, and [ Busi ] is here too, if we have some financial questions that I don't know the answer of. Operator: [Operator Instructions] Our first question is coming from Tom Burlton with BNP Paribas. Thomas Burlton: I've got a couple just on BioPharma to kick off and then one on capital allocation. So on BioPharma, specifically within ancillary activities and the Central Lab, Bioanalysis business, you referenced these awards. Is there anything you're able to give us in terms of additional details on sort of how big, anything slightly more granular about phasing and so forth? Because I was originally expecting some of these to start coming through in sort of mid-2025, and it feels like they got pushed to the right, I guess, because of client decisioning and things like that. And in your opening remarks, you talked about anticipating potentially a significant sort of boost in demand. But you said by 2027, and then you went on to say that some of those could ramp up quite soon. So I'm just trying to understand the timing there and what's going on? Because it feels like that when it does come through, it could be quite a big driver to Biopharma and then to group organic growth. The second one, still within BioPharma, just on the discovery part of the business. It looked like through the back end of last year, we've seen a bit of a pickup in terms of the biotech funding. And I think that only really accelerated to kind of through Q4. We don't have the kind of longer run, I guess, data on your discovery business by quarter. How would you think about the sort of normal lead lag time as to when that should flow through to your business, your network and we really start sort of seeing it in numbers? Just still trying to gauge the sort of, I guess, the cadence of BioPharma growth as we go through 2026. And then just on capital allocation, keen to understand kind of how you're thinking about buybacks. So you mentioned towards the end of your remarks, you've been very -- you've been active in buying back shares and returning cash to shareholders and the share price has developed, I guess. You've got fairly fixed targets in terms of your added M&A revenues and your leverage is, I guess, within the target range. Would you expect buybacks to be a kind of ongoing feature, maybe not at the levels they were in 2025, but how should we think about kind of ongoing return of cash and whether you'll be kind of pragmatic or consistent about that? Gilles Martin: Thanks a lot, Tom. On BioPharma, yes, Central Lab and Bioanalysis, we have some fairly large contracts. And our best guess now maybe would be H2 -- that we are talking about would be H2 2026 for start of that. It's always difficult to time. They have to recruit patients, et cetera. So that's our best guess as we can see. What is clear is the comp has eased now. So going forward, we don't expect anywhere those revenues going down. And if you do the math, if you have a negative 20% or negative 30%, even on a small part of the scope, that has a big impact on the average growth of that scope. So that -- we don't think we're going to have any negative, especially not of that magnitude going forward, and that should have an impact on the overall growth of BioPharma this year. And in the second half, hopefully, if we get those programs to kick in, it could become quite substantial. And well, maybe if I said 2027, I think overall, BioPharma, even our core BioPharma product testing could grow more than the mid-single digits where it is now. And that could also increase. When would that be? That's what maybe I said '27. But overall, BioPharma, I don't see why BioPharma as a whole shouldn't grow faster than life. It has been the case for decade. And this -- we've had phases like this again in 2012, where the pharma industry was reevaluating pipelines and so on. The industry was a bit soft for a couple of years, and then we've had a decade of much faster growth. So I think that will return. And why will it return? Because simply, the research is providing so many new products that are so powerful that it's just worth it for the pharma industry to spend money to develop those drugs because they will make a lot of profit with it. Even at lower reimbursement, they will make a lot of profits. Discovery, yes the lag time, that goes from company to company, project to project, but it's not immediate indeed before a project starts. What is it 6 months, 12 months to get things to flow through depending on the project and the products in actual work for even the coding, it takes 2, 3 months to design a study to design a project. It's not something that you buy off a catalog. All those studies for BioPharma, they are bespoke and they take time to define. It's like you build a house, you need to get the plans, get the plans approved before you can start building it. Capital allocation. Well, if you look at -- we're an active buyer in the market, and we also have our own assets that sometimes we get approached by people who would like to buy some of our potentially noncore assets. So we know what those assets are worth. If you look, ALS is trading at 15x EBITDA, UL is trading at 19 or 20x EBITDA. A lot of transactions are in that range between 15 and 20. Even with the recent rerating, our stock is trading at 10x. So obviously, if I have extra capital to deploy, it's a no-brainer to buy back our shares. I know what I buy. I know the potential of the profit increase of what I buy. I don't have to do -- we don't have to do a due diligence on it. We know what we're buying. And so once we've done the M&A, we think it will be accretive, and we think we can get our return over our hurdle rates. And if we have extra possibilities, we are going to continue to do buybacks. And I think we will generate a lot of cash. And actually, we might buy even more this year as we bought last year. Of course, that will depend on how the market view our share and share price, et cetera. But in spite of the recent good run of our shares, on those metrics, if you just look like the multiples of, that people pay for assets in the market, either public assets or private assets, we have -- we're anywhere between 30% and 60%, 70% undervalued. And in the capital allocation policy that our Board follows and we talk about, buying back our shares appears very attractive at the moment. To us, we're insiders. So we -- maybe if you're an outsider, there are other considerations that apply. As an insider, we will continue the buybacks. Operator: Our next question is coming from Suhasini Varanasi with Goldman Sachs. Suhasini Varanasi: A few from me, please. So you mentioned the cereulide testing that you had launched in January. Have you seen increased demand for that testing given the recalls seen in the market? And is it possible to quantify the proportion of benefit to revenues? That's the first one. Second one is on the margins. Your reported EBITDA margins have seen very strong underlying improvement in 2025. Can you perhaps provide some color on the scale of the expansion that you expect in 2026 and maybe the key risks around this. FX, obviously, is a little bit of a risk. We can't quantify that. Synlab, maybe the drag is a little bit less than last year. Or maybe additional M&A? Just some color around that would be helpful. Thank you. And I think in your prepared remarks, you had indicated something around EBITDA margins could potentially return to peak COVID levels beyond '27. Just wanted to understand -- get some clarity on that. And is it the medium-term target potentially beyond '27? Gilles Martin: Yes. cereulide, it is just starting. We don't know how big this crisis will be, how many charges, how many lots were affected. I'm not sure it will become a routine test because that was apparently caused by a contamination from contaminated oil from China. So hopefully, that will stop and be put under control. So we -- and considering the size of Eurofins, for something like that to become material, it would have to be a really massive, massive global recall of all the milk in the market. So we don't expect any impact -- any material impact on our revenues. But still, it's good for our clients to know that when there is something like that, we are there and we have the most sensitive methods, much more sensitive than the ISO method. So if they want to check their supplies, we can do that for them very well. Yes, we've gone on the advice of many of our investors and potentially analysts, we've gone away from giving specific margin targets. And some companies do that. We've done it for 2027, and we stick to that because they were there and we believe in it. And hopefully, we can do better than that. So for this year, what we've said we will improve. And as you say, some of the factors that you mentioned will play a role. FX, we don't exactly know what it will be. M&A, we don't exactly know. We have a number of start-ups. We have to see exactly how fast they ramp, new buildings when they come online, et cetera. So what we can say is we think we will improve. We think we'll achieve or do better than the 24% margin next year in '27. I can't be more specific this year. What is clear is we have massive investment in IT that we hope to largely complete this year. So that should help definitely next year. How fast all those programs get deployed, all those software gets deployed, how fast do they get -- do we start to accrue the benefits of it is also a little bit difficult to plan quarter-by-quarter. And what I said about margin, maybe don't get too excited too quickly. But it has always been the case that our best scopes have -- EBITDA margin in excess of 30%. The whole of Eurofins will never be there, but there's no reason why 24% should be a cap. Of course, we will talk about that once we complete that period. And depending on our perimeters then on potential M&A, we might do then, et cetera, we'll try to set objectives beyond 2027 when we publish 2027 results. But all things being equal, staying in our market, staying in our current perimeter, there's no reason why we shouldn't go beyond that because every year, we're improving. And there's a very long -- if I look at what we plan to achieve this year, there's a very long list of things we are doing that will improve our results substantially. And if on top of that, BioPharma starts to pick up a bit, it could be even more faster and more meaningful. Operator: Our next question is coming from Delphine Le Louet with Bernstein. Delphine Le Louet: A couple of questions on my side and a bit of a clarification regarding the infant baby formula product and how big that is actually today into the food business. And sticking with the food business with a broader vision, where are you taking the most market share? Or where have you been taking the most of the market share over the course of '25 when it comes to segments or region into that field? And second question, dealing with the CapEx envelope for next year and probably the year after in the range of EUR 400 million. I was wondering how much of that is dedicated to the regular, let's say, IT ongoing and to the IT transformation you're coming to a close now. Can you detail that a bit more, please? Gilles Martin: Thank you. It's really hard to say where we gain share or where we don't. I think we gained share, especially in the markets where we are strong in North America. I think we continue to gain share in the many European countries we do too. And this baby formula testing, this test is not something we were doing in the past. By the way, we just developed the test, but it's not going to be a huge market, a huge -- I hope so for the milk industry. Although from time to time, there are issues in the milk industry, and there were issues in North America and a lot of recalls in North America. We helped our clients a lot to go through the shortages to help them mitigate the shortages of the milk powder in North America over the last few years. So this is -- we work -- what we do is essential. People forget it, but there are segments of the population who are very fragile. And when they eat contaminated food, it can be fatal and especially babies. And we also test a lot of supplements, sport supplements. If you put not enough or too much vitamin in certain products, it can be toxic. It's not only the bacteriological contaminants. So this is more like a reminder of you can't stop testing food. If you stop testing food, bad things happen. And actually, it shows maybe nobody could have guessed that, that would happen. But it shows you have to have very broad testing programs because even if a contamination hasn't happened in 5 years, it doesn't mean it won't happen again. And if you have a brand that is valuable, you don't want to be the one whose products are contaminated. I think that's maybe one of the many wake-up calls. It's not because you haven't had a problem with your products in the last 5 years that you won't have one tomorrow. So testing is important. It's like having a fire detector, maybe you haven't had a fire in 20 years, but you best [Technical Difficulty] detector in your house or in your [Technical Difficulty] that can still happen. On the [Technical Difficulty] Operator: Apologies ladies and gentlemen. We have appeared to have lost our speaker line. One moment, please, while we try to get them back. Once again, apologies, ladies and gentlemen, we are trying to get the speaker line back in, one moment, please. Okay. Ladies and gentlemen, we have just heard from the speakers. They are trying to reconnect. So please hold, they would be with us momentarily. Okay. Ladies and gentlemen, I believe they will be with us in one moment. Once again, apologies for the slight delay in getting our speakers reconnected, but they will be with us shortly. Okay. I believe we have our speakers back with us. Gilles Martin: Thank you. Sorry, everybody. I don't know what happened with the telephone line. So I was answering the answer -- the question on IT CapEx and indeed, maybe EUR 50 million of the IT CapEx is linked to this development of new IT solutions for digitalizing our full network of laboratories. I think we can take the next question. Operator: Our next question is coming from Remi Grenu with Morgan Stanley. Remi Grenu: Just one last question remaining on my side. I think there's been press coverage around the potential divestment of part of your consumer and tech product testing business. So can you maybe tell us how you're thinking about that division in the context of the perimeter of the company? And if overall divestments are still very much on the table as you flagged on previous call and how we should think about you going into 2026? Gilles Martin: Thank you. Well, we get a lot of inbound calls. There are things businesses that we look from inside what we like, what we don't like. As I mentioned, there are smaller businesses in Clinical Diagnostics last year that we closed or sold in countries where we had no path to become market leader. We like our consumer product testing. We like our material science testing, although material science was softer in '25, we see a great potential with all the AI chips and the memories now that are in great demand and the needs for tools that's going to pick up. So we like that division. We like consumer products, and we'll never part with certain elements of it. They are very close to the core of our business of medical device and testing for life, et cetera. But we do get inbounds. And then we are -- when our boards get inbound, we have a duty to look at it because, of course, we get very attractive offers sometimes, extremely attractive compared to our current valuation. And so we have to look at it. What comes out of those reviews, we never can know, and we'll look at it. But I'm running a company as a CEO, but also as a member of the Board, I'm a capital allocator, and we have to look where we put our shareholders' capital to work. We have no limitation. We're not limited by the amount of capital we have to invest in our core sector, but maybe there might be at some point, M&A opportunities in our core area of business that are larger that we want to take on. And then maybe it's worth to have an active review of the value of all our assets. That's all I can say about that. Operator: Our next question is coming from Allen Wells with Jefferies. Allen Wells: A couple from me, please. Firstly, just maybe a financial question. I just wanted to understand some of the moving parts on the free cash flow for the business. Obviously, solid reported number, but it does include another working capital inflow in Q4 and obviously, year-on-year reduction in CapEx. I just wondered how you guys are thinking about the sustainability, particularly of those two variables as we move back towards the ambition of a mid-single-digit growth level business. Maybe you can talk a little bit about the drivers of that working capital movement because I think it's the second year in a row you've had an inflow at the full year? And likewise, on the CapEx side, it sounds like you expect similar levels of CapEx in 2026 versus 2025 or maybe even slightly lower. Can that level of CapEx support an acceleration in growth up to the kind of 6.5%? That's my first question. And secondly, just a follow-up question on [Technical Difficulty] net-debt-to-EBITDA towards the upper end of your, I guess, preferred range. You talked about the potential to do more buyback of shares in 2026. But if I assume a similar CapEx and M&A trends, it doesn't look like that will be self-funded at least on my back of the envelope calculation says. So are you happy to run net-debt-to-EBITDA up towards the top or even above the top end of that range? Gilles Martin: Very much. Yes. Well, we did a good job in working capital this year. And of course, that is finite. We're not going to get very big negative net working capital. I think we might still have a little bit of room over the next 2 or 3 years to be better at collection. We're not as good as maybe we should be at collection. And so -- but that's always a fight, of course, with our clients who want to pay later. And we -- but they don't always pay on time like in any business. So I think we can be better at getting our clients to pay on time. And we're kind of kind to many suppliers. So we pay maybe a bit too fast. So I think I couldn't tell how fast net working capital will be improving, and it can maybe 1 year be a bit less good and so on. So that element, I think it was a good year of EUR 40 million or EUR 50 million this year and last year will not be a gain of EUR 50 million every year forever, obviously. I think long term, we can do a little bit better. That's what I can say on the net working capital. On CapEx, I think we have a high CapEx at the moment. Our maintenance CapEx is 2% or 3%. And with that, we can grow mid-single digit. And so with CapEx at EUR 400 million ex investment in own sites, we have headroom. We didn't quite spend the EUR 400 million in the last couple of years in '24 and '25. So we're a little bit below in '24 and '25. But we are confident our EBITDA will increase. If you run the numbers, we don't want to give a number, but if you put 24% of whatever revenues you model based on M&A, et cetera, you're getting close to EUR 2 billion or around EUR 2 billion of EBITDA. And if the free cash flow conversion is over 50% -- significantly over 50%, that's a lot of cash to use for buybacks and M&A. So we have headroom -- and as we talked about assets, when we look at certain assets that could give even more headroom. But we cannot predict the future. A lot of those things look at what we could buy for M&A. I don't know what is going to come our way at a value where we find we can get a good return. That is definitely very hard to plan. And the same thing, are we going to keep all our assets or maybe some marginal ones we will dispose of for very high multiples. We did it already for the -- what is it called our software testing business and media testing business. I think we sold it for 18x EBITDA because we've got a really good offer. This is -- there's a bit of opportunism on that level of capital management depending on our own M&A opportunities and the level of our share price. So net-debt-to-EBITDA, on the other hand, we don't want to exceed the 2.5x. That's clear. And I think overall, if you look at all the cash flow we should be generating this year and next year, unless our share price would be very depressed for that period, we should rather move down than up on the net-debt-to-EBITDA multiple. Allen Wells: Can I ask one kind of additional question? Just looking at the numbers around Europe as well. We know obviously that growth accelerated in Q4 to 5%. That was on a slightly easier comp. It looks like a chunk of that improvement was the diagnostics business, which we know there was a bit of comp effect. Was there any contribution in that Diagnostics business from the organic growth in Synlab or maybe what's the organic contribution from Synlab in there? Because obviously, I know that you account for the organic growth from day 1. Gilles Martin: I think it was 0 in Synlab. It's negative actually because we are shedding some contracts that were loss-making. So... Allen Wells: Just the Diagnostics, the underlying Diagnostics business coming back, nothing from Synlab? Gilles Martin: And I think also Synlab is part of M&A. And so it's -- so no, Synlab is not-- another thing, I think looking at figures after the comma in organic growth per quarter and trying to analyze changes that post-comma changes on organic growth quarter-to-quarter is not really meaningful. It can be one contract, it can be just when something finishes, the contract finishes, doesn't finish. I wouldn't extrapolate too much, especially if you look at it at smaller slices like one activity in one continent. Operator: We will take our final question today from François Digard with Kepler Cheuvreux. François Digard: I will -- maybe just a follow-up on cereulide analysis. Could you share with us how quickly you were able to roll out these tests? You shared already that the commercial implication is limited, but it's interesting to understand how you have processed through that, the first question. The second question is on BIOSECURE Act in the U.S. Do you expect it to be a tailwind for you? Or could your France, European nationality in state prove to be a disadvantage in the U.S.? Gilles Martin: Well, we have several labs around the world doing this test at the moment, and some are still setting it up, and they are cooperating to exchange method because that could be also an issue for clinical diagnostics in human health. I don't know if you heard, but in some countries, even the government labs didn't have a proper test to test the stool of the babies that were affected. So I don't know the exact minute how many of our labs are actually doing it. But when it all started, I think within a week, there was a test running at one of our labs. And maybe we might have had a lab that was already able to do it, but was not performing the test routinely because the demand was not there. And BIOSECURE Act, I don't know that it will have any impact. I mean I'm not sure I've heard from anyone in our company that would have an impact one way or another. No, we do our own testing locally in every country. So we have local companies that do testing in Europe, others do -- are based in China, the local testing in China, local companies in the U.S. doing testing in the U.S. I have to conclude -- sorry operator. Yes, I have to conclude and thank everybody for joining our call. It was a long presentation. I apologize, but I tried to give some color from the management perspective on our numbers. I will be happy to meet some of you in London and for other meetings over the next couple of weeks and later during the year. Thanks a lot for your support, and have a great day. Goodbye. Operator: Thank you, Dr. Martin. Ladies and gentlemen, the floor -- sorry, the call is now concluded, and you may disconnect your lines. And we thank you for joining us, and have a pleasant day.
Operator: Ladies and gentlemen, welcome to the STMicroelectronics Full Year 2025 Earnings Release Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Jerome Ramel, EVP, Corporate Development and Integrated External Communications. Please go ahead, sir. Jerome Ramel: Thank you, Maura, and thank you, everyone, for joining our fourth quarter and full year 2025 financial results call. Hosting the call today is Jean-Marc Chery, ST President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, President and CFO; and Marco Cassis, President, Analog, Power and Discrete, MEMS and Sensor Group and Head of ST Microelectronics Strategy, System Research and Application and Innovation Office. This live webcast and presentation materials can be accessed on ST Investor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST results to differ materially from management's expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning and also in ST's most recent regulatory filings for a full description of these risk factors. Also to ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to one question and a brief follow-up. Now I'd like to turn the call over to Jean-Marc Chery, ST President and CEO. Jean-Marc Chery: Thank you, Jerome. Good morning, everyone, and thank you for joining ST for our Q4 and full year 2025 earnings conference call. I will start with an overview of the fourth quarter and the full year 2025, including business dynamics, and I will hand over to Lorenzo for the detailed financial overview. I will then comment on the outlook and conclude before answering your questions. So, starting with Q4. We delivered revenues at $3.33 billion, above the midpoint of our business outlook range, driven by higher revenues in Personal Electronics and to a lesser extent in Communication Equipment and Computer Peripheral and Industrial, while Automotive was below expectations. Gross margin of 35.2% was also above the midpoint of our business outlook range, mainly due to better product mix. Excluding impairment, restructuring charges and other related phaseout costs, diluted earnings per share was $0.11, including certain negative one-time tax expenses impact of $0.18 per share. Q4 revenue marked the return to year-over-year growth. During the quarter, we further worked down inventories, both in our balance sheet and in distribution, and we generated a positive $257 million free cash flow. Looking at the full year 2025. Net revenues decreased 11.1% to $11.8 billion, mainly driven by a strong decrease in Automotive and to a lesser extent, in Industrial, while Personal Electronics and Communication Equipment and Computer Peripheral both grew. Gross margin was 33.9%, down from 39.3% in full year 2024. Excluding impairment, restructuring charges and other related phaseout costs, diluted earnings per share was $0.53. We invested $1.79 billion in net CapEx, while generating free cash flow of $265 million. Let's now discuss our business dynamics during Q4. In Automotive, during the quarter, we grew revenues 3% sequentially. Year-over-year revenues declined, but with continued improvement in the trend. Automotive design momentum progressed with design wins across both electric and traditional vehicle domains for applications such as onboard chargers, DC-DC converters, powertrain and vehicle control electronics. These included design wins for power semiconductors, smart power devices, automotive microcontrollers, analog and sensors. These awards supported by engagements with various OEMs and Tier 1 ecosystems, strengthen our position as a key supplier to the automotive industry. Regarding the acquisition of NXP's MEMS sensor business, the transaction we announced in July is still expected to close in H1 2026. In Industrial, revenues were better than expected, showing increases of 5% sequentially and 5% year-over-year. Importantly, inventories in distribution further decreased and are now normalizing. In Industrial, our portfolio of microcontrollers, sensing technologies and analog and power devices is strongly positioned to support industrial transformation trends and the need of physical AI. During the quarter, we saw design wins across industrial automation and robotics, building automation, power systems, health care and home appliances. In November, we held our STM32 Summit where we announced several key innovations, including the first microcontroller built on the 18-nanometer process, a next-generation wireless microcontrollers and an updated suite of edge AI software tools. Personal Electronics, fourth quarter revenues were above our expectations, down 2% sequentially, reflecting the seasonality of our engaged customer programs. During the quarter, we strengthened our position in mobile platform and connected consumer devices, both with our engaged customer programs as well as our open market offering for devices such as our sensors, secure solutions and power management products. Revenues for communication equipment and computer peripherals were up 23% sequentially, better than expected. In AI and data center infrastructure, we continue to reinforce our position supporting the increasing demand for higher power density and energy efficiency. During the quarter, we secured multiple design wins for silicon and silicon carbide-based power solutions, supporting next-generation AI compute architectures. We also continue to work with customers to bring our silicon photonics technology to the market. The strong momentum in optical connectivity technologies for data centers also contributed to a significant rise in demand for our high-performance microcontroller used in pluggable optics. The low-earth orbit satellite business based on our BiCMOS and panel level packaging technologies continued to progress during the quarter with shipments ramping to our second largest customer. Moving to sustainability. We remain on track for our key 2027 commitments. Carbon neutrality in all direct and indirect emissions from Scope 1 and 2 and focusing on product transportation, business travel and employee commuting emissions for Scope 3 and 100% renewable energy sourcing. A major milestone this year was the launch of Singapore's largest industrial district cooling system at our Ang Mo Kio facilities in Q4. We also continue to maintain our strong presence in the major sustainability indices where we were honored to be recognized in the Time world's most sustainable companies list for the second consecutive year. Now over to Lorenzo, who will present our key financial figures. Lorenzo Grandi: Thank you, Jean-Marc, and good morning, everyone. Let's have a detailed review of the fourth quarter. Starting with revenues on a year-over-year basis by reportable segment. Analog products, MEMS and sensor grew 7.5%, mainly due to Imaging. Power and Discrete products decreased by 31.6%. Embedded Processing revenues were up 1% to 2% with higher revenues in general purpose and automotive microcontrollers, offsetting declines in connected security and custom processing products. RF and optical communication grew 22.9%. By end market, communication equipment and computer peripheral and personal electronics both grew by about 17%. Industrial grew by about 5%, while automotive decreased by about 15%. Year-over-year, sales increased 0.6% to OEM and decreased 0.7% to distribution. On a sequential basis, Power and Discrete was the only segment to decrease by 3.9%. All the other segments grew, led by RF and optical communication up 30.5%, while Embedded Processing and Analog products, MEMS and sensor were up, respectively, 3.9% and 1.1%. By end market, sequential growth was led by communication equipment and computer peripherals, up 23%. Industrial was up 5% and automotive was up 3%, while Personal electronics declined 2%. Turning now to profitability. Gross profit in the fourth quarter was $1.17 billion, decreasing 6.5% on a year-over-year basis. Gross margin was 35.2%, decreasing 250 basis points year-over-year, mainly due to lower manufacturing efficiencies and to a lesser extent, negative currency effect and lower level of capacity reservation fees. On a sequential basis, gross margin improved by 200 basis points. Q4 gross margin included about 50 basis points of negative impact resulting from a nonrecurring cost related to our manufacturing reshipping program. In the next few quarters, we expect a similar negative impact on gross margin from the just mentioned nonrecurring costs. Total net operating expenses, excluding restructuring, amounted to $906 million in the fourth quarter, slightly increasing year-over-year due to unfavorable currency effect. They were slightly better than expected, reflecting our continued cost discipline and the initial benefit from our cost savings initiative. For the first quarter 2026, we expect net OpEx to stand at about $860 million, decreasing quarter-on-quarter. As a reminder, these amounts are net of other income and expenses and exclude the restructuring. In the fourth quarter, we reported $125 million operating income, which included $141 million for impairment, restructuring charges and other related phaseout costs. These charges are related to the execution of the previously announced company-wide program to reshape our manufacturing footprint and resize our global cost base. Excluding the nonrecurring items, Q4 non-U.S. GAAP operating margin was 8%, with Analog product MEMS and Sensor at 16.2%, Power and Discrete negative 30.2% Embedded Processing at 19.2% and RF and Optical Communication at 23.4%. Fourth quarter 2025 net loss was $30 million, including certain onetime noncash income tax expenses of $163 million compared to a net income of $341 million in the year ago quarter. Diluted earnings per share was negative $0.03 compared to $0.37 of last year. Excluding the previously mentioned nonrecurring item related to the impairment, restructuring charges and other related phaseout costs, non-U.S. GAAP net income stood at $100 million and non-U.S. GAAP diluted earnings per share stood at $0.11, including certain negative onetime tax expenses impacting of $0.8 per share. Looking now at our full year 2025 financial performance. Net revenue decreased 11.1% to $11.8 billion. In terms of revenue by end market, Automotive represents about 39% of our total 2025 revenues. Personal Electronics about 25%; Industrial, about 21% and Communication and Computer Peripheral about 15%. By customer channel, sales to OEMs and distribution represent 72% and 28%, respectively, of total revenue in 2025. By region of customer region, 43% of our 2025 revenues were from the Americas, 31% from Asia Pacific and 26% from EMEA. Gross margin decreased to 33.9% for 2025 compared to 39.3% for 2024, mainly due to lower manufacturing efficiencies and to a lesser extent, the price and mix, lower level of capacity reservation fees, negative currency effect and higher unused capacity charges. Operating income stood at $175 million compared to $1.68 billion in 2024. Excluding $376 million for impairment, restructuring charges and other related phaseout costs, non-U.S. GAAP operating margin was 4.7%. On a reported basis, net income was $166 million and EPS was $0.18. On a non-U.S. GAAP basis, they stood respectively at $486 million and $0.53. Net cash from operating activities totaled $2.15 billion compared to $2.97 billion in 2024. Net CapEx expenditure was $1.79 billion in 2025, in line with our revised expectation and lower than the $2.5 billion of 2024. Free cash flow was $265 million positive in 2025 compared to the $288 million positive of the previous year. Inventory at the end of the year was $3.14 billion compared to the $3.17 billion at the end of the third quarter and $2.79 billion one year ago. Days sales of inventory at quarter end were 130 days, slightly better than our expectation compared to the 135 days for the previous quarter and 122 days in the year ago quarter. Cash dividends paid to stockholders in 2025 totaled $321 million. In addition, during 2025, ST executed share buybacks totaling $367 million. ST maintained its financial strength with a net financial position that remains solid at $2.79 billion as at end of December 2025, reflecting total liquidity of $4.92 billion and total financial debt of $2.13 billion. Now back to Jean-Marc, who will comment on our outlook. Jean-Marc Chery: Thank you, Lorenzo. Now let's move to our business outlook for Q1 2026. We are expecting Q1 '26 revenues at $3.04 billion, a decrease of 8.7% sequentially, plus or minus 350 basis points. We expect our gross margin to be about 33.7%, plus or minus 200 basis points, including about 220 basis points of unused capacity charges. This business outlook does not include any impact for potential further changes to global tariffs compared to the current situation. In terms of net CapEx for 2026, we plan to invest about $2.2 billion to support capacity addition for selected growth drivers like those for cloud optical interconnect and our manufacturing reshaping plan. To conclude, 2025 turned out to be a challenging year for the end market we serve, characterized by continued inventory correction in automotive and industrial, in particular, the first part of the year. The second half was better with gradual improvement of the revenue trend and a return to a year-on-year growth in the fourth quarter. We are entering '26 with a better visibility than entering '25 with the inventory correction in distribution progressively improving. Beyond the evidence of a cycle recovery, ST will benefit from the following company-specific growth drivers. In automotive, we see solid momentum in our engaged customer programs in ADAS, where we expect to grow this year and in the coming years. In silicon carbide power devices, following a significant contraction in 2025, we anticipate a return to revenue growth in 2026 with revenues projected to recover to 2024 levels by 2027. In sensors, we see strong demand, both in MEMS and imaging sensor and our planned acquisition of NXP MEMS business will strengthen our leading position across the automotive and industrial segment. In industrial, in general purpose MCUs, building on market share gains 2025 and a road map of new product launch for 2026, we are on track to return to our historical market share of about 23% by 2027. In Personal Electronics, where we continue to see strong momentum in our engaged customer programs in sensors and analog, we should keep on benefiting from increased silicon content in 2026 and beyond. In communication equipment, computer peripheral, in data centers, including cloud, optical interconnect and power and analog for AI servers and data centers, with the current market dynamic, we believe we can deliver $1 billion revenue before 2030 with already USD 500 million in 2026. In low-earth orbit satellites, we are expanding our customer base, and we anticipate continued revenue growth as low earth orbit constellation projects expand globally and penetrate new applications such as direct-to-cell constellation. Lastly, ST is uniquely positioned to address human wind robotics through our broad portfolio, spanning MCUs, MEMS, optical sensors, GNSS and power management. We are already generating revenues through engagements with major OEMs, and we estimate our current addressable bill of material at about $600 per system. Thank you, and we are now ready to answer your questions. Operator: [Operator Instructions] Our first question comes from Francois Bouvignies from UBS. Francois-Xavier Bouvignies: My first question maybe for Jean-Marc, I wanted to come back to what you said about the outlook. I mean, if we look at your revenue guidance down 8.7% quarter-on-quarter, this is below seasonal -- better than seasonal, sorry, of minus 11%. And if we take into account less days, it's actually significantly above seasonal. So, I was wondering, I mean, this is looking quite interesting. And if we compare to other peers like TI yesterday or ADI and Microchip, you see a number of your peers talking about above seasonal. I mean what's your view on the trajectory from here? Do you think this above seasonal trend can carry on a little bit? Or we shouldn't get carried away like we did in the last two years where we have many fall starts? Do you see like a very genuine evidence of a cycle recovery from here? Jean-Marc Chery: Well, we will not guide for 2026 today, clearly, but we are confident in our ability to grow organically for next year. But it's clear that we enter in a better and healthier situation compared to '25. If you remember last quarter, okay, I already shared with you that we were seeing a backlog that were reading during the quarter better than the usual seasonality. And today, with the visibility we have on Q2 that generally speaking, okay, is plus, let's say, low mid-single digit, but we absolutely see no reason that we will not be at least capable to deliver it. More important, I think, beyond the cycle is to share with you that we see for the company some specific growth driver. First of all, in automotive, clearly, we will have the sensor. And at a certain moment, when we will complete the acquisition of NXP, of course, it will bring additional revenues. This is obvious. But we see also positive momentum on ADAS ASICs and the silicon carbide after last year that was pretty challenging. Well, in industrial, clearly, the dynamic is really strong, thanks to the inventory correction gone, but more important is our portfolio. So we have done a tremendous effort in introduction of new products in '25 and '26, and this will contribute beyond the cycle. For Personal Electronics, our engaged customer program, you know that we have the visibility, okay? So I confirm to you. So we confirm that it will support us beyond the cycle. And last but not the least, data center. But clearly, in 2026, cloud optical interconnect, so means both photonics ICs and analog mix signal by CMOS ICs plus our high-performance general purpose microcontroller will contribute because you know that the connectivity engine of the server will move to optical one. So this will be certainly an acceleration. And as well, we will start to contribute to the power supply unit and to the server from the green to the processor. Last but not the least, beyond the cycle in '26, we see also low earth orbit satellite communication with our engaged customer program, so with our ASICs really positive. This will be a bit offset by the capacity fee reservation. But all in all, I confirm really our confidence level to grow organically in 2026 and because we have, let's say, significant growth driver beyond the cycle of the market. Francois-Xavier Bouvignies: Very clear. And yes, maybe on the gross margin side, I mean, with it, I mean, obviously, it's a concern for the market. You delivered the guidance is in line on the gross margin, but 33.7%. But when I look at the consensus, it has 35.6% of gross margin for the year. So it would assume a recovery from here. So with the top line that you described nicely, should we see as well an improvement of gross margin from the level in Q1? Lorenzo Grandi: Maybe I take this one, Jean-Marc, about the gross margin. But today, of course, the gross margin will depend on the evolution of the revenue in the course of the year. As explained by Jean-Marc, we expect, let's say, to increase. But the gross margin today that we see in Q1, we believe is clearly the lowest point in the year, this expectation of 33.7%. So we will see some increase. This increase is also driven by the fact that we expect to have constantly reduction in our unloading charges during the year. So we expect some mild increase for the second quarter and then a more significant increase also driven by the seasonality of the revenues in the second half of the year. Yes, at this stage, we can say that the expectation for us is to have increase in our gross margin all over the year. Operator: The next question comes from Andrew Gardiner from Citi. Andrew Gardiner: I was interested, Jean-Marc, in digging a bit deeper into the automotive space. Clearly, your largest end market and the one where we're still seeing the most difficulty in terms of getting through the bottom of this cycle. There's a number of sort of end market data points out there that are, I suppose, still causing investors' questions in terms of the health of the market, tariff threats back and forth admittedly, but also not helping. I'm just wondering how -- can you give us a bit more detail in terms of how you're seeing your customers behave? Do you think inventory is absolutely at a bottom in terms of the automotive channel and at the OEMs and the Tier 1s. What kind of confidence do you have as we look into the future quarters that we can return to stronger demand trends? Jean-Marc Chery: Well, first of all, clearly, when we see our Q4 revenue in automotive, it was slightly below our expectation and mainly, in fact, driven by the pulling from inventory a little bit lower than expected from some Tier 1 means that the automotive market for, let's say, legacy application, clearly is pretty soft. Inventory correction is certainly gone, but there is a kind of a softness of this kind of application. What will be positive on automotive is clearly what is around, let's say, the electronic architecture, the new software-defined electronic architecture calling for more complex MPU, MCUs definitively. So this will be an important growth driver. But we know that the electrical powertrain will be still an important driver. But here, it is more the competition landscape that changed completely compared a few years ago because you see that out of, let's say, more than 30 million vehicles produced in China, more than half are battery based compared to America, where it is more marginal in terms of production. And in Europe, it is below 1/3. So here, it's more a question of the competition is in China. So you know that in China is more complex to compete. But the powertrain electronics, the demand is there. So, all in all, I think the automotive market based on 90 million, 92 million, 93 million vehicles out of which 17 million to 18 million vehicle battery based and similar number in hybrid is still changing in terms of mix as well from the car classification is more middle end or premium car, even this car now embed some electronics. So the market is not yet stable. So that's the reason why we have to be, let's say, cautious to adapt ourselves. But we see a different situation compared entering in '25, where we faced very strong inventory correction in Q1 last year, if you remember, from our main customer, this will not be repeated. It is more, let's say, a progressive stabilization of the market in terms of mix of car electrical hybrid thermal combustion engine and mix of car between high premium, premium and middle class and mix between China, APAC, Europe and Asia. So this is something we have to, of course, closely monitor and adapt ourselves with our supply chain. So this is how we see the automotive market. Andrew Gardiner: Just a quick follow-up, given you mentioned China at length there. How is the partnership with Sanan progressing? Is that going as you anticipated? Is it helping your competitiveness in that market? Or is it still too early? Jean-Marc Chery: No. Clearly, so we will start to ramp up the facilities now, okay? We have modernized. We know exactly the efficiency of this fab. And clearly, it will be a key success factor in our capability to compete on the Chinese market. Operator: The next question comes from Joshua Buchalter from TD Cowen. Joshua Buchalter: I actually wanted to drill into the Personal Electronics segment a little bit more. I think there's some concerns of disruption or even pull-ins in the short term due to higher memory costs. It came in better in the quarter. Maybe you could walk through what the drivers you're seeing are there and if you're seeing any changes in order pattern. And I believe you called out higher silicon content in 2026. Was that referring to expectations for your largest customer this year? Jean-Marc Chery: Yes, you know that our revenue are mainly driven by our biggest customer and more on the high-end kind of product, which are, in some extent, less sensitive to the memory price. So, at this stage, with the visibility we have, first of all, we don't see significant impact detected by us. And I confirm that we expect to keep growing in personal electronics driven by our main customer in 2026, thanks to our increased device based on silicon and not module content increase in '26. So far, PE will be a growth driver for us in '26. Joshua Buchalter: And then I think the last couple of quarters, you've been kind enough to give us your book-to-bill ratios in auto and industrial. It seems like things are getting better on the industrial side in particular. Can you update us, I guess, on those metrics and whether you're mostly done with the channel inventory clearing on the industrial side? Congrats on the solid results. Jean-Marc Chery: No. In Industrial, the book-to-bill was well above parity. Clearly. Also, beyond your question, I can tell you that the POS were growing, let's say, between low teens, mid-teens, which is a good news. So we continue to decrease our inventory. But on automotive is the book-to-bill is a little bit more complex because we have some few key customers that are putting order in one shot for six months. So the book-to-bill must be, let's say, assessed on one-year moving average or six months moving average. So corrected from this, let's say, abnormal, let's say, process, the book-to-bill was parity on automotive. Operator: The next question comes from Stephane Houri from ODDO BHF. Stephane Houri: I just wanted to come back a bit on the scenario for the year, and I know you're not guiding. But historically, you've been saying that the second half is like 15% above the first, that's normal seasonality. And then on the top of that, you may have some specific programs. With the sting point you guide on Q1 and we look at -- when I look at the consensus for the full year, it seems to be banking on something lower than that because of the starting point in Q1. So can you just confirm that you see now that the inventory correction is done normal seasonality throughout the year and maybe give some comments about the adds of some customer engage program? Jean-Marc Chery: No. On the inventory correction, what we communicated, okay, I and Lorenzo and myself is to say by end of Q2, we believe we will be hold the excess of inventory. And this today, I can confirm -- it's already the case for many product family. We are still here and there some pockets of excess inventory versus what we see. But looking at the current dynamic, POS, POP by end of Q2, this will go. So now it's sure that in H2, we will be exposed directly to the end demand. Now about again, what we consider engaged customer program be the cycle, let's say, we can split I have to say. One is the usual personal electronics, and why we say it's cycle is because silicon content increase, okay? So we have the visibility with the current visibility we have, okay? So this will help us to grow the cycle of personal electronics and assuming our main customer will perform in market share really well performed in 2025, okay? So this will drive our growth. Moving to communication equipment and computer peripheral, well, communication equipment. Communication equipment, it is clear that for the lower or satellite communication is an important driver because thanks to our capability to supply and compete, our growth is driven by our largest customer in this field of activity. And as we see is pretty successful. And certainly this year, will be another demonstration of the success. Now since two quarters, we are supporting our second largest customer that is growing as well. So it is clearly beyond the cycle. So this will be a significant growth driver beyond the cycle for ST. Last but not the least is AI data center. You know AI data center, okay, we were, let's say, a bit delay for what call the device addressing the power station we are in, let's say, process to close the gap and offer solution to our customers. But clearly, we will be at of the business dynamic, it is the optical engine or the cloud optical interconnect. So its photonics ICs, MOCs and high performance general microcontroller. And this will contribute to the growth of ST significantly in 2023. Then moving to the more, let's say, traditional market focus we have, so automotive industrial. For ADAS, ASIC, last year was a challenging one because we saw some inventory correction on, let's say, some legacy ASIC. But this year, okay, clearly, with the visibility we have, this will be a booster of growth. Finally, our SiC MOSFET, about the difficult year of '25 will grow again. And I can confirm to you that up to now in Q1, we have a good book-to-bill on silicon carbide that is very encouraging. And definitely, our sensor contribution with the acquisition of NXP MEMS plus the existing imaging sensor, existing MEMS we have. And I am very pleased that beyond the inventory correction done on general purpose microcontroller, the proliferation of our new products are really paying back very well. And I am really confident that in '27, we come back to our historical market share and '26 will be an important step to demonstrate it. So this is actually in a few words how we can describe '26. Stephane Houri: I have a small follow-up on the gross margin comments. I think last quarter, you said that you think you would end up Q4 2026 above the level of Q4 2025 in gross margin. Do you still feel confident with what you see developing the mix, the underloading charges, et cetera, et cetera? Lorenzo Grandi: Yes. Yes, I confirm that at this stage, the expectation is that Q4 this year '26 should be better than Q4 '25. Operator: The next question comes from Domenico Ghilotti from Equita. Domenico Ghilotti: A couple of questions. The first is on the unloaded charges. You are guiding for a significant drop in Q1. trying to understand despite the lower sales, I'm trying to understand if you see this number at the bottom and if you are already benefiting from, say, the efficiency plan that you carried out. And second is some color on, if you can, on the second client in low earth orbit. So should we assume that it is a significant number or just starting entrance of new clients or an add-on, but not particularly relevant? Lorenzo Grandi: Maybe I'll take the one of the unused charges. Yes, unused charges are declining in the first quarter. There are -- the reason -- the main ingredient of the declining in this quarter is the fact that, as you know, we are progressing with our programs to reshaping our manufacturing infrastructure. This program is progressively reducing our capacity in 6-inch for silicon carbide, 150-millimeter for silicon carbide and 200-millimeter for silicon. And we start, let's say, to move ahead on this plan. So this is, if you want, is something that is mechanical. At the end, the capacity is reduced. We are now moving our product on the existing capacity on one side, 8-inch for the silicon carbide and the 300-millimeter for the silicon. So that's why we see the level of unused capacity, notwithstanding that the revenue are lower in respect to the previous quarter to reduce. This trend will continue. Unused capacity will not disappear in the year, but will significantly reduce in the year and will be one driver for our improvement in the gross margin in the course of 2026. Jean-Marc Chery: About the second question, yes, it's significant. If not, we will not mention. But I can just confirm you to number in Q4, our CCP segment grew sequentially 23% and year-over-year 22%. Definitively, it is linked to the low or satellite business we have, and it is driven both by our first customer and then by the second one. So at 22%, 23% growth sequential and year-over-year, so you can conclude it is significant. Operator: The next question comes from Sandeep Deshpande from JPMorgan. Sandeep Deshpande: My question is about your fab loading into the current quarter. Given what is happening with the gross margin in the current quarter, how is the fab loading going through in the quarter? And how is the mix shifting overall in terms of the gross margin? Because you have a revenue decline, but the gross margin is declining. So are you reducing your fab loading this quarter? Or are you increasing your fab loading? And my follow-up question associated with that is how the mix, particularly associated with your better margin microcontroller products is shifting? Lorenzo Grandi: In the quarter, as I was saying before, the unloading charges is mainly related to the fact that we are moving out capacity, reducing capacity in certain specific fabs. where, of course, we are now moving production in different fabs, 300 millimeters, so reducing our capacity. So at the end, when you look at the level of loading, we are not overloading our production, let's say, in the quarter. Clearly, if you look the inventory and you look where it will be the dynamic of the inventory in the quarter, as usual, you know that there is this seasonality in our inventory in which in the first half, our inventory is somehow increasing and then decreasing in the second part of the year. So, at the end, what it will be the impact is that now the expectation is end the quarter Q1 in the range of 140 days of inventory compared to the 130 days where we stand today. But I repeat that this is more related, let's say, to the normal dynamic of our inventory over the year than, let's say, loading our manufacturing infrastructure in a way that is -- the impact on unloading charges is mainly related to the fact that we started with our programs to reduce capacity in some specific areas. Clearly, the impact -- the positive impact, let's say, of this in terms of gaining efficiency and so on will come probably later, as you know, in our, let's say, manufacturing infrastructure. We do expect our program to be -- to start to yield a positive impact in our -- in our manufacturing efficiency more in 2027 than this year. But one of the impact that visible is the reduced level of unloading. Together also with the expectation of growth in terms of revenues. This we will see during the year, let's say, depending on the level of growth. Sandeep Deshpande: And my follow-up question is regarding about your microcontroller business, which is if you look at the Embedded Processing segment, it grew 1.2% year-on-year. I mean, many of your peers in this market are seeing better growth at this point. So why is ST growth in a key segment for ST lagging at this point or something else happening in that division? Jean-Marc Chery: So, embedded processing segment, clearly, the growth dynamic we have on the general purpose microcontroller is, let's say, at least consistent with our peers. Why it is a little bit offset? It is offset by our automotive microcontroller because, okay, up to now, our automotive microcontroller are more the microcontroller that will be, let's say, for some model of car moving to the software-defined vehicle architecture removed clearly. And I already explained that we have done a strong effort in 2025 to rework the road map of our micro, but this will be paid back, okay, more, let's say, end of '27 and '28. For the time being, yes, we suffer on the automotive microcontroller that is, let's say, optically offsetting the real good health of the general purpose. But the general purpose microcontroller, let's say, maybe I can share with you one number, okay, for Q1, the embedded processing solution segment will grow up low 30s. So above 30% year-over-year. So you can imagine that the growth of general purpose will be really, really strong more than, let's say, the secure microcontroller are growing a little bit less because driven by the market. And okay, of course, we have some offset linked to the automotive micro. But I can confirm to you that our general purpose microcontroller are performing or overperforming the market. Jerome Ramel: Mona, I think we have time for one more question. Operator: Next question comes from Sébastien Sztabowicz from Kepler Cheuvreux. Sébastien Sztabowicz: Coming back to the transformation program, have you made any specific progress so far? And notably on the manufacturing front? And are you still on track to reach your savings ambition for the end of '27? And the second one is more on the OpEx trend. So Q1, we know where it will stand. But for the full year, where do you see OpEx trending? And how do you see the start-up costs impacting the OpEx 2023? Do you plan to accelerate a little bit further the cost-cutting actions for OpEx? Lorenzo Grandi: In terms of our reshaping programs, I would say that is progressing in line with the expectation. In the course of 2025, the main, let's say, impact was related to the savings in our OpEx that indeed, when you look at the overall are declining, notwithstanding, let's say, the negative impact of the euro dollars. So at this stage in the course of 2026, as I said, we will start, let's say, progressively to transfer some activity from -- in silicon carbide to 8-inch in silicon to the 300-millimeter. As I was saying before, is now expected to yield the benefit in our manufacturing infrastructure efficiency of this program towards the second part of 2027 and 2028. So my short answer is, yes, we are on track in respect to what we have communicated previously. So, this is the situation. In respect to the expenses of 2026, now the expectation remains substantially the same, means that at the end, at this level of exchange rate, including the impact of the hedging, we should be able to stay with a net OpEx means including other income and expenses on a low single-digit increase, something in that range, mainly driven by the fact that we will have a reduction in other income and expenses in respect to the one of 2025 due to the phaseout cost because, of course, let's say, from the one side, we reduced the capacity in our manufacturing 6-inch, 8-inch. But on the other side, we have a progressive phaseout from these steps that will be reported in this line. It's a temporary effect, but it will be there during 2026. Jerome Ramel: Thank you, Sébastien, and thank you, everyone. I think this is ending our call for this quarter. So, thanks very much all of you for being there, and we remain here at your disposal should you need any follow-up questions. Thank you. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Dennis Shaffer: Good afternoon, ladies and gentlemen. Before we begin, I would like to remind you that this conference call may contain forward-looking statements with respect to the future performance and financial condition of Civista Bancshares, Inc. That involves risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures intended to supplement but not substitute the most directly comparable GAAP measures. The press release, also available on the company's website, contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. This call will be recorded and made available on Civista Bancshares' website at www.civb.com. At the conclusion of Mr. Shaffer's remarks, he and the Civista management team will take any questions you may have. Now I will turn the call over to Mr. Shaffer. Dennis Shaffer: Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to welcome you to our fourth quarter and year-end 2025 earnings call. I'm joined today by Charles A. Parcher, EVP of the company and president of the bank, Ian Whinnem, SVP of the company and chief financial officer of the bank, and other members of our executive team. This morning, we reported net income for 2025 of $12.3 million or 61¢ per diluted share, which is consistent with our linked quarter and represents a $2.4 million or 24% increase over the fourth quarter in 2024. Included in the 2025 results were nonrecurring expenses related to our acquisition of Farmers Savings Bank that negatively impacted net income by $3.4 million on a pretax basis and $2.9 million on an after-tax basis, equating to 14¢ per common share. Going forward, we expect any additional expenses related to this transaction to be minimal. For the year, we reported net income of $46.2 million or $2.64 per diluted share, which compares to $31.7 million or $2.01 per diluted share for 2024. This is particularly impressive given that there are 2 million average additional shares outstanding as a result of our capital offering in July and our acquisition of Farmers Savings Bank in November. Taking into consideration the nonrecurring that occurred during 2025, our earnings per share for the year were reduced by $0.15. Backing out the nonrecurring fourth quarter expenses, our pre-provision net revenue increased by $6.7 million or 55% over the previous year's fourth quarter and by $2.2 million over our linked quarter. Our ROA for the quarter was 1.14% and excluding one-time expenses was 1.42%, continuing our string of improving our ROA for each quarter of 2025. For the year, our ROA was 1.11%. For the quarter, we were pleased to announce the closing of our transaction with Farmers Savings Bank, adding $106 million in loans and $236 million low-cost deposits to our balance sheet and are looking forward to a successful system conversion over the weekend of February. Our teams continue to work together towards the successful integration of our organization. Net interest income for the quarter totaled $36.5 million, which is a $1.9 million or 5.5% increase over the linked quarter and a $5.1 million or 6% increase over our fourth quarter in the previous year. During the quarter, our earning asset yield declined eight basis points while our funding costs declined 19 basis points. This resulted in the expansion of our net interest margin by 11 basis points to 3.69%. As we have discussed on previous calls, during 2025, we were focused on increasing our tangible common equity, reducing our CRE to risk-based capital ratio, and reducing our reliance on wholesale funding. To that end, we muted loan growth by keeping CRE loan rates somewhat elevated. The success of our July capital offering and the acquisition of Farmers Savings Bank have allowed us to become a little bit more aggressive in lending across our footprint. Excluding the newly acquired farmers' loans, our loan and lease portfolio grew $68.7 million, which represents an annualized growth rate of 8.7% during the fourth quarter. We anticipate mid-single-digit loan growth in 2026. For deposit funding continues to be a focus. And we were pleased that our nonbroker deposit funding, excluding deposits acquired through the Farmers Savings Bank transaction, grew organically by nearly $30 million during the quarter, allowing us to continue reducing our brokered funding. We believe this reduction in wholesale funding enhances the value of our core deposit franchise. Earlier this week, we announced an increase in our quarterly dividend to $0.18 per share, which represents a $0.01 increase over the prior quarter. Based on the December 31 closing market price of $22.22, this represents an annualized yield of 3.2% and a dividend payout ratio of nearly 30%. During the quarter, noninterest income increased $251,000 or 2.6% from our linked quarter and increased $869,000 or 9.6% from 2024. The primary drivers of the increase from our linked quarter were a $287,000 increase in interchange fees due to the typical elevated spending that comes during the holidays and a $380,000 increase in other fees related to leasing activity. These increases were partially offset by proceeds on a policy we received in the prior quarter and a $416,000 reduction in residual income from our leasing activity. As we have noted, leasing fees, particularly rent residual income, are less predictable than more traditional banking fees. For the year, noninterest income decreased by $3.8 million or 10% from 2024. This decline was primarily attributable to lease revenue and residual income. You will recall that we recognized a $1 million nonrecurring adjustment as part of our conversion to our new leasing system during the quarter. That, coupled with the overall decline in lease production this year, led to a reduction in lease-related revenues in 2025. We are confident the investments we have made in our leasing infrastructure this year will allow our leasing team to operate at a higher level in 2026. For the quarter, after adjusting for the $3.4 million in nonrecurring expenses related to the acquisition, noninterest expense was $27.6 million, which is consistent with the $27.7 million in our linked quarter after backing out $664,000 in nonrecurring farmers' expenses incurred in the third quarter. Year to date, after adjusting for the $3.8 million in nonrecurring expenses, noninterest expense decreased $2.4 million or 2.1% from our prior year. The primary drivers of this decline were a $3.1 million decline in compensation expense and a $1.4 million decline in equipment expense, which were partially offset by slight increases in a number of other expense categories. The decline in compensation expense was due to a slight reduction in FTEs, controlling overtime, and an increase in the amount of salaries and wages we defer related to loan origination. The decline in equipment expense was primarily the result of a decline in depreciation expense on leased equipment. This is the result of using residual value insurance to reduce depreciation expense related to operating leases. Our efficiency ratio for the quarter improved to 57.7% compared to 61.4% for the linked quarter and 68.3% for the prior year fourth quarter. Our effective tax rate was 16.8% for the quarter and 16.3% for the full year. Turning our focus to the balance sheet. As I mentioned, even after backing out the loans we acquired from Farmers Savings Bank, our lending team generated $68.7 million of organic net loan growth during the quarter, which is an annualized rate of 8.7%. While loans grew in nearly every category during the quarter, our most significant increase was a $90 million increase in residential real estate, which included the addition of $56 million in residential loans from Farmers. The loans we originate for our portfolio continue to be virtually all adjustable rate, and our leases all have maturities of five years or less. Although we were pleased with our success in bringing our CRE concentrations more in line with investor expectations, we will remain mindful of making sure we have the funding and capital to support future CRE growth. At December 31, our CRE to risk-based capital ratio was 275%. During the quarter, new and renewed commercial loans were originated at an average rate of 6.74%. Residential real estate loans were originated at 6.13%. And loans and leases originated by our leasing division at an average rate of 8.77%. Loans secured by office buildings make up only 4.5% of our total loan portfolio. As we have stated previously, these loans are not secured by high-rise metro office buildings. Rather, they are predominantly secured by single or two-story offices located outside of central business districts. Along with year-to-date loan production, our pipelines are strong, and our undrawn construction lines were $162 million at December 31. As previously mentioned, we anticipate our organic loan growth to be in the mid-single digits in 2026, as we leverage farmers' excess deposits and our loan pipeline to continue to build. On the funding side, we added $236.1 million in low-cost deposits from the Farmers transaction. In addition, we were able to continue our pattern of reducing broker deposits for the fourth consecutive quarter by nearly $30 million. Our continued focus on attracting and retaining lower-cost funding helped us lower our overall cost of funding by 19 basis points during the quarter to 2.08%. While we continue to see some migration from lower-rate demand accounts into higher-rate time deposits during the quarter, the addition of Farmers' lower-rate deposits allowed us to reduce our cost of deposits by four basis points to 1.59%. As shared during our last call, we launched our new digital deposit account opening platform during the third quarter, limiting online account opening to CDs. In the fourth quarter, we began offering online account opening for checking and money market accounts. In addition, we rolled out our deposit product redesign initiative. The goal of this initiative is to align our deposit product set with our new digital channels. We are seeing some success and look forward to launching a more comprehensive digital marketing campaign for online deposits once we get past the farmer's system conversion. Our deposit base continues to be fairly granular. Our average deposit account, excluding CDs, is approximately $28,000. At quarter end, our loan-to-deposit ratio was 94.3%, which is down slightly from our linked quarter. We anticipate maintaining this ratio within our targeted range of 90% to 95%. Other than the $464.4 million public funds with various municipalities across our footprint, we had no deposit concentrations at year-end. We believe our low-cost deposit franchise is one of Civista's most valuable characteristics, contributing significantly to our solid net interest margin and overall profitability. We view our security portfolio as a source of liquidity. At December 31, our security portfolio totaled $685 million, which represented 15.8% of our balance sheet and, when combined with our cash balances, represents 22% of our total deposit. At December 31, 100% of our securities were classified as available for sale and had $45 million of unrealized losses associated with them. This represents a decline in unrealized losses of $6 million for our linked quarter and a $17 million decline from 12/31/2024. So this is strong. Earnings continue to create capital. Our overall goal remains to maintain our capital at a level that supports organic and inorganic growth and allows for prudent investment into our company. We were happy to announce an 18¢ per share dividend earlier this week, which represents a penny per share increase in our quarterly dividend. We view this as a sign of confidence management and our board has in Civista's ability to continue generating strong earnings. We continue to operate with a $13.5 million repurchase authorization and a 10b5 share repurchase plan in place. While we have not repurchased any shares during the year, we believe our stock is a value and we will continue to evaluate repurchase opportunities. We ended the year with our tier one leverage ratio at 11.32%, which is deemed well-capitalized for regulatory purposes. Our tangible common equity ratio increased from 9.21% at September 30 to 9.54% at year-end on strong earnings. We feel this gives us capital to support organic growth and to invest in technology, people, and infrastructure. While economic conditions across the country remain mixed, the economy across Ohio and Southeastern Indiana is showing no systemic signs of deterioration. Our credit quality remains solid, and our credit metrics remain stable. Delinquencies remain low and are consistent with the prior year-end, while our net charge-offs were slightly lower in 2025 than the prior year. Our past due loans did increase $7 million during the quarter, and our nonperforming loans increased by $8.5 million to $31.3 million. Total nonperforming loans to total loans were 0.95%, up slightly from the linked quarter but down from the 1.06% at the end of 2024. The continued strong performance of our credits coupled with moderate loan growth resulted in a $585,000 provision for the quarter. Our ratio of allowance for credit losses to total loans is 1.28% at December 31, which is consistent with the 1.29% at 12/31/2024. And our allowance for credit losses to nonperforming loans is 135% at year-end, compared to 122% at 12/31/2024. In summary, our fourth quarter was an extension of what was a very productive and good year. Among the many initiatives we accomplished were a successful capital offering, the acquisition of Farmers Savings Bank, rolling out our new digital banking solution, and migrating to a new core lease system. All of which contributed to our achievement of two long-standing goals. We were able to increase our tangible common equity ratio from 6.43% a year ago to 9.54% at 12/31/2025. And reduced our CRE to risk-based capital ratio from 366% at the beginning of the year to 275% at year-end. These investments and efforts, coupled with our expanding net interest margin and controlling expenses, produced exceptional results as our full-year net income was $14.5 million or 46% higher than a year ago. Civista remains focused on creating shareholder value, serving our customers, and being a good corporate citizen in each of the communities that we serve. Thank you for your attention this afternoon and your investment. Now we'd be happy to address any questions you may have. Operator: Ladies and gentlemen, we will now begin the question and answer session. You will hear a prompt that your hand has been raised. If you would like to withdraw from the polling process, please press star and the number two. If you are using a speakerphone, please make sure to lift your handset before pressing any keys. Your first question comes from the line of Justin Crowley from Piper Sandler. Please go ahead. Justin Crowley: Hey, good afternoon, guys. Dennis Shaffer: Hi, Justin. Hello. Justin Crowley: Wanted to start out on the loan growth side of things. You know, some pretty decent growth in the quarter when you set aside farmers, and you mentioned the guidance for mid-single-digit growth looking out here. Just curious if you could talk a little more on how you think the complexion of that growth will take shape in terms of the split between commercial, where you talked about being a little bit more aggressive, and then on the residential side where you've seen some growth recently? Charles A. Parcher: Yeah. Justin, this is Chuck. I think we'll see kind of go back to more normalized growth in '26. Being that the commercial area will believe that growth book both C&I and commercial real estate. You know, we did have quite a bit of growth in '25 in the residential side. A lot of that due to we didn't really have a good outlet for our construction product and our CRA product, so we held most of those on the book. If we get a little bit of a blip downward in interest rates, we feel like we'll probably move some of that to the secondary market. It'll come up our balance sheet. So I would focus more so on commercial and C&I growth, as we normally do, and hopefully a little bit more leasing growth as well, but that'll be in the C&I bucket. Dennis Shaffer: And, Justin, I might just add that we don't want our funding to kind of keep pace with our loan growth. So we've been pretty successful in raising deposits over the last six, seven quarters. I think we've grown deposits six in the last seven quarters, but we kind of want to, you know, and those will those two things will kind of go hand in hand and we made some significant investments. Within some technology, particularly on the digital front, that we think will help us continue to raise deposits so that we can continue to fuel loan growth. Justin Crowley: And then, you know, I guess, you know, you mentioned it, but, you know, on that digital channel, depending on the success you see there and how much you can grow that platform, could that potentially get you beyond mid-single-digit growth? Or would it be that that digital channel is just gonna come at, you know, obviously, it's gonna be higher cost there. So you, of course, gotta think about the spread on new business. Just curious there. Charles A. Parcher: Right. I don't, you know, I don't think it substantially will jump that, you know, above that right now. I think, you know, again, we want to be mindful of our margin as well. So there's a number of factors that kind of play into that. But, you know, we just we'll be a little bit mindful of that. But we do think we have opportunities within our markets and stuff. Dennis Shaffer: And we are excited. I mean, I think we'll see accelerated growth through the digital side in '26. It's just it's gonna be hard to quantify until we get all of our products, you know, up and running on there. And to see the success that we have. Justin Crowley: Okay. Where is that digital channel now? Don't know you have the balances handy. And, you know, what kind of yields are we talking about there? Charles A. Parcher: Well, we don't have the balances handy, you know, right off the top. You know, we just you know, we're kind of in the infancy stages of that, but we are seeing some success. I mean, we've shifted from, you know, just offering CDs online with what we recently rolled it out. We wanted to make sure that we had, you know, things working and, you know, all our fraud prevention in place and stuff. And then now we've added checking and savings and money market accounts. And just last month, I mean, just adding just like you were we were surprised that we opened 28 new checking accounts last month on the through the digital front and stuff. So just think there's opportunity, but we'll try to give updates on balance as we go, maybe get further along in the year and stuff. Justin Crowley: Okay. Got it. And then, you know, maybe one on the NIM. Know, I've got the past few rate cuts, that'll continue to work their way through here. But you give us a sense for how the margin could trend through the year? You know, number one, I guess, if we get more of a pause out of the Fed, over the near or medium term, and then maybe square that to a scenario where, you know, we do eventually get a couple more cuts. Ian Whinnem: Hey, Justin. This is Ian. So right now, at say for the first quarter, we'd expect that margin to expand two to three basis points. And then into the second quarter and beyond, maybe another three to four and capping out around there. Justin Crowley: Okay. And, you know, that forecast that sort of assume a flat rate scenario, or what does that what's embedded there? Ian Whinnem: Right now, we're assuming a cut in June and then again in the fourth quarter. And if it stays flat, it'll be a little bit higher at the end of the year. Justin Crowley: Okay. And then maybe just one last one on expenses. Obviously, some noise with, you know, partial quarter of Farmers, but, you know, what's the best way to think about run rate, you know, certainly in the first quarter, but even just, you know, beyond that, considering the cost saves that'll come out of the acquisition once you get through conversion. Charles A. Parcher: Yeah. So we have now the expenses that we have in the first quarter, still gonna have the higher expenses for farmers running their core as well as some personnel until the conversion occurs in February. Following that, then we'll have a reduction in some expenses, but that won't occur until that third month of the first quarter. So what we're anticipating is first quarter expenses to be, you know, similar to where we are maybe in that '29 range, 29 to 29 and a half. For the first quarter expenses. In the second quarter, gonna have the merit increases that come in once per year for our colleagues. And that'll offset those reductions I mentioned a little bit ago. And we're making some good investments into our company. Yep. Yeah. We're using some of that capital we raised to invest back in the company too. So that's you know, we are buying, you know, investing in some technology, investing in some people, and some resources to continue to grow the franchise. Justin Crowley: Okay. Great. Very helpful. I appreciate it. Ian Whinnem: Thank you. Operator: Your next question comes from the line of Jeff Rulis from D. A. Davidson. Please go ahead. Jeff Rulis: Thanks. Good afternoon. Dennis Shaffer: Hi, Jeff. Jeff Rulis: Just a question on the credit side. It sounds like pretty steady state. You don't seem to I guess, tracking some of the linked quarter. The question being, was a lot of that acquired on the farmer side from the linked quarter increase? Mike Mulford: Jeff, this is Mike Mulford. No. The quality we brought over from FSP was very good. So that was not the reason for the increase. Jeff Rulis: What was that? If you could just in terms of We have one we have one credit that we had participation with another bank that we put on non-accrual in the fourth quarter. It was about $8 million. And so we work we're working with that lead bank to resolve that. But it was a case of, you know, it had been current. It matured. In November, so it did hit thirty days at year-end. But, again, we put it on non-accrual until we get the situation resolved. And Jeff, $8 million as Mike mentioned, the 8 and a half million dollar increase in the non-performing. So you know, it really was just that one quick credit. So we think it's somewhat, you know, an isolated instance. Jeff Rulis: Got it. The nonperformance actually were down from the year. On a percentage basis. Yep. We're okay. That sounds like that credit might have some, you know, potential for a more expedited resolution or don't wanna put words in your mouth, but you feel good about that. Moving through. Mike Mulford: Yeah. It's in the early stages. Again, we're working with the lead bank, and it did while it was not originated by us, we participated in it. It was a borrower that we had been familiar with and we had made loans to before. In the past. So again, we're working through it. I expect it'll the better part of twenty-six to work that out. And then even though we knew the good borrower, we have no other loans on the books. With that borrower. So and then, you know, just Jeff, we typically don't buy a lot of participations. We participate loans out, but typically have not been a bank that's bought a lot of participations just because we have such strong organic and such strong demand within our markets. So most of how we grow our portfolio is organically. Jeff Rulis: Got it. And just a follow on on the margin. Three sixty-nine, just trying to get what proportion of accretion assumptions, we're looking at kind of inching up from here? Any unpacking the core versus accretion? Ian Whinnem: Yeah. So within the fourth quarter, the accretion's gonna be in there for two full months. Of the three of the three month quarter. When we think in terms of the dollar impact, it's pretty minimal. It's an immaterial acquisition for the most part. Jeff Rulis: Okay. Alright. Thanks. Last one. Apologize. The tax rate is something in the mid-sixteens. Is that a level you'd subscribe to? Ian Whinnem: Correct. Yeah. We're anticipating 16 and a half for 2027. Jeff Rulis: Right. Thank you. Ian Whinnem: I sent that for at least 69 for 2026. My apologies. Operator: If you'd like to ask a question, please. Your next question comes from the line of Terry McEvoy from Stephens. Please go ahead. Terry McEvoy: Hi, Terry. Hey, Terry. Hi, Terry. Guys. Good afternoon. Could you just talk about new commercial loan yields and maybe just comment on loan spreads and overall competition there? Charles A. Parcher: Well, Ohio is still pretty competitive. Ohio and Indiana, I should say, is still relatively competitive. I think we put last December's new and renewed came on at $6.73. I would tell you some of the larger deals are coming in a little bit less than that. I would say the good deals are probably coming in six and a quarter, six and a half right now. But it's been relatively consistent. You know, the five-year treasury has been relatively constant here over the last sixty to ninety days. And you know, that margin is still coming in, you know, relatively $2.75, give or take, over the five-year. We do have some loans repricing in the first quarter and throughout the remainder of the year, Chuck, you wanna share that with. We're just bringing that for based on the twelve thirty-one year-end, we've got about $225 million of credit that we put on, you know, three or five-year adjustables. And they will reprice throughout 2026. And those rates, give or take, I would say, are coming off $4.75. And probably come back in the, you know, probably pick up. Point and a half on most of those. Terry McEvoy: That's helpful. Thank you. And then you've got a large a couple large Ohio banks focused elsewhere. Detroit's, I'm gonna guess, what, a 100 miles from Sandusky, which is another market going through some disruption. So how are you thinking about maybe playing some offense in 2026 given that backdrop, and could it impact your expenses if hiring picks up? Charles A. Parcher: We feel good about it, Terry. I mean, we've already we've hired think we've got three new lenders coming on here beginning of the year. Now they were replacements or filling slots of people that got elevated within our organization. We got another couple people coming on at the end of the first quarter waiting to get their bonuses at their shops. So we feel good about where the talent's coming from. We're picking some up from banks that, to be honest with you, have either been that are either being acquired or already have been. You know, the obviously, the West Bank of Premier one was a big one that was last year, and we've got some talent, you know, from there. You know, Ian most of Ian's treasury area finance area came from Premier. And we feel really good about the disruptions. We're not only getting calls from those employees at those institutions, but we're also getting calls from the clients of those institutions as they go start to go through the changes. So we feel like we've got a lot of opportunity just because of the disruption. Dennis Shaffer: Yeah. And that expense rate we and I mentioned earlier, does include some of those additions. Terry, should be that some of the investments we're making back into the company on the people side. Terry McEvoy: Right. Thanks for taking my questions. Have a good day. Charles A. Parcher: Thanks, Terry. Thanks. Operator: Your last question is from the line of Timothy Switzer from KBW. Please go ahead. Timothy Switzer: Hey, good afternoon. Thanks for taking my question. Dennis Shaffer: Hey, Tim. Hi, Tim. Timothy Switzer: I apologize if any of this has already been covered. But the first question I have is, with regards to the capital stack, you guys are pretty healthy capital levels. Close to Farmers. You know, are there any is there any, like, optimization you need to make now that you've closed that deal? And then, you know, what are your thoughts on share repurchases going forward? Know historically, you guys have said you know, you think it's a good value at these prices. Dennis Shaffer: Yeah. Yeah. We still think we're a value, so we continue to we didn't repurchase anything last year, but we do have our 13 and a half million dollar authorization in place. We have them, you know, we're set up there. And as long as we feel we're you know, there's some value there, we certainly will consider. We think that's a good way to deploy capital. But we kind of evaluate we've been in a blackout we weren't able to purchase that. Through the acquisition. So we continue to evaluate that and as long as we continue to have strong earnings, that's definitely a part of our capital stack. So, you know, we're always looking for ways to maximize our capital. Timothy Switzer: Got it. Okay. And I assume most everything on guidance has been covered by this point, but can you maybe discuss what you guys are seeing for leasing revenue next year? It's just always kind of a tougher item to model. Ian Whinnem: Yeah. So I can speak to that and are you talking about the noninterest income side of it there? Timothy Switzer: Exactly. Ian Whinnem: Yeah. So it is a little lumpy, and so within the fourth quarter, we did have a lease disposal gain that came in. It was about a half million dollars, about 500,000. So when we think in terms of the guidance, within the fourth quarter, we have a Mastercard annual volume bonus that we get. Of about $250,000 that comes in each year. We have those security gains which is about a $120,000. And then that first quarter, usually, we see a little bit of a slowdown. On the mortgage gain on sale as well as the leasing gain on sale. So you know, we expect that leasing revenue to drop off on the gain on sale. And maybe a little bit slower on the traditional leasing revenue. But total noninterest income, we probably guide you towards maybe $7.08 to $8.02. For the first quarter. And then increasing from there to the second quarter, maybe another half million. Timothy Switzer: Okay. Alright. That's all for me. Thank you, guys. Dennis Shaffer: Thanks, Tim. Operator: There are no further questions at this time. I would like to turn the call back to Mr. Dennis Shaffer for closing comments. Sir, please go ahead. Dennis Shaffer: Thank you. Well, in closing, I just want to thank everyone for joining today's call. And for your investment in Civista. Our quarter and our year-end results were due in large part to the hard work and the discipline of our team. I remain confident that this quarter and this year's list of accomplishments are strong financial results, our disciplined approach to managing. So this positions us very well. For long-term future success. And just look forward to talking to everyone in a few months to share our first quarter results. So thank you for your time today. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.
Operator: Hello, everyone. Thank you for standing by, and welcome to Southside Bancshares' Fourth Quarter and Year End 2025 Earnings Call. [Operator Instructions] I will now hand the call over to Lindsey Bailes, VP. Lindsey Bailes: Thank you, Alexandra. Good morning, everyone, and welcome to Southside Bancshares' Fourth Quarter and Year-end 2025 Earnings Call. A transcript of today's call will be posted on southside.com under Investor Relations. During today's call and in other disclosures and presentations, I'll remind you forward-looking statements are subject to risks and uncertainties. Factors that could materially change our current forward-looking assumptions are described in our earnings release in our Form 10-K. Joining me today are President and CEO, Keith Donahoe; and CFO, Julie Shamburger. First, Keith will start us off with his comments on the quarter and then Julie will give an overview of our financial results. I will now turn the call over to Keith. Keith Donahoe: Thank you, Lindsey, and welcome to today's call. Early in the fourth quarter, market conditions allowed us to continue the partial restructuring of our available-for-sale securities by selling approximately $82 million of lower-yielding long-duration municipal securities with a combined taxable equivalent yield of 2.6% and generating a $7.3 million net loss. All sales were completed at the end of October with net proceeds together with additional portfolio cash flows and a $49.7 million sale of a T-bill reinvested in various low premium, primarily 5.5% coupon agency MBS with an average yield of $536 similar to the third quarter security sales, we believe the fourth quarter sales enhances future net interest income while providing additional balance sheet flexibility as we grow. We estimate the payback on the third quarter security sales to be less than 3.5 years. Overall, we experienced a million linked quarter increase in net interest income, resulting primarily from lower funding costs and moderate loan growth. Our net interest margin expanded to 2.98% and we expect additional net interest margin expansion resulting from the redemption of approximately $93 million of supported debt on February 15, 2026 . The fourth quarter new loan production totaled approximately $327 million compared to third quarter production of approximately $500 million. Of the new loan production $25 million funded during the quarter with the unfunded portion of this quarter's production expected to fund over the next 6 to 9 quarters. Excluding regular amortization and line of credit activity, fourth quarter payoffs totaled approximately $164 million. While higher than the third quarter payoffs of $117 million, it was the second lowest quarter for payoffs during 2025. Third quarter CRE payoffs included 28 loans secured by industrial, retail and multifamily, medical office, general office and commercial land. Most of these were concentrated in 5 industrial properties and 8 retail properties. Outside of CRE payoffs, we did exit a C&I participation during the quarter due to pricing well below our comfort zone our loan pipeline dipped to $1.5 billion mid-quarter, but rebounded after the first of the year to just over $2 billion today. The pipeline is well balanced with approximately 42% term loans and 58% construction or commercial lines of credit. This mix is unchanged from the third quarter. C&I-related opportunities represent approximately 20% of today's total pipeline, and that's down slightly from third quarter's 22%. Credit quality remains strong during the fourth quarter, nonperforming assets increased $2.6 million, primarily related to a $2.4 million loan secured by a small residential condo project. but remain concentrated in the previously disclosed $27.5 million multifamily loan we moved into the nonperforming category during the first quarter of despite this loan not paying off in the fourth quarter, we remain optimistic that the borrower will finalize their refinance within the next 2 weeks. As a percentage of total assets, nonperforming assets remained low at 0.45% when considering our net income, earnings per share and other financial results, excluding the onetime loss on the sale of securities, we had an excellent quarter. Overall, the markets we serve remain healthy, and the Texas economy is anticipated to grow at a faster pace than the overall projected U.S. growth rate. With that, I'll turn the call over to Julie. Julie Shamburger: Thank you, Keith. Good morning, everyone, and welcome to our fourth quarter and year-end call. For the fourth quarter, we were pleased to report net income of $21 million, an increase of $16.1 million or 327.2 and Diluted earnings per share were $0.70 for the fourth quarter, an increase of $0.54 per share linked quarter. We reported net income of $69.2 million for 2025, a decrease of $19.3 million or 21.8% and and diluted earnings per share of $2.29 compared to $2.91 for 2024. The decrease was driven by the restructuring of the AFS securities portfolio. As of December 31, loans were $4.82 billion, a linked quarter increase of $52.7 million or 1.1%. The linked quarter increase was driven by an increase of $29 million in construction loans, $24.1 million in commercial real estate loans and $14.8 million in commercial loans, partially offset by decreases of $6.2 $6 million in municipal loans and $5.7 million in 1 to 4 family residential loans. The average rate of loans spend during the fourth quarter was approximately 6.6%. As of December 31, our loans with oil and gas industry exposure were $71 million or 1.5% of total loans compared to $70.6 million or 1.5% linked quarter. Nonperforming assets remained low at 0.45% of total assets as of year-end. Our allowance for credit losses decreased to $48.3 million for the linked quarter from $48.5 million on September 30. And Linked quarter, our allowance for loan losses as a percentage of total loans decreased 1 basis point to 0.94% at December 31. During the fourth quarter, we continued restructuring a portion of our AFS securities portfolio that included sales of approximately $82 million of lower-yielding longer-duration municipal securities. Purchases of $373 million, primarily mortgage-backed securities occurred during the fourth quarter to replace securities sold during the restructuring of the AFS portfolio during the third and fourth quarters. The purchases more than offset sales maturity and principal payments, resulting in an increase in the securities portfolio of $147.9 million or 5.8% to $2.70 billion at December 31 when compared to $2.56 billion on September 30. The increase for the linked quarter brought the total securities portfolio to a level consistent with the first and second quarters of 2025. As of December 31, we had a net unrealized loss in the AFS securities portfolio of $767,000, a decrease of $14.7 million compared to $15.4 million last quarter. The improvement occurred primarily due to the restructuring of the AFS portfolio and an improvement in the remaining AFS portfolio. There were no transfers of AFS securities during the fourth quarter. On December 31, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $788,000 compared to $905,000 linked quarter. This unrealized gain more than offset the unrealized losses in the AFS securities portfolio. As of December 31, the duration of the total securities portfolio was 7.6 years compared with 8.7 years at September 30 and the duration of the AFS portfolio was 4.8 years compared to 6.5 years on September 30. At quarter end, our mix of loans and securities was 64% and 36%, respectively. The slight shift compared to 65% and 35%, respectively, last quarter. Deposits decreased $96.4 million or 1.4% on a linked-quarter basis due to a decrease in broker deposits of $233.5 million partially offset by an increase of $40.8 million in retail deposits and an increase of $86.3 million in public some deposits. On February 15, we will redeem our $93 million of subordinated notes due in 2030. The rate on the note adjusted during the fourth quarter to a floating rate of 7.1%, our capital ratios remained strong with all capital ratios well above the threshold for well capitalized. Liquidity resources remained solid with $2.78 billion in liquidity lines available as of December 31. And and repurchased 369,804 shares of our common stock at an average price of $28.94 during the fourth quarter. There have been no purchases of our common stock since December 31, and we have approximately 762,000 shares remaining authorized for repurchase. Our tax equivalent net interest margin was 2.98%, an increase of 4 basis points on a linked-quarter basis, up from 2.4% at the end of the quarter. Our tax equivalent net interest spread for the same period was 2.31%, an increase of 5 basis points from 2.26% the increase in the net interest margin and net interest spread is primarily due to lower funding costs. For the 3 months ended December 31, we had an increase in net interest income of $1.5 million or 2.7% compared to the linked quarter. Noninterest income, excluding the net loss on the sale of AFS securities increased 4, or 4% for the linked quarter, primarily due to an increase in deposit services, billing income and brokerage services income partially offset by a decrease in other noninterest income. Other noninterest income decreased primarily due to a decrease in swap fee income. Noninterest expense was $37.5 million for the fourth quarter, consistent with the last quarter with a slight decrease of $57,000. Our fully taxable equivalent efficiency ratio decreased to 52.28% as of December 31 from $52.99 as of September 30, primarily due to an increase in total revenue. We have budgeted a 7% increase in noninterest expense in 2026 over 2025 actual primarily related to salary and employment benefits, software expense, professional fees, retirement expense and a onetime charge of approximately $800,000 and in connection with the redemption of the subordinated notes on February 15. During 2025, we budgeted for several software initiatives that did not materialize, and we have allocated those into the 2026 budget. For the first quarter of 2026, we anticipate noninterest expense of approximately $39.5 million. We recorded income tax expense of $3.8 million compared to $189,000 in the prior quarter, an increase of $3.6 million, driven by the loss on sales of AFS securities in the third quarter. Our effective tax rate was 15.3% for the fourth quarter, an increase compared to 3.7% last quarter. And we are currently estimating an annual effective tax rate of 17.4% for 2026. Thank you for joining us today. This concludes our comments, and we will open the line for your questions. Operator: [Operator Instructions] Your first question comes from the line of Woody Lay with KBW. Wood Lay: Then I believe you just called out expense growth is what you're budgeting in 2026. I was just hoping to get a little more detail and exactly how much of the incremental expense build is related to these software projects? And could you also talk about the hiring strategy and how that's built into the budget? Keith Donahoe: Yes. I'll hit at a high level and Julie can provide some details. So I don't have the breakdown in front of me on the bench between software and FTEs. But what's going -- what's really happening is on the software front, we are looking at moving our core out link. And so we're currently hosting it on-premise, and we're going to take it off premise. In the long run, we anticipate that to create some efficiencies for us. as we move into expanded growth mode and/or if we make an acquisition that's going to make that more efficient prospect for us. So that's part of it. We're also starting an initiative to build out a data platform which we do believe will give us over time, much more insight into the raw data that we have in multiple systems right now. So those are the 2 biggest components of the software spend from an FTE standpoint, some of this is we hope will make us more efficient in the long run as well because we are changing some of our processes within the loan origination group. And we are kind of where everybody is in right now. We're pumping high volume of loan grocer system that probably wasn't ready for it yet. So we are making some personnel changes and shifting people around, which means also adding some staff in certain situations. So that's bulk of what we're doing, Julie, if you've got any additional detail? Julie Shamburger: I was just going to point out on the FTEs, since December 23, our FTEs have been down about 6% actual number of FTEs. So that speaks somewhat to Keith's comments about adding some staff. Also as far as the numbers in the software and data processing, we've got about $2.3 million, $2.4 million additional in the budget over 2025 spend. So I don't know if that answers your question, Wood, the software and data processing, which is where combined how it's reported in our -- all of our filings in the 10-Q and 10-Ks and earnings. Wood Lay: Got it. That's really helpful color. I appreciate that. Maybe a follow-up. You mentioned working. Julie Shamburger: I was just going to say that the $39.5 million that I forecasted, if you will, for the first quarter doesn't reflect the full 7% as these are not all day 1 increases. We expect them to come in over the course of the year. So I just wanted to add that color as well. Wood Lay: Yes. Appreciate that. And maybe a follow-up, you mentioned the core switch might help with M&A down the road. And just wanted to get your thoughts on just given the deal activity we've seen recently in Texas, how you are thinking about M&A for sell side in the current environment? Keith Donahoe: Yes. It's still part of the strategy. we are open to discussions. Again, as I've told a lot of folks, we're not going to acquire just to acquire. We're going to be strategic. If it's filling out a geography for us, and/or picking up. We've got -- as an example, we've got only a loan production office in Dallas, if we can find the right target in Dallas, that would be a good expansion for us because it would help us fill out the Metroplex. Same thing in Houston, we've got effectively a loan production office. We are opening a new retail location in the Woodlands and which should be opening in the next 60 days. But it's those target areas. And even in Austin with only 2 locations. If the right opportunity comes around, we are discussing those situations and are open to it. I hope that helps. Wood Lay: Yes, that definitely does. All right. That's all for me. Operator: Your next question comes from the line of Michael Rose with RJ. Michael Rose: Maybe we can just start on the margin. Obviously, the balance sheet restructuring on the securities restructuring was smaller this quarter than than last, but you are going to redeem the sub debt that you mentioned. Just with those puts and takes in the loan pricing competition, things like that, can you just give us some expectations on maybe what the first quarter margin could look like? Keith Donahoe: Yes. It's going to be positive, although it will be muted. I think we'll see a bigger pickup as we move through the rest of the year. We do have a onetime charge coming in the first quarter for the redemption. But directionally, it's going to be positive, but -- and pick up towards the end of the year. Julie Shamburger: From the standpoint of the sub debt, it repriced in the middle of the fourth quarter, and it's going to go away in the middle of the first quarter. So strictly with respect to the $93 million, it's going to have about the same impact in the first quarter as it did in the fourth. But when those sources of funding are replaced in the second quarter, we'll certainly see we expect for sure to see some improvement just with respect to that 1 piece of funding, if that makes sense. Michael Rose: Okay. Yes. Thanks for the clarification, Julie. I appreciate it. And then maybe as we just think about loan growth, I appreciate the comments at the beginning of the call just around some of the production and paydown activity. I know paydowns are really difficult to forecast. But just given some of the investments that you've made in people and opening up new locations over the past few years. Should we think about a higher level of production, it seems like the environment is pretty conducive for loan growth here. Just wanted to get a sense for how we should kind of think about at least on the production side as we move through the year. Keith Donahoe: Yes. From a production standpoint, I anticipate us to probably exceed 25%, but we do have a large number of payoffs that are in our forecast, some of which are these construction projects that have stayed on our books longer than what they normally would as these projects are finished and stabilized occupancy comes around and so we've got a high number of those maturities happening this year. So we anticipate some of those moving out into the permanent market and/or sales. So those are some of the headwinds that we're still facing I'm excited because I was a little concerned that the pipeline dropped to $1.5 billion in the middle of the fourth quarter but we have rebounded strongly, and we're back up over $2 billion now. Over half of that pipeline is in the very early stages, which means it hasn't run through our credit screening process, but they're starting to move through. But we do have a significant number in the closing process right now. So I would love to tell you, I'm super optimistic that we may beat our numbers, but that right now, it's too early in the year to make that call. But we are very active across all of the markets and I do anticipate it being a good year for us on the loan growth side. Michael Rose: I appreciate it, Keith. And maybe just one final one for me. obviously, the buyback stepped up a little bit this quarter. The restructuring is also a little bit smaller than the third quarter as well. But how should we think about kind of the pace of buybacks from here? You guys will have decent capital accretion as we kind of move through the year, stock is still relatively attractive on a tangible basis. Just wanted to get your thoughts, updated thoughts on the buyback. Keith Donahoe: Yes. I think from a -- just a strategic standpoint, we're going to continue to be opportunistic with it. What may impact that is if there is an acquisition in the future. But at the same time, those are probably -- when you look at capital strategy, those are -- first, we've got the sub debt retirement is obviously the #1 capital strategy. close behind that is stock buyback and then M&A. So we're -- all of that's going to work together, but -- and 1 of them may impact the other one, but we'll see how that goes this year. Michael Rose: All right. I'll step back. Operator: Your next question comes from the line of Brett Rabatin with Hovde. Brett Rabatin: Julie wanted to start off on just the fee income outlook from here. And it seems like brokerage has had some pretty good trends. I was just curious if there were any drivers that you were specifically thinking about the '26 in terms of fee revenues? And then just any thoughts on the outlook for 2026? Julie Shamburger: Sure, Michael -- Brad, sorry, I'll take that one. We are expecting an increase in -- a pretty nice increase in our fee income. We've put in our budget about $1.5 million for an increase. That's what we're budgeting. And a lot of it does come -- most of that does come in the trust income fees. We've -- I think we told you on the last couple of quarters that we have picked up some additional talent in that area, and we've built up a really strong team that we're excited about. And even looking to to increase that team into the Fort Worth North Texas area. Right now, it's pretty much -- well, it is completely in East Texas and Southeast Texas areas of our market areas, but we are looking to increase it in the North Texas area. So we have budgeted additional fees there. And looking for some additional increase in just treasury fees and as well in the brokerage services because we have seen some nice pickup in those 2 areas over the last year. And that's where most of the increase is coming from. Brett Rabatin: Okay. That's helpful, Julie. And then I wanted to just go back to the securities portfolio and just -- are all the actions that you guys have anticipated played out from here? Is there anything else that you might want to do? Or is basically anything from here would be more opportunistic relative to rates changing? Keith Donahoe: Yes. For us, we're going to continue to be opportunistic with it. And we're sitting here today, rates aren't in the right position for us to continue to make moves, if they do, and we're watching -- it's a daily process for us. And so if we're seeing the right signs, we will make those moves. But right now, we're in a holding pattern, if you will. Brett Rabatin: Okay. And then maybe lastly, just -- you've talked a little bit about it on hirings. There's been quite a bit of M&A activity in Texas was just curious, Keith, any thoughts on that disruption, if that's an opportunity for you maybe in the Dallas market, Fort Worth market, with either people or clients? Is there anything that you're specifically targeting related to disruption? Keith Donahoe: Yes. We're seeing opportunity both from a people -- on the people side as well as customer side. We've been working on a couple of C&I opportunities in the Metroplex that are sort of being disrupted because of the acquisitions we're seeing Obviously, the transaction that was announced yesterday in Houston, I think we could see some activity out of that, but it's too early to tell that we have our antenna up, and we are looking and we'll be looking for both customer displacement as well as employee displacement. So yes, we're active in that and we'll continue to be so. Brett Rabatin: Okay. Great, for the color. Operator: Your next question comes from the line of Jordan Ghent with Stephens. Jordan Ghent: I just wanted to ask a question on M&A, kind of going back to that. How do you guys think about that as far as the target asset size and especially in relation to crossing $10 billion? Keith Donahoe: Yes. I mean it still remains that we aren't going to buy something in the $2 billion category. We would be below 1 -- I mean, 1.5 roughly. But if there's an opportunity that can spring us over that in a significant way, we will look at that as well. But as you know, in the state of Texas when you start getting into the $3 billion to $5 billion range, those are fewer. So there's more opportunities in the lower than $2 billion market. And we're looking and if we can get one down that gets us close, and that helps us get to the point that we can spring over 10 with the second transaction. So we're -- it's a little bit of puzzle will put together, but we are looking at opportunities and continue down the same strategy that we've had in the last couple of years on that topic. Jordan Ghent: Okay. And then maybe just one follow-up question for Julie on the operating expense for that 1Q 26 number, the 39.5%, does that include that onetime charge? Or is that excluding that onetime charge of $800,000. Julie Shamburger: Yes, Jordan, it will include it. Operator: There are no further questions at this time. I will now turn the call back to Keith Donahoe, President and CEO, for closing remarks. Keith Donahoe: Thank you, everyone, for joining us today. We appreciate your interest in Southside Bancshares and the opportunity to answer your questions. We're optimistic about 2026 and look forward to reporting first quarter results during our next earnings call in April. Thank you. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Greetings and welcome to the Five Point Holdings' Fourth Quarter and Year-End 2025 Conference Call. As a reminder, this call is being recorded. Today's call may include forward-looking statements regarding Five Point's business, financial condition, operations, cash flow, strategy, acquisitions and prospects. Forward-looking statements represent Five Point's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause Five Point's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in today's press release and Five Point's SEC filings, including those in the Risk Factors section of Five Point's most recent annual report on Form 10-K filed with the SEC. Please note that Five Point assumes no obligation to update any forward-looking statements. Now I would like to turn over the call to Dan Hedigan, President and Chief Executive Officer. Daniel Hedigan: Thank you, Vaughn. Good afternoon, and thank you for joining our call. I have with me today, Kim Tobler, our Chief Financial Officer; and Leo Kij, our Senior Vice President of Finance and Reporting. Stuart Miller, our Executive Chairman; and Mike Alvarado, our Chief Operating Officer and Chief Legal Officer, are joining us remotely. On today's call, I will review our fourth quarter and full year 2025 results, which marked another important milestone for Five Point. I'll discuss our operational progress during the year, highlight several major accomplishments across our communities and outline our strategic priorities as we move into 2026. Ken will then walk through our financial results in more detail and review our outlook. We'll open the line for questions following our prepared remarks. Turning first to our results. I'm very pleased to report that 2025 was another record year for Five Point despite challenging market conditions. In the fourth quarter, we generated $58.7 million in net income, resulting in annual consolidated net income of $183.5 million, exceeding our prior record set in 2024. Our net income for the year exceeded the revised guidance we issued in Q2 2025 by roughly $6 million, reflecting our team's expertise and consistent execution across our platform, disciplined capital management and continued pricing strength at the Great Park. Beyond our strong financial results, we also obtained critical entitlement approvals during the fourth quarter at both Valencia and the Great Park. I'll provide additional detail later in the community updates. These entitlements will enhance our near-term cash flows by creating a foundation for the company's future development. It goes without saying that we could not have hit these operational and financial milestones over the past few years without the dedicated and focused efforts of our small and efficient hard-working team. During the 3 months ended December 31, 2025, we were able to close meaningful land sales of both of our active communities. In Valencia, we closed an industrial land sale consisting of 13.8 acres for a purchase price of $42.5 million. At the Great Park, the venture closed 3 new home programs with 187 homesites on 19.7 acres for an aggregate base purchase price of $181.5 million. As a result of Great Park operations during the quarter, we received $73.6 million in distributions and incentive compensation payments from the Great Park Venture. Let me now talk about the market. 2025 unfolded against the housing market that remained challenging, shaped by economic uncertainty, elevated interest rates and affordability constraints. Even so, our results underscore the resilience of our assets, which in part derived from the consequences of operating in supply-constrained California markets. At the Great Park, homebuyer and builder demand remained strong throughout the year, allowing us to close the sales on 13 different programs consisting of 920 homesites while maintaining -- while also maintaining pricing discipline. In Valencia, although home sales volumes were more modest and we like to delay residential land sales to our guest builders, the long-term value of the asset was significantly enhanced by securing major entitlement approvals that will support the next phase of our residential and industrial development activity. As a number of public homebuilders have recently noted, homebuyer demand nationally has continued to be tempered by ongoing affordability headwinds. We have seen this impact more in Valencia than in the Great Park, but we believe that demand will continue to be supported by the persistent undersupply of housing in our core markets. As we look ahead, we expect that despite intermittent challenges from interest rates or other factors that affect consumer sentiment, we should see growing buyer confidence and moderating interest rates translate into improving demand for well-located homesites. Against this backdrop, in 2025, we significantly strengthened our company. From a financial perspective, during the year, we materially enhanced our balance sheet and capital structure. We refinanced our senior notes, issuing $450 million of 8% notes due October 2030 and repaying another $75 million, which will reduce our annual interest expense by approximately $20 million. Since January 2024, we have paid down a total of $175 million in debt. Additionally, we expanded and extended our revolving credit facility to $217.5 million with a new maturity of July 2029. These actions greatly reduced our near-term refinancing risk while preserving substantial liquidity. We ended the year with cash of $425 million and total liquidity of $643 million. Importantly, our balance sheet and liquidity provide us with exceptional flexibility around capital allocation, including the ability to engage growth opportunities, which I will discuss later, as well as the ability to potentially return capital to shareholders over time. To be clear, however, our first priority is to pursue our growth strategy as we seek to expand recurring revenues. From an operating standpoint, 2025 was defined by securing critical entitlement approvals in Valencia and the Great Park, steady demand at the Great Park, continued progress on land development activities for the next phase of infrastructure at Candlestick and the successful closing and integration of the Hearthstone land banking platform, which added a pivotal new earnings stream to our business. Before turning to community updates, I want to briefly review our operating and growth strategy, which continues to guide our decision-making. Our strategy rests on 4 core pillars. First, maximizing the value of our existing communities. This means aligning land sales with builder demand, pacing development appropriately and maintaining the flexibility to be patient when market conditions warrant it. Second, maintaining a lean operating structure. Even as we've grown earnings and expanded our platform, we remain disciplined in managing overhead and fixed costs. Third, matching development spending with revenue generation, ensuring capital is deployed efficiently and not too far in advance of monetization. And fourth, expanding our platform through targeted growth initiatives, most recently through the addition of Hearthstone and its short-term land banking business. Let me now provide you with some updates on our communities, starting first with the Great Park Neighborhoods. During the fourth quarter, builders in our Great Park community sold 78 homes versus 187 in Q3. This decrease in sales is primarily attributable to seasonality and reduction in available home supply as existing collections sold out. We currently have 12 actively selling programs in the Great Park Neighborhoods with 8 additional programs planned to open later this year. These current and upcoming programs will ensure our guest builders can continue delivering a wide variety of housing options throughout Great Park Neighborhoods. During the year, we closed multiple large residential land sales, many of which incorporated price participation structures designed to balance near-term certainty with long-term upside. The 3 programs we closed in the fourth quarter utilized this price participation model. An average base purchase price for these fourth quarter sales was $9.2 million per acre before taking into account potential price participation. These transactions spoke for our ability to adapt structure without sacrificing value. We currently are in the bidding process with builders for 4 new residential programs totaling approximately 27 acres. We expect to complete the bidding process and close these land sales by the end of this year. Importantly, we also received approval from the City Council for new entitlements that will allow us to convert approximately 100 acres of commercial land into additional market rate homesites, further advancing the value of this community. Next, I'll move to Valencia, our other active community. Valencia is still in the early stages of its development and has many future phases of land delivery ahead of it, which will enable us to provide much-needed housing in the Los Angeles market. Home sales showed improvement during the quarter as our guest builders sold 70 new homes versus 50 in Q3. During the fourth quarter, 2 programs sold out in Valencia, and we now have 10 builder programs open and actively selling. Additionally, we anticipate 6 new programs will open during 2026, offering prospective homebuyers additional home product options. As I mentioned, we closed our first significant industrial land sale in over 15 years at Valencia during the fourth quarter, consisting of 13.8 acres for a purchase price of $42.5 million. In order to optimize land values, we elected to delay residential land sales in 2025. We are currently talking to our guest builders about potential land sales in 2026. Although we did not complete any residential land sales, 2025 was a transformational year for Valencia as we received unanimous approval from Los Angeles County Board of Supervisors for the Entrada South and Valencia Commerce Center entitlements. Like California and Valencia, in particular, have a long history of land use litigation, challenging new housing projects, which unfortunately, we've had to build into our business planning, we're happy to report that no litigation was filed to challenge the approval of these communities, an outcome that will allow us to accelerate our development time line. Entrada South is expected to consist of approximately 120 net acres of residential land, over 1,300 market rate homesites and approximately 40 net acres of commercial land, while Valencia Commerce Center is expected to include approximately 110 net acres and will cater towards industrial-focused uses. We're also pursuing approvals for 3 additional villages. When approved, these villages, combined with existing entitlements will provide over 10,000en titled homesites, creating a deep pipeline for future land sales to help meet demand in the county's chronically undersupplied housing market. These approvals will substantially enhance the long-term value of Valencia and will position it to become an increasingly meaningful contributor to our results. Turning to San Francisco. We're finalizing engineering for the next phase of infrastructure and we're working with local agencies and ministerial infrastructure permits for the initial site work. We still expect to begin this initial site work at Candlestick in the first half of 2026. Now let me discuss Hearthstone. We closed the acquisition in Q3 of 2025 and the Five Point and Hearthstone teams hit the ground running. I want to reiterate how excited we are to have this incredible talented and experienced group from Hearthstone as part of Five Point. At closing, Hearthstone had approximately $2.6 billion of assets under management and that figure has since grown to approximately $3.4 billion. Additionally, we anticipate securing $300 million to $500 million of newly originated capital commitments in the first quarter. In 2025, Hearthstone contributed $11.8 million of management fee revenue and $3.5 million of net income to Five Point's consolidated results. Beyond the near-term financial contribution, Hearthstone considerably expands our relationship with institutional capital partners and builders and provides a scalable platform for fee-based earnings growth. With Hearthstone, Five Point now participates in both long-duration master planned community development and shorter duration land banking, creating a more balanced and diversified earnings profile. Now that we are well into the process of integrating Hearthstone, we're exploring additional revenue growth options available to Five Point. We're currently evaluating middle duration opportunities in the land ecosystem in order to grow a durable platform for the future. While I can't provide further information at this juncture, our management team is focused on leveraging our experience, balance sheet and capital relationships to pursue opportunities utilizing outside capital partners to create additional fee-based revenue streams using an asset-light approach. We expect to have more to report on these initiatives on future calls. Before I wrap up, let me provide an outlook for 2026. Based on what we have seen today, we expect consolidated net income in 2026 to be approximately $100 million. We expect our earnings will be weighted more heavily towards the second half of the year as land sales and fee-based income accelerate. The volume and timing of our planned land sales are largely a reflection of our strategy of matching sales to absorption of homes in our communities in order to optimize land value. Let me conclude by saying how proud I am of what our team accomplished in 2025. We delivered record earnings, strengthened our balance sheet, advanced major entitlements and expanded our platform in a meaningful way, all while maintaining a disciplined and patient approach to capital deployment. Five Point enters 2026 with exceptional liquidity, a deep pipeline of entitled land and a broader set of tools to create value across the land development cycle. We believe this positions us well to continue delivering consistent performance and long-term value for our shareholders. With that, I'll turn it over to Kim to walk through the financial details and outlook in more depth. Kim Tobler: Thank you, Dan. As Dan shared, we finished a challenging year strongly and are positioned to effectively bring land in our existing communities to market, grow our Hearthstone land banking platform and seek other growth opportunities in coming years. I'm going to review our fourth quarter and annual results for our fiscal year ended December 31, 2025. I will then conclude with some guidance on what we are expecting in 2026. In the fourth quarter, we recognized $58.7 million of net income. This is made up of the following components: we added $42.5 million industrial land sale at our Valencia community and reported a 31.25% gross margin. We also had $33 million of management services revenue, $24.6 million associated with our management of the Great Park Venture and $21.2 million of which is incentive compensation. And finally, $8.4 million associated with Hearthstone. Our fourth quarter SG&A was $16 million. We recognized $44.9 million of equity in earnings from our unconsolidated entities, $44.2 million of which was generated by the Great Park Venture. The equity and earnings from the Great Park Venture resulted from net income of $128.2 million, which was largely attributable to land sales revenue of $181.5 million from closings in the quarter, for which we reported a 75.5% gross margin. Finally, we recognized $8.9 million of tax expense. As previously noted by Dan, our results for 2025 improved relative to 2024, demonstrating the impact of the sustained focus and operational discipline we have maintained over the past several years. For the year 2025, we recognized $183.5 million in net income that is made up of the following components: our fourth quarter industrial land sale at Valencia that I previously mentioned. We also had $65.3 million of management services revenue, $53.5 million associated with our management of the Great Park Venture, $40 million of that, which is incentive compensation, and $11.8 million associated with Hearthstone's 5 months of activity. 2025 SG&A was $60.6 million, which was more than 2024 SG&A of $51.2 million. That increase was largely attributable to the Hearthstone acquisition costs, increased share-based awards granted over the past 2 years, and performance-based awards reaching established goals. We recognized $203.6 million of equity in earnings from our unconsolidated entities, largely made up of $201.3 million from the Great Park Venture. The equity in earnings from the Great Park Venture was attributable to Five Point share of the venture's net income of $584.5 million, which was derived from revenues of $825.7 million. Additionally, we recognized $28.9 million of tax expense. In addition to what Dan shared about our cash and liquidity, I also want to add that at the end of the year, our debt to total capitalization was down to 16.3% compared to 9.6% at the end of 2024. Now a few words about our Hearthstone operations. As Dan mentioned, we ended the year with approximately $3.4 billion of assets under management, which is tracking with what we had expected. In the fourth quarter, Hearthstone generated revenue of $8.4 million and net income of $3 million. For the 5 months of 2025 that Hearthstone was part of Five Point, it generated revenue of $11.8 million and net income of $3.9 million. I'd like to note that included in calculating that income was intangible asset amortization associated with the purchase accounting of approximately $800,000. We are expecting to exceed $4 billion of assets under management before the end of 2026 and expect revenue and net income to grow commensurately. Last year, I recounted the financial progress that Five Point had made since 2022. I'd like to review that again while including our 2025 results. At the end of 2022, we reported a $34.8 million net loss and finished the year with $131.8 million of cash and senior notes outstanding of $625 million. For 2023, we reported $113.7 million of net income and finished the year with $353.8 million in cash and senior notes still of $625 million. For 2024, we reported $177.6 million of net income. We paid our senior notes down by $100 million to a balance of $525 million and ended the year with $430.9 million of cash and total liquidity of $555.9 million. This year, we are reporting $183.5 million in net income. We paid our senior notes down by an additional $75 million to a balance of $450 million and are now ending the year with $425.5 million of cash and total liquidity of $643 million. We are confident in the actions we have taken to strengthen our financial condition as well as the successes we have recently reported with additional entitlements at the Great Park and Valencia. I'd like to conclude by giving some context to the guidance that Dan shared in his remarks. At the beginning of 2026, we have total -- we have a total of approximately 155 net acres of residential land remaining at the Great Park. We also have approximately 55 net acres of residential land, 11 net acres of retail land and 13 net acres of industrial land available at Valencia. These numbers do not include the recently approved entitlements at Entrada South and Valencia Commerce Center that Dan mentioned. We expect to start generating sales from these recently approved entitlements early in 2028. In 2026, we currently expect to sell 20 acres of land in Valencia and 50 acres of land in the Great Park. These sales, together with the contribution of the Hearthstone activities, is expected to result in approximately $100 million of net income for 2026. We expect the majority of the income to be earned in the second half of the year and are expecting a small loss in the first quarter of the year since we are not planning to close land sales in that quarter. In closing, our guidance reflects a challenging housing market, and our strategy remains focused on discipline. By aligning land sales with home absorption, we are projecting -- protecting value, managing risk and positioning the business for normalized demand over time. We believe this approach balances near-term caution with long-term opportunity. With that, let me turn it back to the operator, who will now open it up for questions. Operator: [Operator Instructions] Our first question comes from Alan Ratner with Zelman & Associates. Alan Ratner: Congrats on all the progress in 2025, really impressive results in a tough market, tough housing market, at least. So a lot to run through. I guess just thinking about '26, and I appreciate the guidance there, especially on the revenue and the income generation. I'm just curious when you think of your... Kim Tobler: Alan, we lost you. Can you repeat the question? Alan Ratner: Can you hear me okay? Can you hear me now guys? Kim Tobler: We couldn't hear Alan. Alan Ratner: Can you hear me now? Kim Tobler: Hear you, but we could not hear Alan. Alan, is that you? Operator: Alan, can you hear the speakers? Alan Ratner: I can hear the speakers. Can you hear me? Kim Tobler: We hear you now, Alan. Alan Ratner: Okay. Sorry about that. I don't know what happened. So I will start over. And first off, just congratulating you guys on all the great progress you made in '25. So what I was hoping to get, and I appreciate the guidance on the income drivers for '26. When you look, I guess, specifically at the 2 wholly owned projects, Valencia and San Francisco, I was hoping you could walk through a little bit what the expectation is for development expenditures in '26 and beyond. I know you mentioned the new entitlements on Valencia. So curious if we should expect to see a ramp in development spending there. And in San Francisco as well, if you can kind of quantify the ramp there now that you're expecting to begin some work there. Kim Tobler: Thanks, Alan. Just as it relates to San Francisco, we're in the process of permitting right now, which is requiring a great deal of capital. And we also have permitting that's going to be done at Valencia as well. What I'd suggest you use is for both of those projects, about the same as the capital we spent in the current year, which is about $125 million. So that will be spread between the projects and continue at that pace. We're trying to keep that pace constant as we increase the development in both places. Alan Ratner: Got it. That's helpful. And then I think -- I just want to make sure I'm understanding the entitlement approvals that you guys got. You walked through the Valencia one. I think you also have a reference to approvals in Great Park as well. And I wasn't sure, is that additive to the acreage that you guys have previously disclosed as far as what remains saleable in Great Park? Or is that just part of the main... Daniel Hedigan: Alan, Dan here. Can you hear me? Alan Ratner: I can. Yes. I can hear you. Operator: Alan says he can hear you. Daniel Hedigan: Alan, can you hear me? Alan Ratner: Yes, I can hear you. Daniel Hedigan: Alan, are you there? Alan Ratner: Yes. I am. Daniel Hedigan: We're having a little audio problem here. Okay. On your question on -- I think I heard most of your question on Great Park. So Great Park, I think we've been talking about it. We have 100 acres of land that was identified for commercial uses. But we have worked with the city because they were also identified in their RHNA plan. These sites were identified for RHNA units. So we have actually worked with them to convert that commercial to residential uses. So that is -- I think you're asking, that's really additive to anything we had before. Alan Ratner: Got it. So it was 100 acres and now you're up to what you said 150 based on this new approval? Daniel Hedigan: I'm sorry, I missed part of that, Alan. Alan Ratner: You were at 100 acres and now with this RHNA approval, you're at 150. Is that correct? Daniel Hedigan: No -- I'm sorry, yes. So what that is when -- we have land that we have -- we have existing residential land that we have not transacted on. So we still have additional original entitlement. The 100 are additive to that. And so Kim... Kim Tobler: Alan, just to be clear, we have 155 acres left at the Great Park. The 55 was already residential. And that's what was left of the residential that we were working our way through. The 100 was commercial land that has now been redesignated as residential as a result of the entitlements. Operator: There are no further questions at this time. That concludes our question-and-answer session. I would like to turn the floor back over to Dan Hedigan for closing comments. Daniel Hedigan: Well, first, I apologize for that audio problem we're having. So I appreciate everyone's patience. On behalf of our management team, we thank you for joining us on today's call, and we look forward to speaking with you next quarter. Operator: Ladies and gentlemen, that concludes today's conference. Thank you for your participation. Please disconnect your lines and have a wonderful day.
Operator: Good morning, and welcome to the Dover Corporation's Fourth Quarter 2025 Earnings Conference Call. Speaking today are Richard J. Tobin, President and Chief Executive Officer, Christopher Woenker, Senior Vice President and Chief Financial Officer, and Jack Dickens, Vice President, Investor Relations. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, press star then the number one on your telephone keypad. If you would like to withdraw yourself from the queue, you may press star two. As a reminder, ladies and gentlemen, this conference is being recorded and your participation in consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you. I'd like to now turn the call over to Mr. Jack Dickens. Please go ahead. Thank you, Stephanie. Jack Dickens: Morning, everyone, and thank you for joining our call. An audio version of this call will be available on our website through February 19, and a replay link of the webcast will be archived for ninety days. Our comments today will include forward-looking statements based on current expectations. Actual results and events could differ from those statements due to a number of risks and uncertainties, which are discussed in our SEC filings. We assume no obligation to update our forward-looking statements. And with that, I will turn the call over to Rich. Richard J. Tobin: Thanks, Jack. Let's start on Slide three. Overall, we had a good close to 2025. Our fourth quarter results reflect broad-based top-line strength across the portfolio with organic growth up to 5% in the quarter, the highest level of the year. Revenue performance in the quarter was driven by robust trends in our secular growth-exposed markets as well as improving conditions in retail fueling and refrigerated door cases and services. Our strong bookings rates, which were up 10% in the quarter and 6% for the full year, continue to support underlying momentum across the portfolio, providing confidence in the durability of the demand as we enter the New Year. Book to bill was seasonally high for the fourth quarter at 1.02. Segment EBITDA margins improved 60 basis points in the quarter to 24.8%, on volume leverage and ongoing productivity initiatives. All in, adjusted EPS at $9.61 was up 14% in the quarter, beating our raised third quarter guide and 16% for the full year, a very encouraging result. Our solid operational results are complemented by our capital allocation strategy. The acquisitions that we closed in 2025 are off to a very good start, performing above their underwriting cases. Our current acquisition pipeline is interesting and is dominated by proprietary opportunities. Additionally, we initiated a $500 million accelerated share repurchase in November, underscoring our disciplined approach to capital deployment. With meaningful balance sheet flexibility, we remain well-positioned to deploy capital behind opportunities to enhance long-term shareholder value. We are taking a constructive outlook for 2026. Demand trends are solid and broad-based across the portfolio and are supported by our order book with no individual end market presenting a material headwind based on current visibility. Our balance sheet optionality enables us to dynamically respond to market conditions and opportunistically play offense. We are guiding for adjusted EPS of $10.45 to $10.65 a share in 2026, which represents double-digit growth at the midpoint consistent with our long-term trajectory and commitment to driving sustainable value creation to our shareholders. Let's go to slide five. Engineered products revenue was down in the quarter on lower volumes of vehicle services, partially offset by double-digit growth within aerospace and defense components and software. Despite the organic volume decline, absolute segment profit improved in the quarter with margins up over 200 basis points on well-executed structural cost management, product mix, and productivity initiatives. Clean energy and fueling was up 4% organically in the quarter, led by strong shipments and new orders in clean energy components as well as North American retail fueling software and equipment. Margins were down slightly in the quarter due to lower vehicle wash solutions, but still up materially for the year as we track towards our goal of 25% margin for the segment. Imaging and ID was up 1% organically in the quarter on core growth in our core marketing and coding business and in serialization software. EBITDA margin performance remains very good for the segment at 28%. The foreign currency translation and a higher mix of printer shipments slightly weighed on the margin in the quarter. Pumps and process solutions were up 11% organically with growth in single-use biopharma components, thermal connectors for liquid cooling of data centers, precision components, and digital controls for natural gas and power generation infrastructure. Sokora, which we acquired at the end of the second quarter in 2025, continues to outperform its underwriting case. Polymer processing posted its first quarterly organic growth since '24 due to the timing of large deliveries out of our backlog. Pumps and Process Solutions segment margin continues to perform at best-in-class levels. Climate and sustainability technology posted positive organic growth of 9% in the quarter on continued double-digit growth in CO2 refrigeration systems and significant volume improvements in refrigerated door cases and engineering services, which was expected based on the Q3 booking exit rate. Demand for brazed plate heat exchangers, particularly for liquid cooling applications and data centers, continues to show robust momentum with record quarterly shipments in the US in the fourth quarter. Margins were up 250 basis points in the segment on volume leverage, solid execution, positive mix benefits from secular growth-exposed end markets, with a book to bill of 1.21 in the quarter. The outlook for climate sustainability technology is very encouraging for 2026. I'll pass it to Chris here. Christopher Woenker: Thanks, Rich. Let's go to our cash flow statement on slide six. Free cash flow in the fourth quarter was $487 million or 23% of revenue. The fourth quarter was our highest cash flow quarter of the year, in line with historical trends. We are encouraged by Dover Corporation's full-year free cash flow result in 2025, which came in at 14% of revenue, an increase of nearly $200 million over the prior year. This increase was driven by improved cash conversion on higher year-over-year earnings, which more than offset expected increases in capital spend on growth and productivity projects. Our guidance for 2026 free cash flow is 14% to 16% of revenue, as we expect continued strong conversion of operating cash flow. With that, let me turn it back to Rich. Richard J. Tobin: Okay. I'm on slide seven. Full-year bookings were up 6% in 2025 after growing 7% in 2024. Q4 consolidated bookings were up over 10% over the prior year at seasonally high book to bill above one, continuing the trend of bookings momentum we experienced in the last two years. All five segments posted bookings growth in the fourth quarter, signaling broad-based demand strength for 2026. On Slide eight, we highlight the capital allocation results from 2025 with our priorities. Our highest priority capital spending is organic investment, which has proven to drive the highest returns on investment. We stepped up capital spending by over $50 million in 2025 over the prior year, with a healthy balance between growth capacity expansions behind some of our highest priority platforms as well as productivity and automation investments, including some rooftop consolidations. In total, we expect about $40 million of carryover profit from the previously announced productivity actions in 2026. Our next priority is growth through acquisitions. In 2025, we deployed $700 million across four strategic acquisitions in high-end growth markets, three of which are in our highest priority pumps and process solutions segment. These acquisitions are off to a tremendous start as we work to extract synergies through our center-led capabilities and leverage our global scale channels and supply chains. Finally, in 2025, we announced over half a billion dollars of share repurchases, including the accelerated repurchase program enacted in November. With robust cash flow generated in 2025, our dry powder in 2026 remains almost identical to the starting position from the previous year, as we have self-funded our CapEx, M&A, and share repurchases in 2025. We are in an advantaged position, and I would expect that we will be active in 2026. Let's go to slide nine. Engineered products are expected to improve in 2026. Our aerospace and defense components business continues to experience significant demand tied to electronic warfare and signal intelligence solutions. Vehicle aftermarket, which declined by double digits organically in 2025, has shown some signs of moderating demand with constructive booking trends late in '25 and early '26. With the divestitures of the STACO Environmental Solution Groups in 2024 and the growth of other segments in the portfolio, our engineered product segment now accounts for less than 15% of our total portfolio. The outlook for clean energy and fueling remains solid across most of the business. North American retail fueling is in the early innings of what we believe to be a new CapEx cycle, and the outlook in fluid transport and clean energy components is strong, with particularly robust demand in cryogenic. We expect the headwinds from the vehicle wash equipment and software to improve the headwinds in '25 to improve in '26. Clean energy and fueling should be among the leaders in margin accretion in 2026 on volume leverage and integration benefits from clean energy acquisitions. Imaging and ID should continue its long-term steady growth trajectory given its significant recurring revenue base and solid underlying demand. We are encouraged by the recent uptick in printer shipments, building the global installed base for continued long-term recurring revenue attachment. We expect demand conditions to remain constructive in pumps and process solutions in 2026. The outlook for our artificial intelligence and energy infrastructure is robust, including thermal connectors for liquid cooling of data centers, precision components for natural gas infrastructure, and in Secours inspection equipment for high voltage wire and cables. Demand for single-use biopharma components remains solid, driven by production growth and blockbuster drugs and the ongoing shift to single-use manufacturing methods. As noted, we got a tough comp in the first quarter in biopharma due to heavy restocking in early 2025. But overall, the Q4 exit run rate for the business should hold true for 2026. Finally, climate and sustainability technology should sustain its fourth-quarter exit rate into 2026. CO2 refrigeration systems are expected to continue at a double-digit growth clip. We expect the recovery in refrigerated door cases and engineering services to continue with national retailers signaling the intent to resume maintenance and replacement upgrade spending following a period of tariff-related delays. We are experiencing robust demand across all geographies for brazed plate heat exchangers, with noteworthy growth in North America tied to liquid cooling of data centers where we were booked well beyond Q1. Finally, let's go to slide 10. Full-year guidance is on the left. We'd expect seasonality in 2026 to be similar to the last few years, with Q1 volume slowly ramping into peak product delivery periods in the second and third quarters, with the fourth quarter representing an early indication of next year's outlook. We are encouraged by the momentum in our top-line performance, which marks an improvement over several years of organic growth below our long-term standard. Notably, even during that period of moderated top-line growth, our business model showed its strength as we successfully expanded profitability through disciplined cost management, strong margin conversion, and value-creating capital deployment. The setup for 2026 is constructive. We anticipate solid volume leverage on incremental revenue as well as carryover benefits from prior period restructuring efforts and accretion from M&A. We are committed to continuing our long-term double-digit EPS growth trajectory into '26. Finally, I'd like to thank our global teams for their efforts to deliver these last year's results, and we look forward to serving our customers, partners, and investors in the year ahead. Jack Dickens: And with that, let's go to Q&A. Operator: Thank you. If you would like to ask a question, simply press star then the number one on your telephone keypad. If you would like to withdraw yourself from the queue, you may press star two. We'll take our first question from Steve Tusa with JPMorgan. Steve Tusa: Hey, good morning. Good afternoon, I guess. I know. I'm weird. Right. Yeah. Had to eat lunch, delay lunch for you guys. Richard J. Tobin: Yeah. We'll go early in the morning next time around. Steve Tusa: No. It's nice to avoid the other calls. That's helpful. Price cost, what are we looking at this year? I know you guys buy a bit of steel. So are you thinking about managing the raws? Richard J. Tobin: Yeah. I mean, I think that, you know, right now, we should do what we've done every year, probably, like, one, one and a half percent over. Now clearly, we're looking into commodity costs moving up going into the year. We can talk about incremental margin and what that means. So whether we've got to go back to the well or not, we'll see based on the trajectory. Steve Tusa: Okay. So as of now, how much price are you embedding in the guide? Richard J. Tobin: One and a half to two. Steve Tusa: Okay. And then just one more question for you. You were pretty positive over the course of the quarter in your commentary. Anything you've seen in the last month or so or two months that would change that positive view and tone on just the general economy and business? Richard J. Tobin: No. I mean, look. We were looking for the best organic growth quarter for the year, and we got it. We got the margin accretion that we looked for, considering kind of a little bit of the mix differential that we had in Q4 versus the previous couple quarters. And book to bill is over one. So to me, I think that we hit the three kind of data points that we were looking for. Going into '26. You know, our backlogs are good. I think production performance should be pretty good in Q1. Don't get a little excited about production performance delivery because I think we'll really ramp and the seasonality be the same as usual. But overall, yeah. I mean, we like the setup. Steve Tusa: Great. Thanks a lot. Operator: Thank you. We'll take our next question from Julian Mitchell with Barclays. Julian Mitchell: Hi, good morning. Maybe just to start off with very strong margin performance. But when we're thinking about kind of mix for 2026, and I know there's a lot of different businesses, but I suppose you're guiding for the highest organic sales growth in these segments with the lowest EBITDA margin. So maybe help us understand in DCEF and DCS what sort of operating leverage you're aiming for this year. You know, they're sort of outsized cost savings tailwinds, for example, that mean they can have very strong operating leverage, alongside the high volume growth? Richard J. Tobin: Yeah. No. You're spot on. I mean, what we're looking for in DCEF is the leverage on the revenue growth plus that is the segment that'll be impacted the most from prior period restructuring. So the rooftop. That'll come progressively through the year. So I think that the margin enhancement that we'd expect to get there would be a little bit back end loaded just because of the restructuring benefits. The other one is DCST. You saw the margin jump in Q4 of two hundred and fifty basis points comparatively. We'll see. If we can get more on the volume going from there back to the question we had previously, that's where we're a little bit commodity exposed. Particularly in copper. So do we bounce up the top line expectations a little there? To cover that. We'll see as the year goes on. Right now, bought forward enough that we've got a pretty good idea what we'll get probably in the first half of the year. See if we need to take any pricing action there to cover any headwinds we've got on input costs. But you're spot on in terms of the mix. Julian Mitchell: Thanks. That's helpful. And maybe you've mentioned sort of seasonality, Rich, a couple of times as being sort of a normal year ahead. So should we expect, let's say, year-on-year EPS growth and sales growth each quarter to not be that different from the full-year framework on Slide 10 is, you know? Richard J. Tobin: Yeah. Most No, Julian. That's right. Right. And when we looked at consensus for the year, there was Despite the fact that I think for twelve months, it was oddly high for Q1. or not twelve or for nine months, we've been saying over and over again, be careful about So, look, the full year is the full year. We'll hit the full year, but the biopharma mix in Q1. the seasonality should be the same as it's been sitting in your models historically. Julian Mitchell: That's great. Thank you. Operator: Thank you. We'll take our next question from Amit Mehrotra with UBS. Amit Mehrotra: Thanks. Hey, Rich. Good to talk to you. So just a quick question on growth outlook for this year, 4%. Obviously, that's a good number, certainly a better number than the last couple of years, but it's a bit lower than sort of where we exited at in the fourth quarter. So maybe you can talk about it. Is that just prudent conservatism? A little bit about that. And then it looks like if I look at the margin expansion for this year, it seems like the entirety is explained by maybe that $40 million wraparound productivity benefit. Is that right? And maybe is that just the mix effect kind of offsetting some of the volume leverage? Richard J. Tobin: Yeah. I mean, the answer is yes and yes. I mean, it's early in the year. I mean, if you remember I remember sitting here last year talking about our guidance, and then we ran into tariff tumult. So there is an amount of prudence in terms of the top line and the incremental margin. At the end of the day. You know, we talked about input costs and a variety of other things. These are numbers based on what we see in the backlog that we can execute on. Whether we can move them up or not, we'll see quarter by quarter, but you know, bookings momentum has accelerated into the end of last year. So if we get that same kind of acceleration and we get the visibility, as we move through the quarter, then I would expect, you know, I think that we progressively moved up EPS last year. Based on our original guidance. We would expect to kind of look at doing the same thing. Amit Mehrotra: Yeah. That's helpful. And just related to that. So I know there was, like, a $150 million drawdown in refrigeration last year. Obviously, orders perked up in the third quarter and, I guess, are continuing to move in that direction. Do you feel confident you're able to get all of that back from where we stand today? Richard J. Tobin: We're sold out for Q1. That's what I can tell you. So we're booking, and that is relatively short cycle business. And we're booking well into Q2. So, so far so good. Amit Mehrotra: Okay. Very good. Thank you very much. Appreciate it. Richard J. Tobin: Well, yep. Operator: Thank you. Our next question will come from Jess Brock with Vertical Research Partners. Jess Brock: Hey. Thanks. Good day, everyone. Hey, Avery. It's just back on the incrementals and everything. We've touched on this a little bit. But just cutting through all the different mix changes and the like, just want to make sure there's not anything below the line I'm missing. It looks like you're sort of guiding it observed incremental as reported about 35%. Is that right? Or is there something else you know, in between kind of OP and the bottom line to be aware of? Richard J. Tobin: There's nothing really on the bottom line, Jeff. So you're close on the number or right. You're right on the number, more or less. Jess Brock: Yeah. And then, you know, secondhand. Right? So I'll be careful. But you know, there's been some chatter that you've made some noise about you know, kind of transformative sort of deal generational deal, something very large. Maybe just to kind of address your appetite for really large, or are you more inclined to stick with bolt-ons? Anything you could add there? Richard J. Tobin: Well, it's better than the retirement one from last year. So I'll take the I'll take the transformational deal angle. You know, we're not going to talk about anything in the pipeline. It's not been our history here. I mean, we have a very keen eye about execution risk. I'm sure that we'll do some M&A this year. If we were to consider something transformational, it would have to be shareholder-friendly to Dover Corporation at the end of the day. So it's not as if we look at the way that we look at the business and the business that we own and say that we've squeezed everything out of it. And then now we've got to go do something to move it on. I think we've got a good algorithm here with bolt-on deals and growing the top line that we're not required to do anything, I guess, is the best way I can describe it. Jess Brock: Yeah. Hey. And then maybe I'm sorry. It's a third one. Jack, don't get mad at me. But just back on revenues, you noted, you know, maybe there's some conservatism here. But you know, just thinking about this order growth rate that's been ahead of revenues now for a significant period of time and the fact that things like Secora were coming into organic at, you know, like, faster rate. Like, is it just anything that's more long cycle in the orders or something that doesn't convert quickly? You know, to kind of explain that apparent looking disconnect. Richard J. Tobin: I mean, at the end of the day, I mean, three to five, without getting over our skis here, is a pretty good number. But you're right. If I look at the velocity of orders coming in, you could roll forward and see. Q1's always a kind of an interesting quarter for us because we have a lot of production performance and then we ship a lot in Q2 Q3. I think part of it is let's get into Q1. Let's see if we're manufacturing backlog or we're replacing what we're taking in production performance with new order flow. And if that's the case, then, you know, we'll take a close look at the top line. And, again, don't want to repeat myself, you know, we are cognizant about input costs moving up. And if we have to take pricing action, that will actually drive some top-line growth also. Jess Brock: Right. Okay. Great. I'll leave it there. Thanks, Rich. Richard J. Tobin: Yep. Operator: Thank you. We'll take our next question from Joe O'Dea with Wells Fargo. Joe O'Dea: Hi. Thanks for taking my questions. Wanted to start on the retail fueling CapEx cycle side of things and just if you could elaborate on what you're seeing there, some details across regions, how you think that plays out over the course of 2026 in terms of any accelerating demand there? Richard J. Tobin: It's very much a North American phenomenon. We've actually drawn down our exposures in both emerging markets in EMEA. We haven't left, but we've taken that that's actually been a drag on our top line over the last three or four years that we've gone and done eighty twenty on the customer side. And other than that, it's look. Since February, EVs were taking over the world. So there was not a lot of CapEx spent in retail fueling. And that was reflected maybe not in the margin, which I think we've done a fantastic job of, but on the top line. Well, that's kind of turned the corner here. And if you go look at someone like Costco and what margins are fueling are right now, I think it's woken up the market that spreads at the retail are as high as they've ever been. So and that's gonna drive returns on projects. Joe O'Dea: And then just on the restructuring side, you've got the $40 million carryover from actions last year. I think in the past, you've touched on there could be more to do there. And so just how you're approaching that, when you would make any decisions around it, parts of the business that would see a bigger impact if you do decide to do more? Richard J. Tobin: I think we got a pretty full plate on what we're doing now. So there's a lag time between looking at proposals and then enacting them. Like, if you take refrigeration, we're actually going to carry extra fixed costs for the first half of the year as we're taking down one facility and building another one. So we don't really get the benefit of that until the back half of next year. And that's the same for clean energy to a certain extent. But yeah. Look. Every year, we've got a goal of attacking fixed costs. So we'll update you as we take the charges. We'll tell you what they are and where they are. Joe O'Dea: Got it. Thank you. Richard J. Tobin: Yep. Operator: Thank you. We'll take our next question from Nigel Coe with Wolfe Research. Nigel Coe: Rich, I thought it'd be interesting to think about growth, you know, bifurcated between your, you know, the 20% of what you call secular growth markets and that's been growing double digits. And then the trough markets that are, I don't know, 40%, 50% you know, Marks, Web, Bellback, BSG, refrigeration. Just maybe just talk about, you know, what you're seeing in those two buckets in 2026. Richard J. Tobin: Yeah. The growth bucket is going really well. You have really nothing to add to it. So anything that we'd said over the previous three quarters of last year, that trajectory has continued as I'm so we're good there. I mean, the ones that have been a headwind, I mean, in Belvac, that one's easy. We're just gonna have to wait for the CapEx cycle to turn in can making. At least the conversations are getting there, but we don't really see it in backlog yet. On vehicle service group, that has very much been a European story. And that is why despite having the headwind on the top line, you don't see a lot of margin dilution because that's just reflective of the difference between the regions where we make high margins and not. A certain extent. I don't see that improving yet. But we're almost in year three of Europe being down there. So one would expect that that could turn hopefully during the year as we go forward. And refrigeration was an anomaly. I mean, we discussed it at length at the '3. It was deferment but we showed you the backlog building in Q4 and then look at the growth and the margin expansion. We got in Q4. And as I mentioned to one of the questions, we're sold out for Q1, and we're booking well into Q2 now. So it doesn't look like you know, there's always so much we can make in a given year. Right? We're from a capacity point of view because we've actually taken a lot of capacity out there. But with real what we said about going into '26 is reflected in our backlog and was reflected in the revenue growth in Q4. Nigel Coe: Okay. So refrigeration is recovering nicely. Sounds like MOG is still, you know, still some headwinds there. Everything else fairly steady. Is that a good way to summarize that? Richard J. Tobin: Yeah. Yeah. MOG's gonna, you know, MOG's will see it because and you'll see it in the backlog because the dollar value of MOG's orders are so high. You'll know when it's coming. And right now, it's fair to say that the European chemical market is not doing well. Nigel Coe: Yeah. That's not a shock at all. Just a quick clarification on the internal margins. Is there a structuring payback to sustain 35% saving of raw margins, given the mix pressures you've highlighted? So or could that be? Richard J. Tobin: No. I mean, I look like, you know, I think that, you know, when you do the math and you look at the incrementals, I think that there's more upside than downside there. Nigel Coe: Okay. Clear. Thanks, Rich. Richard J. Tobin: Yep. Operator: Thank you. We'll take our next question from Scott Davis with Melius Research. Scott Davis: Hey, good afternoon, guys. Scott. Hey, Scott. Rich, if you take a step backwards, you know, his portfolio has changed quite a bit since you've taken the helm here, but what do you think the entitlement the new entitlement kinda through cycle growth rate is of this portfolio you have now? Is it kinda right we're kinda in that sweet spot around 5%? Is it four to five? Richard J. Tobin: Yeah. I mean, you know, it is somewhere between three to six, depending on GDP and everything else. But you know, clearly can do five. Scott Davis: Okay. That's what I would have thought. And, guys, it's been a kinda been a while since we've talked about, you know, closed the case, you know, that whole nonsense thing that kind of went up and went down. And Yeah. Are would you've got a big installed base, and it's gotta be aging out. Is there any way to think about the age of that installed base and kinda what the and be able to just socialize maybe the pent-up demand how long those things last before they need to be replaced, etcetera. Richard J. Tobin: Well, it's a little bit of a that business is a little bit of a tale of two cities. There's the CO2 rooftop, which is a change in technology play. We're knock wood. We are the North American market leader, and we're a co-leader in Europe, and we're the North American market leader, and we're doing really well. Because for a variety of reasons. And that's that I would put into the kind of the growth platforms and, you know, when Jack gives you those numbers, that CO2 business is in there. On the retail refrigeration door case business, we've taken that business from somewhere around seven or 8% margin up into the very high teens now. We're finishing the last CapEx. We put you know, we've basically rebuilt the industrial footprint there. So what we end up is with, like, a core refrigeration business, which is around a half a billion-ish dollars, at very nice margins and extremely good cash flow because it doesn't hold any working capital. So it's worth significantly more today than it was back in the day when it was a discussion element. We'll grow that business, but we'll grow it for profitability and we'll grow the CO2 side as quickly as we can because that's we're in the early innings there, and we've got a leadership position. Scott Davis: Okay. Helpful. Good color. Thank you. I'll pass it on. Good luck this year, guys. Richard J. Tobin: Thanks. Operator: Thank you. We'll take our next question from Mike Halloran with Baird. Mike Halloran: Hey, good morning. Well, afternoon, everyone. So first on the clean energy margins, prepared remarks, you mentioned that the mid-twenty percent target. Maybe just some timeline on when you think you can get there, Rich. Richard J. Tobin: You're gonna have to walk it up. So, you know, knock wood, should get into the low twenties this year. And then walk it up from there. Can we accelerate it? Gonna depend it on a little bit of mix. And I really wanna see we we still kind of in a transitional period on the footprint side. So what we really get out once we're done and what the benefit of the fixed cost absorption on the is once we get that done. So we're still doing that now and will probably be completed by the end of the year. On that. So just on the top line, we think we can get into the low twenties. From there, it's gonna be on the roll forward of the cost out. And your guess is as good as mine. We're really excited about the longer-term opportunity on the cryogenic side. Which is not a super large business for us, but becoming larger. If that growth rate and that opportunity continues to expand, then we're very excited about it. Mike Halloran: That makes sense. And then you touched on it briefly there, but you know, you've had comments about, you know, there's only so much capacity to drive the growth. At the same time, you're also doing some of these internal initiatives, managing capacity lower. How do you see that push-pull as you work through the year? Are there areas where you might be putting incremental capital to expand capacity? Or do we feel pretty good about the network as we sit here today and then what's left on the pairing side? Richard J. Tobin: Right now, CapEx is coming down in '26 because of the basically, the completion of the expansion capacity and the restructuring capacity. So coming down. We feel good where we are. We are greenfielding a plant or beginning to greenfield a plant in North Carolina. That'll probably take us into '27 by the time that's complete. So, you know, we got a flexible model. I mean, we can kind of expand capacity relatively quickly, but the only new one that I would add to that is the greenfield plan in North Carolina. So besides the ones that we had in flight that we detailed in Q3, Mike Halloran: Thank you. Richard J. Tobin: Yep. Operator: Thank you. We'll take our next question from Andrew Obin with Bank of America. David Ridley Lane: Hi. This is David Ridley Lane on for Andrew Obin. Wondering if you could talk about your exposure on sort of the natural gas power generation side. Do you supply components for just large turbines, or is it small turbines and reciprocating engines as well? And then notably, over the last kind of three, six months, there's been a number of capacity expansions by the equipment providers and to still participate in that. Thank you. Richard J. Tobin: The answer to your question is yes, yes, and yes. So everything from large turbines to midstream to reciprocating compressors, that the large turbine business is kind of front-running the market right now. And while capacity in percentage terms has moved up quite a bit, these are very, very big units. So the unit value is high, but the number of units is not dramatic. We believe that going to be significant follow-on CapEx on the delivery side, meaning getting the natural gas to those turbines. We expect that to kick off hopefully, but expected to kick off in the '26. David Ridley Lane: Got it. And just a sort of clarify a thing from the slides. There's something about price cost in the fourth quarter for the clean energy and fueling segment. Is that kind of one-time? Or Richard J. Tobin: You know what? You got Christopher Woenker: Yeah. It's just a bit of a timing catch-up in terms of when the price comes in relative to the cost. So it's really just a timing thing we see in the fourth quarter. David Ridley Lane: Got it. Okay. Thank you very much. Richard J. Tobin: Thanks. Operator: Thank you. We'll take our next question from Andy Kaplowitz with Citigroup. Andy Kaplowitz: Good afternoon, everyone. Hi, Andy. Hey, Rich. You mentioned as you get better visibility, then you could adjust revenue guidance. But given book to bill has been pretty good over the last couple of quarters and you still seem relatively positive about your markets, do you have visibility at least to continue that near-term book to bill out or over one that you've been delivering? Richard J. Tobin: That, you know, I don't know. Right? As I mentioned in my earlier comments, right, that Q1 tends to be a production month and not much of a shipment month. Right? So and part and parcel to having a discussion I mean, I can't believe we're giving out guidance and talking about moving guidance already. But part and parcel to that is getting through Q1 and seeing whether we're eating into our backlog or we're neutral or is backlog building even in excess of production, which is basically what we'd have to add into the back half of the year. So, you know, look, we were here the same time last year, and then the s hit the fan in February. So let's get into the year. Right now, all things look good in terms of trajectory, you know, exit trajectory and backlog trajectory and orders and everything. Let's kind of walk it into Q1 and we'll give you an update when we get there. Andy Kaplowitz: That's helpful, Rich. And then I want to ask you. Know it's kind of a GDP, maybe a GDP plus business, but what if anything gets you going there a little bit more? I know the low single-digit forecast for '26 and you did mention you're in the middle of the sort of multi-year margin expansion progression and structural cost out. So where are you in that progression? Do you still have, you know, good margin upside in that segment? Richard J. Tobin: We're actually deploying a bunch of CapEx into that business right now. Kind of some modernization and productivity. So if that all goes well, that'll drive margin. From there, you know, it's consumer goods exposed. I don't follow consumer goods that closely. Well, whether we see capacity expansions there, which would drive kind of the organic growth higher than kind of normal. But, I mean, it's such a messy number. Because it's a global business and it's got a lot of FX running through it. We try not to get above our skis. On kind of the longer-term growth rate because it flops around. But it's a highly valuable business when you look at the cash flow dynamics of it. Andy Kaplowitz: Helpful, Rich. Thanks. Operator: Thank you. We'll take our next question from Brett Linzey with Mizuho. Brett Linzey: Hey, good afternoon all. Hi. Hey. Question on the 20% of the business tied to the secular market. You've done a good job highlighting that over the last several quarters. Curious postmortem, how did that group of businesses grow in 2025? And then are you still seeing a pretty solid double-digit type of rate here for '26 for that 20%? Richard J. Tobin: Yes and yes. Brett Linzey: Okay. And then, a follow-up on capital allocation. So slide number eight, the dotted bar stack frames the optionality on the flex leverage. Maybe just an update on the investment-grade leverage ratio that's implied there. I would imagine that it's calculated off of full-year 2025 EBITDA. Right. And it is probably the max leverage with some wiggle room kinda to maintain investment grade. So it's just simple math. Richard J. Tobin: Yep. Brett Linzey: Okay. Got it. I will leave it there. Thanks a lot. Richard J. Tobin: Thanks. Operator: Thank you. We'll take our next question from Joe Ritchie with Goldman Sachs. Joe Ritchie: Hey, guys. Good afternoon. Richard J. Tobin: Hey, Joe. Joe Ritchie: So I'll start by just asking I mean, I'll ask the flip side to Jeff's question from earlier. So not talking about big deals, but potential across your business. I know you look at your portfolio frequently. Just how are you thinking about the portfolio as it stands today? And potentially, you know, addition by subtraction? Richard J. Tobin: Well, I mean, we've got a fiduciary responsibility if someone wants to purchase a portion of the portfolio. We have to consider it. Number one. Right now, we're comfortable with what we own. We do preserve optionality if we were to lever to do deals that we could delever. By monetization of the portfolio as an option per se. But right now, we're fine with the portfolio as it is. Either organically investing in it, or the portions that we've historically done more M&A. Joe Ritchie: Okay. Alright. Good to hear. And then I'm not gonna ask you to change guidance. You just gave guidance. But if you go back to that slide nine and you take a look at your organic growth expectations for the year, where across the portfolio do you think you have the biggest swing factors this year? Richard J. Tobin: I mean, they're all correct. And if you added one percentage point to all of the you know what I mean? It's there's no you know, this one can double based on our expectations. It's more of you get a point here? Do you get a point here? Do you get a point there? And, you know, when at the end when you add it all up, adds a couple points to the top line. So I don't know, without getting over our skis here, I think that those are directionally absolutely right. Joe Ritchie: Okay. Sounds good. I hope you get that point as we progress through here. Richard J. Tobin: Thanks, Joe. Good to talk to you. See you. Operator: Thank you. Our final question comes from Deane Dray with RBC Capital Markets. Deane Dray: Thank you. Good day, everybody. Richard J. Tobin: Hey, Dean. Deane Dray: Hey. Maybe just pick up on Joe's question there because I've been staring at page nine, and I'm trying to remember the last time you know, you had organic growth all green and all the arrows on margin. Pointing up uniformly like that. And it just it begs the question, was there anything different about the planning process this year? Is this strictly a bottom-up aggregation of each one of the businesses? Or did you overlay in any way, haircut anything, you know, remember a year ago, the tariffs you decided that you did want to be a little more conservative. So is there any element of trimming or boosting here that you'd like to share? Richard J. Tobin: Sure. I think it was in the comments, but I mean, I think that we were pretty upfront over the last two or three years of some of the longer cycle businesses that had done extremely well were cycling down. Because it was coming out of the backlog. So, you know, the MOGs and the Belvacs of the world, we knew that we were exiting some businesses or some revenue in Europe. In our fueling solutions business that was gonna be negative. That was incorporated into our guidance. So meaning top-line headwind, but margin up. And then we did not have a I don't know. I think that we had thought going into '25 that we were concerned about vehicle service group in Europe, and that's the way it turned out at the end of the day. So I think what this shows here is that we don't have an identified headwind like we have whether it's because of long cycle businesses cycling down, and or particular markets that we think are under duress. Deane Dray: That's helpful. Thank you. And just a quick one. Backlog has come up a bunch of times in Q&A here. Just directionally, how much of 26 revenues do you expect are in backlog today just kind of directionally? And how does that compare to other normal times? Richard J. Tobin: I don't know in total. I can just tell you anecdotally. I think I mentioned it before. Something like refrigeration that grew heavily in Q4. Right? And that is not a normal state of affairs. We generally bleed in historically in that particular business. Or most of our businesses actually bleed down backlog because we built so much backlog in Q4 of this year, in Q4 and replace it in Q1. The swing factor is going to be do we eat into it in Q1, or does it just continue to build? And if it does, it's proactive for the back half of the year, but we'll know that in the next sixty days or so. Deane Dray: Thank you. Richard J. Tobin: Thanks. Operator: Thank you. That concludes our question and answer period. End of Dover Corporation's Fourth Quarter 2025 Earnings Conference Call. You may now disconnect your line at this time, and have a wonderful day.
Operator: Good morning, ladies and gentlemen, and welcome to Champion's Third Quarter Results of the Financial Year 2026 Conference Call. [Operator Instructions] I would now like to turn the conference call over to Michael Marcotte. Please go ahead. Michael Marcotte: Thank you, operator, and thank you, everyone, for joining us here to discuss our third quarter results. Before we get going, I'd like to highlight, we'll be using a presentation that's available on our website at championiron.com. I'd like to highlight that throughout this call, we'll be making forward-looking statements. If you want to read more about forward-looking statements, risks and assumptions, you can also visit our MD&A, which is also available on our website. Joining me here today includes many of our executives, including David Cataford, our CEO, who will be doing the formal portion of the presentation; and our COO, Alexandre Belleau. With that, I'll turn it over to David. David Cataford: Thanks, Michael. Thanks, everyone, for being on the call today. I'm very happy to be able to present the fiscal year 2026 third quarter results. In terms of the highlights, so we managed to produce roughly about 3.7 million tonnes during the quarter and sold just shy of 3.9 million tonnes also during the quarter. One of the big highlights as well is we've continued to improve on our cash costs. So our cash cost delivered in the vessel in Sept-Îles was just below $74 per tonne, which translated in the quarter when you look at the realized price of an EBITDA of $150 million, a little bit less than the previous quarter, but the main difference was essentially the provisional price adjustment. So we managed to have a pretty flat quarter-on-quarter. In terms of community governance and sustainability, continued working with local communities and also with the -- our First Nations partners of Uashat mak Mani-utenam. One of the big highlights is we managed to send roughly about 160 people to the community to do a full immersion to be able to work alongside with the community, again, strengthening our partnership and allowing us to view potentials for growth in the future alongside our partners in Uashat mak Mani-utenam. In terms of operational results, one of the highlights for the quarter is definitely the amount of tonnes that we were able to bring down from the stockpiles at Bloom Lake. A lot of those tonnes are now sitting at the port, but we much prefer having them closer to the vessels at the port than on stockpiles at the Bloom Lake site. So we managed to decrease our stockpile by about 1.1 million tonnes quarter-over-quarter, reducing the stockpile to about 600,000 tonnes at the mine. Our inventories increased at the port to roughly about 900,000 tonnes, and we'll be able to destock that over the next few quarters to be able to fill the vessels [ in this system ]. In terms of our operations, again, as we mentioned, quarterly concentrate production of about 3.7 million tonnes. What's important to note as well is that we continue to operate in a way that keeps the mine very healthy. So when you look at our strip ratio, the amount of tonnes of waste that we've moved during the quarter, again, making sure that ore is available and that we can continue working on our blending strategy to make sure that we can dilute down a portion of the harder iron ore that we've had in one of the small zones that we discovered that we disclosed to the market a few quarters ago. In terms of the industry overview, so a pretty flat quarter when you look at the P65, the freight and the premium for the P65 over the P62. So during the quarter, P65 averaged about $118 per tonne, a slight increase of about 1%. There was a very slight decrease in terms of the premium for the P65 over the P62 and a slight increase in C3 freight cost of about 2% during the quarter. But again, pretty flat in terms of quarter-on-quarter. What does that do on our provisional price adjustments? So when you look at this quarter, very uneventful provisional price adjustment, about USD 3.3 million over the quarter. When we account this over 3.9 million tonnes that were produced, it has an impact of about $0.80 per ton in terms of the tonnes sold. When we look at the tonnes that are still on the water now at the end of the 31st of December, we had about 2.5 million tonnes in transit, and we've expected a price of around USD 117 per tonne. If you look at our average realized selling price, pretty close to the P65 index. As you know, we have some tonnes that are still subject to slight discounts due to the fact that we're selling more on spot and not on long-term contracts. This is the year that we'll be able to start shifting that portion because as we deliver our new plant and we're able to sell 69% iron ore, we will now enter into longer-term contracts. But when you look at this quarter, when we account for the conversion of U.S. to CAD and discount the freight cost, we had a net realized price of about CAD 121 per tonne. In terms of our cash costs, so we've continued working on our cost at site, reducing again our cash cost during the quarter to just below $74 per tonne delivered in the vessel, pretty big decrease, and we're continuing to work on our costs. So as you know, the main factors for us is definitely when we have a good iron ore recovery and we have good production, that definitely reduces the cost per tonne at our site. Mind you, this quarter was a quarter that did not have a major shutdown, but still continuing our downward trend in terms of operating costs. What does that translate in terms of financial highlights? So as we mentioned, revenues of about $470 million, EBITDA of $150 million and a net income of $65 million for the quarter. In terms of our cash, so cash sits at roughly about $245 million on the 31st of December this year. Main impacts were obviously the cash flows from operations, where we invested, we invested mostly on the sustaining CapEx and also the DRPF CapEx, and we also paid out our semiannual dividend during the quarter. There was also a change of working capital, mainly due to receivables that have increased. So that should unwind in the next quarter. In terms of our balance sheet, very well positioned to be able to continue our growth initiatives, about $1.1 billion of cash, cash equivalents and working capital and also including the available liquidities that we have on our various facilities. So very well positioned to be able to finalize our growth initiatives. Talking about our growth initiatives. So if we look at our main project, the DRPF project, so we're coming close to completing the project now and being able to commission the first tonnes, still on target to reach our $500 million investment for the full project. Right now, all the equipment is installed. So it's just finalizing some tie-ins with the equipment, and we're now also starting the commissioning of certain equipment as we speak. So pretty excited about the next steps for this project. We're still on target to be able to deliver our first tonnes of DRPF and our first vessel in the first half of this year. When we look at the impacts of starting the plant, we just need to remind everyone that there are some impacts that will come with the interactions with the Phase 2 project. So there will be some interruptions in the plant as we commission the various equipment. We had forecasted in our feasibility study roughly about 20 days for the Phase 2. We'll try to make up a portion of that for -- in the Phase 1 plants, but there will be some interactions in the coming quarter to be able to fully commission this plant. But once that's done, we do expect a ramp-up of roughly about 12 months to be able to get the plant fully running and minimal impacts on the actual Phase 2 production once the tie-ins are completed. So very exciting because we're now finalizing all of the potential contracts with various clients. We do expect to sell most of those tonnes in markets that we had announced, so either Europe, North Africa or Middle East. So working with our partners to be able to finalize those contracts, and we'll be ready for when these tonnes come into the market in the first half of this year. One of the other highlights that we discussed also just a few days before Christmas was the potential acquisition of Rana Gruber. So we entered into a transaction agreement with Rana Gruber to acquire the company. The transaction is fully financed. So a portion of cash, roughly about USD 39 million. We have La Caisse de dépôt, one of our long-standing partners that is also supporting us for USD 100 million. And we also have a fully underwritten term loan with Scotiabank of USD 150 million that we'll start syndicating down to our bank syndicates. So as my understanding, all of our partners are very happy to support us with this transaction. Again, just to remind everyone why we're doing this transaction. Well, one, Rana Gruber is a robust operation that's operated for over 60 years, uninterrupted in all of the various cycles. They benefit from pretty interesting margins in terms of the material that they produce, and they're also on track to start producing higher-grade material, which is fully aligning with what we do at Bloom Lake. They're also very well positioned versus European clients. This is a client base that we want to increase in the future. And there are just a few days of sailing time from their various clients, making it a producer of choice for a lot of steel mills in Europe. We do think there are opportunities in the future with the asset to be able to potentially increase on the volume side, and we also benefit from an extraordinary team over there, fully aligned in terms of values and operation style. So we do think that this is very positive to be able to combine the 2 -- these 2 assets. In terms of our other projects, so as you know, we're also working on the feasibility study and the permitting of the Kami Project. So that's all going according to plan. We should be in a position by the end of this year to finalize the feasibility study and potentially obtain our construction permit for the project and also fully aligned with our partners, Nippon Steel and Sojitz to be able to continue on the next step. So we'll see once we finalize the feasibility study and the permitting process, where is the market for DR grade type material, and we'll then be able to look at the next steps for the project going forward. We also, just to remind everyone, have over 5 billion tonnes of resources just south of Bloom Lake. So we are doing a little bit of drilling just to make sure that we can refine our estimates in terms of the actual tonnes over there, but all very high-grade material that is -- I think will position us very well in the future. Short term, maybe no impact, but in the medium, long term, could definitely be very beneficial for our company. So with that being said, I'd like to thank all of our staff and everyone for making these results possible. I think, again, a very good quarter. We had a few hiccups last year and definitely had some quarters that were impacted by either forest fires or a bit of breakage on certain equipment at our site. But I think that's behind us, and we're now back in a very good operational position. And I think when you look at the results and the cash costs that are continuing to come down, it's a proven element that we're back on track in terms of operations. So with that being said, I'll turn it over for the Q&A portion of the call. Operator: [Operator Instructions] Your first question is from Julio Mondragon from BMO Capital Markets. Julio Mondragon: So I just got a couple of questions. But the first one I would like to ask is, well, you have seen the cost reducing significantly quarter-on-quarter, what are the key drivers of this cost reduction? And also, how sustainable this is in the near term? Like what would be your unit cost target for the next few quarters to understand a little bit more about your cost strategy here. David Cataford: Well, the cost strategy is always to produce at the lowest cost possible. When you look at the results, well, obviously, this was a quarter that didn't have a major shutdown. So quarter-on-quarter, that was one of the impacts in terms of the cost reduction. When you look at the amount of tonnes that were produced, definitely, when we produce more tonnes, well, we'll always have a lower cost per tonne. So that's definitely one of the elements that has improved. And as we come out of this whole stockpile history portion, well, that's definitely going to reduce our costs as well going forward. So those are the main elements. But our strategy is definitely to continue working on various elements that we can improve our costs. How do we do that? Well, we're improving the mining efficiency, also working on our shutdowns to be able to be more efficient. If we can get that plant up and running a little bit more often, well, that's going to allow us to produce more tonnes, it's going to dilute down a lot of our fixed costs. So those are definitely the strategies that we have shorter term to be able to continue on the trend to have good operating costs. Julio Mondragon: And if I could ask one more question. So currently, you are targeting commercial production in the first half of this year from the DRPF plan. So does it mean you are going to achieve nameplate capacity in this period? And also because we're talking about premiums, can you provide a quick outlook of the market and the premiums for this product? David Cataford: Yes. Thanks for the question. So once we get the plant up and running, we believe the ramp-up time is going to be roughly about 12 months to get the full nameplate capacity. So that's the time frame to be able to get the full nameplate capacity. If we can do it quicker, well, we'll definitely come back to the market, but that's what is in our plan right now. In terms of premiums, well, obviously, when you have a new product like ours, at 69%, we need to be able to prove to our various clients that we can hit that number and that it reacts well in their plans. So there's always some trial discounts to the DR grade premiums when you look at the first cargoes. But I think once we are able to demonstrate to our clients that we're hitting consistently the quality, well, then we'll be able to get out of that territory and start benefiting fully from the CR premiums. In the market today, the DR premiums have increased slightly compared to last year. So I do think we're in the right trend. But for us, you have to remember that, one, there's the premium that is interesting, but there's also the freight advantages by selling closer to home. So when you combine those, I do think we're going to have better margins for our material, hence, better returns for our shareholders. Operator: Your next question is from Orest Wowkodaw from Scotiabank. Orest Wowkodaw: Two things from my end. First of all, on the ship loader issue at the port of Sept-Îles, how -- is that rectified? Or how long was that down? I'm just wondering when normal shipments would have resumed post year-end? David Cataford: Yes. Thanks for the question. That was roughly about 4, 5 days. So it wasn't a -- well, I mean, we consider it major, but when you look in the yearly results, it's not necessarily major, just annoying for us because we would have sold probably an extra vessel during the quarter, which would have been nice. But realistically, the operations restarted about 5 days after the breakage. I don't think it's something that is necessarily recurrent, just an issue that happened, but unfortunately, happened right at the end of the quarter. Orest Wowkodaw: Okay. So should we expect that the 900,000 tons of inventory at the port to basically be cleared out here in the current quarter? David Cataford: Well, there's always going to be inventory at the port because as you know, vessels are roughly about 200,000 tons. So it's tough for us to clean out the inventory completely. So I'd say probably closer to 2 quarters to be able to get down to a level that is more in the range of having one vessel on the ground. So that's realistically about the time frame that we believe we can get those tonnes down. Orest Wowkodaw: Okay. And then just changing gears back to the DPRF. Should -- I realize you're not expecting commercial sales, I guess, until sometime in the second calendar quarter. But should we -- like as we're waiting for better visibility on what premiums may look like, should we start to anticipate that like we're going to see some increase in your blended realized price starting as early as Q2 and that ramps over future periods? Or should we just thought -- or is that not realistic? David Cataford: I think it's probably closer to Q3 where you're going to start seeing some results. Q2, definitely, we're going to have our first tonnes that are produced, first tonnes that are sold. But depending on how the actual integration goes and we're able to start up the plant when we look at the interruptions that we'll have to be able to tie in the actual plants together, I think in Q2, that's not when we're going to start seeing the results. It's more in Q3. Orest Wowkodaw: Okay. And when you mentioned earlier also the 20 days of tie-in, is that this current calendar quarter? Is that when that's expected? David Cataford: It's Q1 of fiscal year 2027. So sorry, I think I said on the call this quarter, but in my mind, we're already in April. Orest Wowkodaw: Okay. okay. So we're talking calendar Q2? David Cataford: Correct. Operator: [Operator Instructions] And your next question is from Fedor Shabalin from B. Riley Securities. Fedor Shabalin: David, so several quarters ago, you mentioned that Bloom Lake output could reach between 17 million and 18 million tons annually once all bottlenecks are resolved. The progress of debottlenecking in the fourth is clearly visible. And my question is, where are we now on the path to achieving this 17 million, 18 million tonne production target at Bloom Lake? And I would assume we're not far away. And what additional steps remain to get there? David Cataford: Yes. Thanks for the question. When we go back, the main target for us was definitely to make sure that if we do some investments, we'll be able to get those tonnes down. So the main focus was really to be able to work on the rail portion to make sure we can get the tonnes. When we look at the last quarter, we brought down quite a lot of tonnes from site. So that definitely gave us some good visibility. Now we're in a situation where we're back in the very, very cold winter months. It's actually a very cold winter up to now. So there are some elements that impact the rail portion. But when we take all that into account, I do think we're in a territory where we feel more confident that the logistics side will be able to bring down the tonnes. So now most of the work to be able to define what needs to be done to be able to increase the production is pretty well known. So we're going to start working on those projects to be able to look at the debottlenecking. But that was also one of the thought processes when we looked at acquiring a project like Rana Gruber. So initially, we thought those tonnes would come from Bloom Lake. I still think that Bloom Lake will get to the 17 million, 18 million tonnes. But in the interim, we will now have an asset that produces just shy of 2 million tonnes out of Norway, and that's definitely going to help as well in terms of the production increase. Fedor Shabalin: Yes. That's helpful. And my follow-up question is on DR grade market overall. What does the current landscape look like? And how large is demand now? And do you anticipate any changes to premium above 65% Ferrum from P65 that you outlined previously? And if I recall correctly, it was roughly in the ZIP code of $20 per metric ton. And are there plans to sell a portion of DR pellet feed output to third parties? David Cataford: Yes. Thanks for the question. So the thought process is not to sell those tons to third parties. So we want to sell directly to the steel mills that require this type of material. Again, when we look for potential clients, we want to make sure that they have the right ports so that they can take capesize vessels so that we can fully benefit from the closer to home tonnes. If there are some advantages by going with the smaller Panamax, but there's still some freight advantage for us, it's definitely something that we can look at. But when we combine the freight advantage and also the premiums for the DR, once we get out of the trial cargoes, I do think that the market is looking pretty good to be able to get a significant premium on our side. When you look at this year, well, the DR grade seems to be in a better position than it was last year. But again, there's quite a lot of noise with projects like Simandou coming on. So it doesn't impact the DR grade, but it did impact the view on the high-grade material, not necessarily ramping up to the level that was initially expected. So I think that's keeping the high-grade portion quite healthy. But we will see in the next quarters where that DR premium goes. But when we look at the fundamentals, there's quite a lot of plants getting delivered that need this type of material. There are some plants that have tried to also find ways to upgrade material that might not deliver the results that they thought. So that will definitely be some potential clients for us down the road. But when I look at the environment closer to the whole Sept-Îles port, I do think that we'll have the right clients to sell our material at the right premium there. Operator: Your next question is from Dalton Baretto from Canaccord Genuity. Dalton Baretto: David, I wanted to start by asking -- well, I've got 2 questions on Rana Gruber. I'll start with the first one. When you look at their client base, particularly in Europe, do you see any synergies there with you trying to place the DRPF material? Does that help you in any way? David Cataford: Thanks for the question. So definitely some advantages just in the fact that also they're so close to their clients. So when we sell to Europe, we're close, but we're not that close. They're about 3 days sailing time. I think there's some good potential combinations on that front. When I look at potential blending strategies, that's definitely something that's top of our mind as well. So is it possible to have some potentials in that front to be able to get a better premium for material. That is something that we will look at. I think the main focus now is definitely closing the transaction, making sure that the asset is under our control in the next few months. And then I definitely see some potential advantages and synergies with clients in Europe. Dalton Baretto: That's great. And then similar sort of question, but on the operations side, I was looking at their Capital Markets Day presentation from last year, and it looks like they're about to set off on the same trajectory that you guys just went through in terms of upgrading their material to DRPF. Given what you guys have just been through, do you think that you can accelerate that time line at all? David Cataford: There's various ways to look at it. If you remember, even at Bloom Lake, initially, we thought, do we want to build 1 or 2 flotation plants and get all of our tonnes to 69%, but we thought maybe it makes more sense to do one and maybe there'll be a blending strategy directly at Bloom Lake. So if we transpose that to Rana Gruber, is it the upgrade that is necessary because now we're only looking at 2 million tonnes? Or is it possible to take, let's say, 1 million of those tonnes, blend it with some 69% material and it becomes DR grade. So there's -- again, there's a lot of potential synergies between the 2 sites. Does it mean that we have to accelerate a DR transition at Rana Gruber? Or does it mean that we can work in a different space. We'll definitely look at what's the most accretive for our shareholders. Operator: There are no further questions at this time. I would now like to turn the call over to David Cataford for the closing remarks. David Cataford: Super. Thanks, everyone, for your support. Thanks for being on the call today and not looking at a gold analyst at this time. So yes, gold is definitely in favor, but I do think that the high-grade premium for our material is going to be extremely interesting in the coming years. When I look at our company, I mean, we're just coming out now of a 7-year CapEx cycle, roughly about $2.5 billion invested on time and on budget to create the foundation that we have now. And I do think that in the future, we'll be able to benefit from very good premiums and have a very interesting capital return strategy for our shareholders. So again, thanks, everyone, for your support and looking forward to speaking to you in the next quarter. Operator: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.
Operator: Hello, everyone, and welcome to the Southwest Airlines Fourth Quarter 2025 Conference Call. My name is Jamie, and I will be monitoring today's conference call, which is being recorded. A replay will be available on southwest.com in the Investors section. [Operator Instructions] Now Danielle Collins, Managing Director of Investor Relations, will begin the discussion. Please go ahead, Danielle. Danielle Collins: Thank you. Hello, everyone, and welcome to Southwest Airlines Fourth Quarter 2025 Earnings Call. In just a moment, we'll share our prepared remarks, after which we will move to Q&A. Joining me today are Bob Jordan, our President and Chief Executive Officer; Andrew Watterson, our Chief Operating Officer; and Tom Doxey, our Chief Financial Officer. Before we begin, a reminder that today's session will make forward-looking statements, which are based on our current expectations of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our earnings press release. With that, I'll turn the call over to Bob. Robert Jordan: Thank you, Danielle, and good morning, everyone, and thank you for joining our earnings call today. We've been looking forward to 2026 when all the incredible work undertaken by the Southwest team will show dramatically improved results. First, however, a few comments on this past year and our fourth quarter 2025 results. The fourth quarter capped a year of meaningful transformation and accelerated execution at Southwest. We finished the year and the quarter strong for both revenue and cost, achieving full year EBIT of $574 million, which was above our prior guide of $500 million. Operating revenues of $7.4 billion for fourth quarter and $28 billion for the full year were quarterly and annual records. Our fourth quarter and full year results underscore that our initiatives are generating the desired results and provide great momentum as we head into 2026. We also ran a terrific operation, coming in #1 in on-time performance, completion factor and the lowest extreme delays in December and our strong operational performance throughout the year led to Southwest earning the top spot as The Wall Street Journal's Best U.S. Airline of 2025. I'm proud of the results, but I'm especially proud of our people who are the ones getting this done every single day, day in and day out. Before moving to 2026 and the exciting year ahead, I want to underscore some of the key initiatives that we successfully implemented in 2025, and here are the larger ones. We changed our product offering, including the implementation of bag fees, addition of a basic economy fare product and flight credit expiration, optimized our Rapid Rewards program, including variable earn and burn rates. Amended our co-brand credit card agreement with Chase, including new benefits and improved economics, launched free WiFi for loyalty program members in partnership with T-Mobile, expanded our online presence through new partnerships with Expedia and Priceline, outperformed our $370 million cost reduction target for 2025, including the first layoff of noncontract and management employees, added 6 new airline partners, launched Getaways by Southwest, added redeye flying, reduced turn time to increase aircraft utilization, deployed new technology to boost operational reliability, a key enabler of our top spot in the Wall Street Journal ranking of airlines, discontinued the fuel hedging program, completed $2.6 billion in share buybacks in 2025, representing about 14% of shares outstanding while maintaining our investment-grade rating. And on Tuesday, we implemented assigned and extra legroom seating, which required retrofitting over 800 aircraft. It is just a stunning list of initiatives undertaken by the Southwest team, all implemented on time and all delivered with excellence. In my 38-year career in this industry, I cannot think of another airline that embarked on so many fundamental changes to their business model and in such a short time, let alone, executed so well. The list of initiatives falls into 2 categories: one focused on offering a significantly better experience for our customers and the other focused on revenue growth and operational efficiency. Collectively, the large investments we have made result in a fundamental transformation and evolution of our business model while building on our core historic strengths. The largest domestic network, a strong balance sheet, unmatched customer loyalty to our brand, outstanding service and hospitality, low cost and operational efficiency, our unique culture and especially our unrivaled people. This transformation is expected to result in a significant step-up in how we grow earnings as compared to the past few years. And for 2026, we are forecasting earnings that are dramatically higher than 2025. For the full year, we are not yet guiding an EPS range. While being well above Wall Street consensus, we are providing EPS guidance that represents the lower end of our internal forecast. With that qualifier, we are guiding full year 2026 adjusted EPS of at least $4, which is materially higher than 2025 adjusted EPS of $0.93. Let me share our reasoning why we are not yet providing an upper range for 2026 earnings. Assigned and extra legroom seating became operational just 2 days ago, and we see earnings upside based on how booking behavior related to those initiatives unfolds, specifically upsell revenue from close-in bookings, which are more closely affiliated with business and price flexible customers. And second, we expect growth in both the business and leisure customer base driven by our new, more attractive product offering. We expect to have better visibility to the upside potential from these initiatives in the next month or two, and we'll provide range-bound EPS guidance when the current quarter results are reported, if not before. Also going forward, we plan to follow the industry norm of providing guidance to investors using broad company forecasts and results. This means we will step back from providing details and specific numbers around activities such as bag fees, assigned seating, the co-brand program and so on. I believe that Southwest 2026 earnings growth will stand out when compared to other major airlines. This is largely due to the nature of the many initiatives we have implemented, initiatives that were previously implemented by other airlines over the last decade or more, whereas the Southwest is implementing these initiatives now. And the work will not stop here. We see meaningful opportunities ahead to grow earnings from areas such as route network optimization under a backdrop of improved operating margins in the business, increasing our corporate customer base driven by product changes that better appeal to the business traveler. And this is a long-term journey, and we believe that executed well, we will see the rewards and additional cost takeout and efficiency efforts. We have an exciting year ahead as we continue to deliver for our customers and for our shareholders. I am incredibly proud of our people. They are the ones getting it done every single day, running a strong operation, serving our customers and transforming our company for the future. And with that, I will turn it over to Andrew. Andrew Watterson: Thank you, Bob. From a network perspective, Q4 capacity grew 5.8% year-over-year despite the fleet count being roughly flat year-over-year. Efficiency initiatives like reduced turn times and the introduction of redeye flying allowed us to maximize asset utilization while maintaining industry-leading reliability. For the full year, operating revenue increased 1.7% year-over-year, supported by initiatives kicking in and strong demand that drove both traffic and realized fares. My comment on realized fares reflects the effect of buy-ups from the changes we implemented. Fourth quarter RASM, which was impacted by the FAA mandated schedule cuts, was down slightly at negative 0.2% year-over-year. Building on the strong foundation, we're entering Q1 with momentum and confidence. We expect RASM to increase by at least 9.5% year-over-year, with contributions from yield, load factor, initiatives and loyalty programs. Q1 capacity is expected to grow between 1% and 2% year-over-year, even as we operate with approximately 7 fewer aircraft, a reflection of continued efficiency gains. Importantly, Tuesday marked the launch of 2 major product enhancements, assigned seating and our extra legroom offering. All aircraft conversions, technology development and employee training were completed on schedule. Customer response has been overwhelmingly positive. And these products are expected to be meaningful contributors to further revenue growth and customer satisfaction in 2026. I want to take a moment and reflect on the changes implemented 2 days ago. Overnight, we made the switch to assigned seating, implemented a differentiated service in our new extra legroom section and changed our boarding process. On Tuesday, we operated more than 3,200 flights as a different airline while continuing to deliver our usual high-quality operation, a testament to our incredible team. These initiatives aren't just enhancements, they represent a fundamental transformation in how Southwest delivers value to customers and shareholders. We're evolving our product to meet the needs of today's travelers while staying true to the Southwest brand. In summary, Southwest is executing with discipline and delivering results that position us for sustained success. Our operational reliability, product changes and strong demand trends give us confidence as we move into 2026. I'll now turn it over to Tom. Tom Doxey: Thanks, Andrew. We delivered a solid quarter with an EBIT of $386 million. We continued our strong cost performance with CASM-X up 0.8% year-over-year despite operating less capacity than initially planned. Our fourth quarter performance reflects the strength of the transformation underway at Southwest and reflects well on our evolving culture, one that is relentlessly pursuing new revenue streams and operational efficiencies in areas that in the past, we had not focused on. At the same time, we continue to invest heavily in our customers, our people and our technology to position Southwest for long-term success. Looking ahead, our initiatives, which represent a deep fundamental transformation of our business, are set to drive significant earnings growth in 2026. The impact from the initiatives launched in 2025 is well understood by us at this stage of the rollout, and we have confidence in our ability to deliver meaningful margin expansion and strong earnings growth this year. As Bob stated, for full year 2026, we are providing an adjusted EPS guide of at least $4, which represents the lower end of our forecast. For the first quarter of 2026, we are guiding an adjusted EPS of at least $0.45 per share, which also represents the lower end of our forecast and compares to a loss of $0.13 in the first quarter of 2025. We expect continued strong cost discipline with CASM-X projected to increase approximately 3.5% year-over-year, which includes approximately 1.1 points of impact from the removal of 6 seats from our 737-700 fleet to enable extra legroom seating. We plan to keep management headcount expense flat to 2025 levels in 2026, and we'll also be focused on operational efficiency within our frontline teams. Turning to fleet. Boeing continues to execute on its delivery commitments. We expect 66 Boeing 737-8 deliveries in 2026 and anticipate retiring 60 aircraft during the year. Full year net capital spending is expected to be in the range of $3 billion to $3.5 billion. In November, we issued $1.5 billion unsecured bonds at industry-leading terms. We ended the quarter with $3.2 billion in cash and a gross leverage ratio of 2.4x, both within our targets. During 2025, we repurchased $2.6 billion of shares and distributed $399 million in dividends. At the same time, we plan to make the necessary investments in our business while staying within the guardrails that support our investment-grade rating. In closing, 2026 is positioned to be a year of significant margin expansion and earnings growth for Southwest, and we remain confident in our ability to deliver and create long-term value for our shareholders. And with that, I'll pass it back to Danielle to start our Q&A. Danielle Collins: Thank you, Tom. This concludes our prepared remarks. We will now open the line for analyst questions. [Operator Instructions] Operator: [Operator Instructions] Our first question today comes from Catherine O'Brien from Goldman Sachs. Catherine O'Brien: So I'll listen to the rule, Danielle and ask my 2 questions upfront. So first question is, I realize it's very early innings on the rollout of your seat products, but I'm just trying to get a sense of how you're thinking about the upside to your base case you shared today. How does January booked RASM compare to 1 half February? And how do both of those time frames compare to that 9.5% base case guide? I'm just trying to get a sense of like what you're evaluating on potential upside. Is that higher upsell -- potentially higher upsell going forward, share shift, something else? I know that was a long for second one, I'll keep it quick. You beat your 4Q CASM guide pretty handily. What drove that? Anything shift out of the quarter we should be aware of as we model '26 CASM-X beyond 1Q? Robert Jordan: It's Bob. I'll take the first one, and then Tom will take the second. On the upper range, well, first, I would just say that bookings for everything related to our new products and initiatives all look really good. So everything is on track. We're just not ready to provide an upper range or upside today. I mean it's really simple. We've got lots of booking data related to the new initiatives, but we have limited data regarding close-in bookings and the behavior of fair upsell and seat ancillaries, especially with those. Close-in bookings, overweight business, and customers that are more flexible and that tends to have higher ancillary take rates. So we just need to see it. And by the way, I'm dying to know the upside as well and asking Andrew every day, but seriously, we will let you know as soon as possible. We just need a month or two to really see the potential. And then maybe separate from that, we're not stopping there. We have -- there's no victory lap. We have other things that we are focusing on above and beyond this potential with the current initiatives. I mean we have the opportunity for more cost takeout, efficiency, network optimization, with our new products, we think we can grow our corporate share. And of course, we're going to continue to optimize the revenue initiatives that we've just put in place. Tom Doxey: Catie, thanks for your question on costs. I'm really excited -- continue to be really excited about the way in which the entire management team is aligned and spending smartly and being efficient with our costs. There's no shift that we're talking about today out of 4Q into 1Q. So this is truly us going in and finding efficiencies in different areas of the business, and it's widespread throughout really every line item there, we're finding cost items. Operator: Our next question comes from Conor Cunningham from Melius Research. Conor Cunningham: Just on the load factor decline in 3Q -- sorry, in 4Q and then it just was larger than the decline in 3Q. Can you just help frame up what's happening there? I was under the impression that you were pushing for additional loads given this, the OTA distribution and so on. And within that comment, maybe you could talk about like is there a load factor target that you need to hit your bag fee target for 2026? And then my second question, sorry, I was hoping you could talk about the decline in the ATL. I realize that there's a revised credit, Chase agreement in there. But just if you could just frame up the drivers. I think that there is some concern out there in terms of like there being a larger decline from 3Q to 4Q and then you expect a pretty big revenue uplift in 2026. So just any thoughts around that would be helpful. Andrew Watterson: It's Andrew. I'll take the first one. And so I'd say that our employees are super engaged with the new Southwest. And it extends to our tech ops employees, and they did such a great job of retrofits of the aircraft overnight. They got so efficient that we were able to delay the -700 retrofits until January. Because in the -700s, as you probably know, we take out a row of seats. Now doing that late in the booking curves means there's limited revenue upside, but there is revenue upside, especially on the peak holiday travel dates. And extending that means that as we came out of it almost nil cost. And so doing that was EBIT positive. And so we don't manage the business for any kind of submetric of load factor or yield. We're largely managing for RASM or the RASM/CASM spread. And so in that situation, we chose a decision that maximized earnings but was unflattering perhaps the load factor, but it was the right decision. That's how we want to manage the company. Tom Doxey: And to your second question on ATLs, one of the benefits that we have now is we have more differentiation in our product and the ability to provide differentiation to those that are at different, different levels within the loyalty program is that more of the revenue can be recognized -- the loyalty revenue can be recognized sooner. Whereas previously, we had to wait, primarily the benefit that was derived from being in the program was when you would ultimately redeem points. Well, now depending on your status, you have the ability to derive a benefit. You may book a flight paying cash tomorrow where you have the ability because of your status to select a seat for free. You may have the ability to have a free bag or bags. So those are benefits that can be derived sooner. So that differentiation that we have in our product offering now allows us to recognize more revenue sooner. So obviously, that means that there is less that falls into that ATL category. So if anyone is looking at that ATL category and seeing that it's smaller and trying to forecast some sort of revenue weakness in the future, that's not what's happening. Operator: Our next question comes from Jamie Baker from JPMorgan. Jamie Baker: A couple for Tom. So with assigned seating broadly anticipated by customers, I'd have thought there might have been a surge in early bird bookings given that there's this significant ramp from the new initiatives. But I guess asked differently, wasn't there already a meaningful amount of early bird in the base? I just kind of thought people would have front-run the changes by protecting themselves with that. And then second, with so many changes at Southwest taking place, I recognize the team isn't going to rule anything out. But maybe for Bob, can you disclose if you have any aircraft RFPs in the market? This is not usually a state secret. Everybody knew Delta had a wide-body campaign and stuff like that. Just curious if you can comment on that. Robert Jordan: Yes, Jamie, although it's a quick one. I'll take the first, and then Andrew will take the second because it's quick. No, we do not have any active aircraft RFPs in the market, okay? Andrew Watterson: And then the other one, the early bird, we -- if I'm understanding your question correctly, we ceased selling early bird for departures after Tuesday. And so now people can get a good seat by buying the stand-alone ancillary. And we do see stand-alone ancillary accelerate close in, and that's the part that Bob talked about, we don't fully understand yet and expect to have in the next month or two more insights into how the booking curve ends for those higher fare passengers. Jamie Baker: Well, so maybe I misunderstood. I thought 4 weeks ago, somebody could have bought early bird to kind of avoid the seating fee. So that's not how it worked. Andrew Watterson: Not for departures on Tuesday, the 27th and beyond. All those were just seat assignment. We do have a kind of upgraded boarding, early boarding you could do, but we didn't really push it and promote it that much because we didn't want to add customer confusion. We will do that later, but that's a modest thing. The large money is coming from fare upsells, so buying a higher fare product or buying stand-alone ancillary. Robert Jordan: Jamie, I think the easy thing is upgraded boarding and early bird, the old ancillary ended on Monday with open seating and the new ancillary started on Tuesday from a revenue perspective, and that's the best way to think about it. Operator: Our next question comes from Scott Group from Wolfe Research. Scott Group: So just a couple of things. So big picture, usually when an ancillary goes up, fare goes down historically, what do you think is sort of different here? Is there any way to sort of share like what percent is going -- since Tuesday is going basic versus prior? And then maybe just, Tom, like a modeling kind of question, like I'm guessing January, you didn't have seats. It's the toughest comp. Like are we exiting the quarter with like RASM in the teens or something like that? Is that the implication of this guide? So I know there's a few, but thank you. Robert Jordan: Yes, I'll take the first one, and Tom will take the second. I think they're really disconnected. So ancillaries, especially now that a lot of that is a seat ancillary, which comes much later, it tends to be a separate decision from the fare purchase or the original booking and purchase of the ticket. So we don't see the correlation in terms of the ancillaries go up, the fare goes down. I mean all of this change, especially with the assigned seating and extra legroom is driven from a revenue benefit perspective by offering customers choice and then giving them buy-up opportunities at the time that they book and then giving them ancillary opportunities at the time, for example, when they select a seat. But no, we don't see that correlation at all that you're discussing. Tom Doxey: And to your second question, of course, we're not going to give RASM guidance by month, but it is a true statement that the extra legroom seats and the seat assignments, those enhance unit revenues. Operator: Our next question comes from Mike Linenberg from Deutsche Bank. Michael Linenberg: So 2 questions. I have a CapEx question for Tom and a revenue question for Andrew. So I guess, Tom, in the release, you did give us the CapEx number, although you indicated that it was a net CapEx number. So presumably, either -- I don't know if there's either sale leasebacks or there's aircraft divestitures. Can you give us a rough sense of maybe what the gross CapEx number is or maybe give us a sense of divestiture gains from aircraft sales in 2025? Tom Doxey: Sure, Mike. So we'll stick with the range that we've guided. There is an element of aircraft sales that are there that bring that down from the gross number. But we'll stick with what's out there in the public number as the net CapEx. Michael Linenberg: Okay. But it's specifically aircraft sales offsetting it. It's not sale leaseback gains or anything else? Tom Doxey: That's correct. Michael Linenberg: Okay. Great. And then just my question to Andrew. Segmentation, it's kind of a new thing. I mean, maybe you'll disagree with me, but I think it is somewhat of a new thing for Southwest. I mean, even in your commentary, you said that you're learning a lot about customer behavior. As we think about how things evolve, sort of what inning are we in? And what are the milestones that you're going to look for that things are really starting to pick up? And maybe as a kind of a teaser here, I know in the past, I recall you indicating that the majority of your bookings or tickets sold used to be in the lowest fare bucket. And I would suspect that, that's going to change, especially as people want the assigned seats and the extra legroom. Can you just give us sort of thoughts on how you see that evolving and maybe some of the key milestones? Andrew Watterson: Thanks, Mike. Yes, we're going from a kind of fare rule-based segmentation. We always had segmentation like device purchase and stuff like that to a product-based segmentation, which you can kind of pay more to get more. And so the question becomes who will pay more to get more from our current customer base. And we're seeing that our current customers who previously bought the kind of base product all in wanted to buy up. They wanted more from us. They wanted the ability to buy these extra product features. And even if they're buying early in the booking curve, they're willing to pay for them. And then of course, later in the booking curve, where most of those people are that are price flexible, you expect to see a kind of a surge of people demanding the higher products. And so we expect to go from like 80-plus percent buying the lowest fare product down to something half or less buying the very basic product. And so we don't know what that will look over the full booking curve for the full year to high season, low season, but we know that, that accelerates at the end, and that's kind of what we're waiting for. So the level of acceleration we see through the kind of February and March, where you have low season, high season will give us a really good idea of what the upside is for this. Operator: Our next question comes from John Godyn from Citigroup. John Godyn: Congrats on the big RASM guide. I wanted to just sort of reask it a little bit on the 9.5%. What is literally in that number and what isn't? It sounds like there's a low expectation of the ancillaries coming in, but it's not like you have 0. I just wanted to kind of understand really what's in there versus what could be upside. That's question one. And question two, it seems like there's a decent chance this year is an all-time high EPS annual year for you. When I look at the last time that happened, ASM growth was considerably higher. So as you get back to your return target, I'm curious how we should be thinking about a reacceleration in growth. Robert Jordan: Yes, I'll take the first one and then a combo, maybe Andrew, on the second one, especially thinking about capacity. Thinking about breaking down RASM detail, I mean, last year, just got a pause. It was just a fundamental transformation of the business model of this company. And it went extremely well. I'm so very pleased and proud of our people. And now all of that -- I mean, all these initiatives, they are the business. They are the new business of Southwest Airlines. It's not a set of initiatives any longer. And we're managing that way. And so everything in our 2026 guide include those run rates coming off of the implementation in '25 and then, of course, the assigned seating launch here on Tuesday. And that's just how we're managing the business. And we're focused even more beyond that on the additional upside, managing those initiatives and optimizing and then our incremental opportunities, again, like network optimization, further cost takeout, so we are moving to, as you obviously know, an EPS guide. Everything related to the initiatives and the run rates are baked in. And that's how we're thinking about managing the business, and we will provide the upside once we are able to quantify it. Andrew Watterson: And then on the growth, I mean, we're not thinking about any kind of crazy growth rates or anything like that. What we're thinking about mostly is in addition to whatever modest growth rates we choose is the reallocation of capacity. And so we have a product now that we see demand for that before we weren't offering. And then also the waterline for all of our markets rises with increased profitability. So we have a great opportunity to redeploy capacity within our current footprint to have less of a negative and more of a positive by moving capacity around. That's what we're really focused on over in the next 12 to 24 months. And we think that's upside to the numbers we've currently given you. Operator: Our next question comes from Duane Pfennigwerth from Evercore ISI. Duane Pfennigwerth: I wanted to follow up, Tom, on a comment you made about the loyalty -- faster loyalty rev rec. I assume there was a bump up with the bag fees and now another bump up with seats and extra legroom. So whatever the RASM tailwind was from rev rec in 4Q, it's likely larger now in 1Q. I wonder if you would frame how many points of your 10 points in RASM growth is due to rev rec policy changes? And then my follow-up, do you have any data or early learnings on receptivity of seats or maybe uplift in core Southwest markets versus maybe more jump ball markets where you have lower share? Tom Doxey: Thanks, Duane. We haven't quantified publicly what the change is there. There's a shift that goes where the split prior was part ATL, part other revenue. Now it's part ATL, some to other revenue and some to passenger revenue. But the exact percentages there, some of that relates to the way that our program is structured, and so we don't get into the details of that. Our Qs and Ks have a bit more color on it, but we don't go into the specific percentages. Andrew Watterson: On the second one, we find that the new product is giving us a strong tailwind in all of our markets. So it's not just a traditional Southwest stronghold where you see the benefit. It's across all customer segments and across all geographies, and that's what's really encouraging for us. Operator: Our next question comes from Tom Fitzgerald from TD Cowen. Thomas Fitzgerald: Just curious on the extra legroom fee. I think last fall, we had talked about that hitting its full run rate potential in the third quarter. Is that still the expectation as you sit here today? And then on the fuel side, I think at one point last year, Tom, we had talked about there being like a nice -- with bag fees, there being a nice fuel offset from the bag fee implementation. And I'm wondering if you started to see that this year. Andrew Watterson: Yes. I think previously in our guidance, we've given that we expect next year that we have the full run rate benefit of the seats. Obviously, we're endeavoring to get that faster. We know there's a ramp-up as customers adapt to it. That's also part of our discussion of the fleet upside. But right now, we're seeing a strong initial reaction, as I said earlier, both to buy-ups and seat ancillaries. Tom Doxey: And Tom, I love that you asked about fuel. Just last week, I'll brag a little bit about our operations team here. Just last week was in a meeting where we were walking through the full list of fuel savings initiatives that we have. You are correct. One of those is that as we carry fewer bags overall, which we knew would be a byproduct of the bag fee, there are fewer bags onboard the aircraft, and there is a fuel savings that comes from that. But there are so many other things that we're doing as a company, new technology tools that we have that are helping us as well as just the behavior that we have in our airports and our maintenance facilities to be able to save fuel. So often in this industry, we talk about CASM-X and it's appropriate. But fuel is a big expense, too. And we're doing a lot to become more efficient there as well. Operator: Our next question comes from Atul Maheswari from UBS. Atul Maheswari: Two questions. First, based on your implied RASM for the full year and based on what we've heard from others, it would appear that if you all hit your outlook, there might be a meaningful shift in airline revenues as a percentage of GDP this year versus the past few years. I know you can only speak for Southwest. So the question is, is the incremental revenues that you're generating this year, is that primarily coming from your existing customers who always wanted to spend more at Southwest but basically could not in the past since you did not have that offering? And that would explain why the revenue GDP equation moves to the right. Or is the incremental revenues that you're generating this year coming from attracting customers of other airlines, which would mean that the revenue GDP equation does not change much for the overall industry even as Southwest generates a significant revenue dollars. So that's question one. And then question two, in the at least $4 EPS target, what is assumed for macro, given Southwest is really the broader industry clearly lost good portion of revenues last year due to macro issues. So in that $4, what portion are you assuming that you get back? Robert Jordan: Yes, Atul, it's Bob. I can take both of those. Really, the -- what's in our guide for 2026 is it's the performance of the initiatives kind of on our current customer base. So there's no assumption, number one, of a big snapback in the macro, and there is no assumption number two of a big share shift. Now again, I do think with the far more attractive product offering, especially to our business customers, that is part of the upside that we can pursue over time. That's a longer journey, but I do think the product offering now certainly appeals more to everybody, but certainly appeals more to our business customers. So that is something we'll be attacking this year, and that provides additional upside. But no, to be specific, there's not a share shift in the calculation, and there's not a planned snapback in the economy in the macro. Operator: Our next question comes from Savi Syth from Raymond James. Savanthi Syth: Congratulations to the kind of Greater Southwest team on that #1 Wall Street Journal ranking, especially in a year that you've been kind of doing a lot of change. I know you're not providing kind of granular guidance, but I was curious, Tom, if you could provide color on CASM-X progression through the year. And particularly, is it fair that the 3.5% pressure in 1Q is maybe the high watermark, especially with capacity stepping up? And then maybe for my second question, on the corporate front, I'm curious what kind of corporate revenue growth you saw in 4Q and maybe what the trends are that you're seeing so far in 1Q? Tom Doxey: Thanks, Savi, and thanks for the shout out on the Wall Street Journal #1 ranking. That is a big deal. Another thing to brag about for our really great operations team and for our people. On CASM-X, we've given guidance for the first quarter. That will be -- we'll give guidance for unit cost and unit revenues during the quarters. And so it won't go beyond 1Q. But what I will say is that I feel like we have a good handle for what the costs are this year. It's been a couple of years now since we've had our labor agreements. Usually it takes a little bit of time for some of those costs to come in. And so now that we're a couple of years separated from that, and we've got, I think, pretty good view on what costs will look like for the year, and we're able to take that into account as we develop the full year EPS number that we've given to you today. Andrew Watterson: And for corporate, you pull out government, which was kind of volatile there in Q4, our corporate business is up mid-single digits. And then entering this year and in January, we had very high bookings that others have reported. So a very strong start to the year in corporate bookings. The benefit, though, as we talked about before, is the new product. We invested in our corporate infrastructure a while ago, a couple of years ago. We have now presence in the distribution channels. We have the sales force, the kind of BTN rankings about how well we are to do business is we're #2 just behind Delta. And so what's missing is the product that the corporate travelers want to buy. And frankly, the companies let them expense. And so having this new product, we will combine that with marketing efforts, our sales force efforts, incremental distribution efforts, and we think there's upside to our corporate business from this new product on top of the infrastructure we already built. Operator: Our next question comes from Andrew Didora from Bank of America. Andrew Didora: Andrew, I know you mentioned earlier that you obviously managed to RASM not a yield or load factor. But just curious like if you could give us any color on kind of how you're thinking about load factor, particularly here into 1Q. Obviously, you're coming off a pretty low base last year, I think around 74%. Historically, 1Qs are closer to 80%. So any thoughts around that would be helpful. And then for my second question, I know, Bob, you spoke to the opportunity for maybe some more cost takeout this year. Could you speak to maybe where that could come from and maybe how to think about CASM and cost opportunities in a 2% to 3% growth world? Robert Jordan: Yes, Andrew, I'll just give a start. The main point was a couple of things. I don't want anybody to think that we're done. I mean there's no victory lap here, as I said, there's a lot of hard work ahead. We're pleased with the momentum, but we are not done. This is a journey, and we're going to keep pressing on additional opportunities beyond the transformation that's been underway. So we took a lot of cost out last year, more this year. We doubled the original cost target. We did our first corporate layoff, which was tough. But what I can tell you is nothing broke. The company, if anything, is moving faster. There's more agility, more pace. And so I think that's been somewhat enlightening that we can press harder. And so there -- our corporate overhead will be down -- headcount will be down again this year. So I'm just admitting that we're going to press even harder on costs, on efficiency. So we're not ready to quantify anything yet, but just making sure that everybody understands that we aren't done with this transformation. We will be attacking other opportunities throughout the year. Andrew Watterson: I would say our teams, revenue management, marketing, we focus on revenue maximization. We don't get caught up in load factor yield. Now we -- our tools and our people now include the incremental upsells, we get an incremental passenger comes with a bag fee, a seat fee, other type of ancillary, that's included into our calculus. So quantitatively, that's in there, but they're all about revenue maximization, not going after the submetrics because that can really lead you down a bad path. And I think just look at revenue maximization, we have done a good job over the last 18 months of doing that, and we'll continue doing that going forward. Operator: Our next question comes from Ravi Shanker from Morgan Stanley. Ravi Shanker: Sorry to go back to the Jan 27 changes, obviously an important topic here. So I hit one topic with multiple questions. I think you said that it's going better than expected. A, can you confirm that? And b, can you -- do you guys know if both the incoming revenues and the book away are higher than expected? Or is the book away lower than you initially expected? And maybe second question on the same topic. Is there a risk that the ancillary revenues are higher out of the gate because people are maybe taken by surprise with some of the changes and maybe that normalizes over time? Or do you think it gets better from here? Andrew Watterson: I'll try to go through your questions there. So yes, the ELR and the preferred seats and assigned seats in general is going better than expected. We are getting book away from other carriers when they have poor reliability. We have that consistently over the last couple of years. So that is a tailwind. It doesn't happen every single day, but does happen quite frequently is a benefit and those people now come over and buy a stand-alone seat or a higher fare. So that's very helpful to have that extra book away. And then the ancillary, we find that what people do when they get to the gate, a crowded flight, they have a higher propensity to buy up. So you get to the gate, it's crowded and you're like,"Well, what seat am I? Oh, I want to change my seat, I will pay more." And so that we see the fuller the flight, the higher the ancillary benefit. Operator: Our next question comes from Sheila Kahyaoglu from Jefferies. Sheila Kahyaoglu: My first question, and congrats on the entire undertaking and the progress you've made. I'd love to hear what feedback you're getting on the product segmentation. Are customers even aware? How has that changed your promotional activity? And in cities like Chicago, where it's become a hot city of late, what really differentiates Southwest versus a network carrier? And maybe my follow-up on the $4 of EPS, what is the assumed paid load factor in total ancillary uplift in the extra legroom seats relative to the '25 base? Robert Jordan: Sheila, let me take a piece of the first one, and I think Andrew will take the second. What is different about Southwest Airlines now, obviously, has been a common question since we implemented assigned seating. And I've been here 38 years, and we have changed constantly over those 38 years. And every single one was, "well, you're just not the same Southwest." And every single time that person or those folks were wrong. So I just want to clear this up. I mean, our people and their heart for serving our customers, I mean, that is and always will be the greatest competitive advantage that Southwest has. That's the difference. That was true on Monday with open seating, and it was true on Tuesday with assigned seating and nobody, no other airline can copy the heart and the soul and the service of our people. So that's what makes Southwest Airlines different. Andrew Watterson: And I would say, in a place like Chicago, at Midway, we have a very strong network. And so our offering to customers where you want to go, we have the strong network there. Price, we have lower cost than our competitors, and so we can offer great deals. Conscious, we're still pushing RASM. With lower cost, we can push great deals. Reliability. Now airlines talk about reliability, but it's extraordinarily difficult to copy. And the fact that we have much higher reliability than any airline in Chicago, customers can count on coming to Midway and having a much better reliability than over at O'Hare. And then hospitality, once again, everyone says their employees are the best. But guess what, look at NPS scores, our employees really deliver great hospitality and a high score. And it's extraordinarily difficult to copy. You can tell your people to treat customers better. But if they don't, what do you do? For us, our customers -- our employees want to treat customers well. And so these are durable advantages of having great hospitality and great reliability. Operator: Our next question comes from Brandon Oglenski from Barclays. Brandon Oglenski: Congrats as well. I think I'll just keep it to one here. But Bob, I mean, I think just judging by some of these questions and definitely like the bloggers and the airline observers out in the ecosystem, there's this view, and I think you've hit on it in the answers to a couple of these questions, but like Southwest is losing its uniqueness, no more free bags and now it's or maybe less egalitarian. But the reality is, I think if we listen to all your competitors, things have moved much more towards a premium focus with consumers. So I don't know, can you just maybe wrap this up a little bit? Like isn't this just offering the market what they wanted? And incrementally, I think you hit on the culture, too, but has the employee base really fully embraced this, too? Robert Jordan: Brandon, thank you. And yes, this is about one thing, and that is chasing our customer. We are committed to following the customer, providing what they want today, which is different than what they wanted 5 and 10 years ago and what they want in the future because we know if Southwest Airlines doesn't provide it, they're going to go to a competitor, and we are not going to let that happen over time. So this is complete -- this has nothing to do with copying anybody. This has to do with offering our customers what they want. And then as Andrew said, doing it even better because we've got the employees and the service delivery and the reliability that they cannot match. I mean, just look -- I'm not meaning to brag, but maybe I am, but we won the #1 ranking in the Wall Street Journal Best U.S. Airline for 2025 for a reason. That's because our service was better, our operation was better and customers see it. And again, at the high level, we are on track. I mean, you see the numbers that we're guiding for 2026. So we're seeing customers embrace the changes, book the product. We are not seeing book away from Southwest Airlines. If anything, we're encouraged that we'll see share shift to Southwest Airlines because the product is a stronger offering now, especially with corporate. So again, this is all about following the customer. Operator: Our next question comes from David Vernon from Bernstein. David Vernon: Great. Maybe, Bob, just to kind of build on that idea, right, you're going to be taking share, raising fares by something in the double digits. Like normally, you would think there'd be some sort of demand elasticity problem in that math. Why isn't that the right way to think about this? Why isn't the big risk here that you put all these changes in, customers get used to them and then eventually, they can just look across other airlines and maybe you're more expensive and you see some of the expectation for what you're going to get in the unit revenue growth competed away because it is still a pretty competitive market as far as we look at it anyway. Any thoughts on the.... Robert Jordan: Yes. And thank you. Again, it's not -- this is not about raising fares. This is about offering our customers choice that we know that they want. So offering them a very basic fare if that's what they want, offering them a fare that comes with extra legroom and a drink and a different level of service and boarding, if that's what they want and a lot of products in between. So it's the customer's choice to buy up, which is very different than sort of across the board raising fares. Same thing on the ancillary side, just like we sold early bird and upgraded boarding. We're offering our customers a choice around priority boarding and obviously a choice around seat selection. So this has nothing to do with raising the fares. This has to do with offering customers choice that they can then choose to buy or not buy. And what we are seeing is that they are choosing to buy those new options. Operator: Our next question comes from Dan McKenzie from Seaport Global. Daniel McKenzie: First, huge congrats to the entire company for pulling off, I think, what most thought couldn't be done. But a couple of questions here. First, the 50% of the tickets that are sold with the buy-up feature, my question really is what percent of revenue does this account for? What would you expect it to account for once you're at maturity? And then secondly here, if corporate bookings are up high single digits or double digits, what fares are they replacing? My guess is they're displacing the $39 fare. And then just related to that, corporate, I'm just curious if the CapEx guide embeds new lounges. Andrew Watterson: So on the buyout, that's the type of stuff that we are working out that Bob is bugging me for all the time. And so we're not going to give those right now. It will become clear over time as we give the high end of our guide and we start to report. But right now, we're just focused on delivering the current guide. In corporate bookings, we found that the kind of segmentation, we introduced the basic fare that the corporates found that they did not want that in their ecosystem. So our sales force did a great team of helping configure selling tools so that, that was not featured and that was beneficial to our corporate revenues. And as we offer these ancillaries, we'll be doing the same thing, and we anticipate additional benefit once the tools and expense policies calibrate to our new offerings that we'll see additional benefits from that. Robert Jordan: And Dan, just quickly on the lounge question. I think I mentioned before there, obviously, we're looking at, again, things that our customers want. There's nothing specific to report there today, but just know that the assumptions that we have internally around what that could look like are built into our guide. So they're not incremental to the guide that we've given you for the quarter or for the year. And I want to go back to your first sentence. I just can't help myself about the congrats on the implementation. I just want to say thank you. And I got to thank our people again. The level of execution last year with so many things. It was just done so flawlessly on time with quality and to be able to win the Wall Street Journal #1 ranking at the same time you're changing the company then to have a winter storm that's historic and manage it incredibly well, come out of that with no hangover at all. And by the way, the next day, do the largest changeover in the history of the company with assigned seating and to have excellent operating metrics on that day. I just don't know how to say anything, but wow, I'm just stunned by what our people have done. Operator: And our next question comes from Chris Wetherbee from Wells Fargo. Christian Wetherbee: I guess I wanted to talk a little bit about the business commentary and I guess what you're looking to see over the course of the next couple of weeks. Presumably, there's been some conversations there and you seem optimistic about upside. So any insight there would be helpful and maybe where some of the share might be coming from? And then the second question would just be sort of understanding what's embedded in the $4-plus guidance around buybacks. Andrew Watterson: On the first one, I would separate out the two things between, one, the -- what we see as the upside from the ancillary sales and the buy-up those are the normal booking curve management and what we expect to see there through the low season of February and the high season of March. That will help us understand better what the upside potential is in the short term. What's not in our guide is this kind of medium-term benefit from increased corporate share or increased corporate revenue as people buy our ancillaries on the company dime. And so that is something that will unfold over medium term and is not in our guide. Tom Doxey: On the buyback question, we continue to believe that the shares are undervalued relative to the long-term fundamentals of the business. And so we'll continue to be opportunistic there, and we'll make sure that we stay in the guardrails that keep us with our investment-grade rating. And one other thing I'll add to that, too, is we've invested a tremendous amount of capital into our people and into our business as well and into our customers. And we've talked about the investments we made into the cabin and things like the bigger bins and the new lighting and the new seats and the in-seat power and free WiFi. And all of these things are part of that capital allocation as well. And so we stay within the guardrails. We invest in the business. We invest in our people, and we invest in our customers and ensure that we stay in those investment-grade guardrails. Operator: Our next question comes from Jamie Baker from JPMorgan. Jamie Baker: Thanks for squeezing me in at the last minute. So the earlier comment about passengers making buy-up decisions at the gate, have you padded your turn times to account for that? Is there any sort of operational impact from that phenomenon? Andrew Watterson: Actually, we took turn time out, Jamie, and -- so all this is, we've scripted out what we sell when and what happens when in our boarding. We have standards and those allow us to handle both employees traveling for non-revenue as well as upselling in the gate area. And so all of that, I think, works well for cost efficiency and revenue optimization. Robert Jordan: And I've got to just add again. I mean we took time out of the turn, managing all these changes, which include changes to boarding, and we won the Wall Street Journal ranking as the Best U.S. Airline, most of which are operational metrics. I mean, not bad. Danielle Collins: And on that note, we'll conclude today's call. As always, if you have any follow-up questions, please reach out to Investor Relations, and we appreciate everyone for joining. Operator: Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
Operator: Good morning, everyone, and welcome to the United Rentals Investor Conference Call. Please be advised that this call is being recorded. Before we begin, please note that the company's press release, comments made on today's call and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control. And consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's press release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2025, as well as the subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that the company's press release and today's call include references to non-GAAP terms such as free cash flow, adjusted EPS, EBITDA and adjusted EBITDA. Please refer to the back of the company's recent investor presentation to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer; and Ted Grace, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Please go ahead, sir. Matthew Flannery: Thank you, operator, and good morning, everyone. Thanks for joining our call. As you know, in 2025, we again committed to doubling down on being our customers' partner of choice. This translates to working hand-in-hand with our customers to provide an unmatched experience across our one-stop shop of gen rent and specialty products, coupled with industry-leading technology and a world-class team. Ultimately, this all culminates in our value proposition, which not only improves the customers' productivity and efficiency, but also positions us to outperform the market. I'm pleased that our team's steadfast dedication to this commitment, in addition to an unwavering focus on safety and operational excellence resulted in another year of record revenue and EBITDA, as you saw in our results reported yesterday afternoon. Today, I'll start with a recap of our fourth quarter and full year 2025 results, followed by our expectations for 2026, which we expect to be another year of profitable growth. I'll keep my remarks brief before Ted reviews the financials in detail, and then we'll open the line for Q&A. So let's start with the quarter's results. Our total revenue grew by 2.8% year-over-year to $4.2 billion. Within this, rental revenue grew by 4.6% to $3.6 billion, both fourth quarter records. Fleet productivity increased by 0.5%, contributing to OER growth of 3.5%. Adjusted EBITDA came in at $1.9 billion, resulting in a margin of 45.2%. And finally, adjusted EPS came in at $11.09. Now let's turn to customer activity. We again saw growth across both our gen rent and specialty businesses in the quarter. Specialty continues to exhibit healthy and broad-based growth. We remain focused on expanding our specialty footprint and capitalizing on the geographic white space available. In 2025, we opened an additional 60 cold-starts, including 13 in the fourth quarter. Importantly, we remain confident that the combination of geographic expansion, the power of cross-sell and the addition of new products to our portfolio will enable us to continue growing our specialty business at a double-digit rate for the foreseeable future while also expanding our competitive moats and providing attractive returns. By vertical, our construction end markets saw growth across both infrastructure and nonresidential construction, while our industrial end markets saw particular strength within power. Similar to last quarter, data centers and power were drivers of growth, but certainly not the only ones. Our project pipeline is larger than ever, and we saw new projects kick off across health care, pharmaceuticals and infrastructure to name a few. Now turning to the used market. We sold $769 million of OEC in the fourth quarter at a 50% recovery rate. For the full year, we sold slightly less OEC than we originally forecast as we held on to some high-time used assets to meet demand. Importantly, the demand for used equipment remains healthy. For the full year, we spent nearly $4.2 billion on a combination of maintenance and growth rental CapEx, which resulted in a free cash flow generation of $2.2 billion for a free cash flow margin of 14%. I'll say it again, as I do every quarter. The combination of our industry-leading profitability, capital efficiency and the flexibility of our business model enables us to generate meaningful free cash flow throughout the cycle and in turn, allocate that capital in ways that allow us to create long-term shareholder value. In 2025, specifically, we allocated capital as we always do, first by funding organic growth and then complementing this with inorganic growth. We then return our remaining cash to shareholders. In 2025, we returned nearly $2.4 billion of excess cash flow to shareholders through a combination of our share buybacks and our dividend. Looking forward, I'm pleased to share that we plan to repurchase $1.5 billion of shares in 2026 and to increase our quarterly dividend by 10%, reflecting our third consecutive annual increase since introducing our dividend in 2023. Now let's turn to our 2026 guidance, which implies total revenue growth ex used of over 6%. This is supported by customer sentiment indicators, solid backlogs and most importantly, feedback from our field teams. In many ways, we expect the construct of demand in '26 to be similar to last year with large projects and dispersed geographic demand driving most of our growth. We'll remain focused on capital efficiency, but repositioning costs will likely remain elevated. Having said this, we're very aware of the importance of profitability and margins. Our guidance, which implies flat margins at the midpoint ex the benefit of the H&E termination fee last year, embeds cost actions we're proactively taking to improve our efficiency and support profitability. We all know yesterday's touchdowns don't win tomorrow's games. Our culture of always wanting to do more and never being satisfied with the status quo is in our DNA. This was on full display a few weeks ago when we held our annual management meeting in St. Louis. We brought together almost 3,000 team members to both celebrate our wins and to find new ways to be an even better partner to our customers as we look to outperform the end market while having an even greater focus on efficiency and profitability. We have an incredible team at United Rentals with a culture that is unmatched in our industry. This is a real differentiator and gives me confidence we can take our momentum and continue to build a best-in-class company. I'm proud to say that the team walked away from the meetings energized and ready to deliver on the expectations our guidance reflects. In closing, I'm excited for what lies ahead for United Rentals. Our team puts customers at the center of everything we do, which positions us well in both the short and long term to capitalize on the opportunities ahead of us and to continue to outpace the industry. Our strategy, business model, competitive advantages and capital discipline allow us to generate compelling shareholder returns for the long term. With that, I'll hand the call over to Ted, and then we'll take your questions. Ted, over to you. William Grace: Thanks, Matt, and good morning, everyone. As Matt just shared, we were pleased with a number of our achievements in 2025, including full year records for total revenue, rental revenue and EBITDA, strong free cash flow and attractive returns as we navigated through some of the unique dynamics woven into the current demand backdrop. Looking more closely at the fourth quarter, we were pleased with our core results, which were partially offset by shortfall in used volumes and some choppiness in our matting business, which I'm sure we'll talk more about this morning. So with that said, let's dive into the numbers. Rental revenue increased $159 million year-over-year or 4.6% to a fourth quarter record of $3.58 billion, supported again by growth from large projects and key verticals. Within this, OER increased by $97 million or 3.5%, driven by 4.5% growth in our average fleet size and fleet productivity of 0.5%, partially offset by assumed fleet inflation of 1.5%. Also within rental revenue, ancillary and re-rent grew by over 9%, adding a combined $62 million as ancillary growth continued to outpace OER. Moving to used. We generated $386 million of proceeds at an adjusted margin of 47.2% and a 50% recovery rate on $769 million of OEC sold. This brought our full year OEC sold to $2.73 billion, up slightly from 2024, but a bit below our guidance of $2.8 billion as we held on to high-time used fleet in certain categories. Taking a step back, at this point, we think the used market has normalized coming off the extremes we saw in 2022 and 2023, and we do expect 2026 to see healthy demand. Importantly, though, we're at recovery rates that will continue to support strong unit economics across the life cycle of our fleet. Turning to EBITDA. Adjusted EBITDA came in at $1.901 billion with a $33 million increase in our rental gross profit dollars more than offset by a $39 million decline in used gross profits due primarily to the shortfall in volumes that I mentioned. On a dollar basis, SG&A ex stock comp was flat year-on-year, translating to a 20 basis point improvement as a percentage of revenue, while other non-rental lines of businesses added $7 million. Looking at profitability. On an as-reported basis, our fourth quarter adjusted EBITDA margin was 45.2%, implying 120 basis points of compression or 110 basis points, excluding the impact of used. We continue to see the same market and margin dynamics play out in the fourth quarter that we experienced all year. From a cost perspective, the biggest of these was again elevated delivery expense, driven largely by fleet repositioning costs, which we'd estimate provided roughly 70 basis points of headwind in the quarter. Beyond that, growth in ancillary is roughly another 20 basis points of headwind, while we also continue to manage through above-trend inflation in a few notable areas, including facilities and insurance. As you heard from Matt, we expect the demand construct in 2026 to look similar to 2025. We expect that most of our growth will again be led by large projects at the same time that our strategy to provide products and services to our customers is likely to drive outgrowth in ancillary revenues. With that said, our entire team is working hard to mitigate the headwinds this presents to overall margins as strategically, we continue to believe that providing our customers with these additional services is an important competitive advantage and helps drive higher OER growth. Shifting to CapEx. Fourth quarter gross rental CapEx was $429 million, bringing our full year total to $4.19 billion. Moving to returns. Our return on invested capital of 11.7% remained comfortably above our weighted average cost of capital. And turning to free cash flow, we generated $2.18 billion, translating to a healthy free cash flow margin of 13.5%. Our balance sheet remains very strong with net leverage of 1.9x at the end of December and total liquidity of over $3.3 billion. This was after returning $2.4 billion to shareholders during the year, including $464 million via dividends and $1.9 billion through repurchases. Combined, this equated to a little better than $37 per share. Now let's shift to the updated guidance we shared last night, which reflects our confidence in delivering another year of solid results. Total revenue is expected in the range of $16.8 billion to $17.3 billion, implying full year growth of 5.9% at midpoint. Within this, I'll note that we're guiding used sales to roughly $1.45 billion on OEC sold of around $2.8 billion, implying total revenue growth ex used of 6.2% at midpoint. Our adjusted EBITDA range is $7.575 billion to $7.825 billion. Excluding the H&E benefit in 2025, this implies adjusted EBITDA margins of flat at midpoint year-on-year. Importantly, this guidance embeds actions we will be taking in 2026 to offset the cost dynamics I mentioned earlier and speaks to our focus on protecting margins as we work through some of the unique factors facing us until local markets rebound. And from a cost perspective, we're better able to leverage the efficiencies that our network density will provide. On the fleet side, our gross CapEx guidance is $4.3 billion to $4.7 billion, an increase from 2025 of approximately $300 million at midpoint. This reflects our confidence in the market in 2026 and beyond. Net CapEx is expected in a range of $2.85 billion to $3.25 billion. Now within all of this, we take our 2026 maintenance CapEx at around $3.4 billion, implying growth CapEx of roughly $1.1 billion at midpoint. And finally, we're guiding to another year of strong free cash flow in the range of $2.15 billion to $2.45 billion. Shifting to capital allocation. As always, our priority is to fund profitable growth, whether it's organic or through M&A. Following this, we focus on deploying surplus cash flow in ways to maximize shareholder returns. With that in mind, we are again increasing our quarterly dividend per share by 10% to $1.97, translating to an annualized dividend of $7.88. Additionally, we intend to repurchase $1.5 billion of common stock in 2026, supported in part through our new $5 billion share repurchase program that is intended to enable buybacks for the next several years. So in total, we intend to return roughly $2 billion to shareholders this year, equating to approximately $32 per share or a return of capital yield of about 3.5% based on our current share price. So with that, let me turn the call over to the operator for Q&A. Operator, please open the line. Operator: [Operator Instructions] We'll go first this morning to Steven Fisher of UBS. Steven Fisher: I wanted to just ask you, Matt, maybe a bigger picture question on ancillary services. Using the, I guess, the baseball innings analogy, where do you think you are on the evolution of this? Is this sort of like the second or third inning where you have a much wider breadth of services left to offer here? Or are we more like kind of sixth to seventh inning and it's a more targeted list? And I guess what's the message around the ROIC on these additional sources of EBITDA and points of customer service? Matthew Flannery: Sure, Steve. It would be hard for me to characterize because I don't know what other products or services we'll add in the future, right? It depends on -- because we need to do them at scale. So it depends on finding if we're going to add additional services to the portfolio, which usually come along with products, right, new products that we're offering, when or how fast that's going to happen. But I will say that our goal overall is to continue to have as many solutions for the customer as possible. We're a big believer in one-stop shop. We know that our partners want someone that could do as much for them as possible to consolidate their vendor base and to have strong services throughout the network of what they need, and that's going to be our driver. As far as the ROI on these, just one thing to remember, although these may be margin dilutive, most of these services, if not all, are not capital intense. So this net-net on a cash perspective, these are profitable. They just dilute margins. We're not doing work for free. But at the same time, it's very much connected to the fleet that we rent. So it's important that the more we separate ourselves by doing these extra services for the customer is a big important part of our strategy. Steven Fisher: Very helpful. And then maybe just on M&A and the pipeline. It looks like you did some smaller deals in the fourth quarter after a quiet few quarters. Can you just talk about kind of what you added in the quarter? And then just curious how active the pipeline is? Did you continue any activity here in the first quarter? And what sort of the range of size of deals you'd consider here? Are there any sort of chunkier deals that you could still do? Matthew Flannery: Yes. So on the latter part of your question, the pipeline is pretty robust. And there's some chunky deals in there, right, specifically when we're looking at opportunities in specialty. But the deals that we did at the end of the year here in '25 were pretty small deals, to your point. We did one trench deal. We did a portable sanitation deal, a very small one to help fill out the footprint. And we did fill out -- we bought an aerial company in Australia to fill out that product offering, which will help those folks continue to serve more -- have more solutions for their customers there. But no impact -- not a large impact numerically, but strategically, they all tie in. And as far as what we're going to do in '26, we worked a very robust pipeline this year. We didn't get -- we got 3 over the transom at the end. It's really more about finding the right fit, finding the right partner. And at the end of the day, the math has got to work. So we're pretty picky there, but there's plenty of opportunity. It just -- it's got to fit for us strategically and financially. Operator: We'll go next now to Jerry Revich of Wells Fargo. Jerry Revich: Ted, I'm wondering if you wouldn't mind unpacking the comments you made within specialty. You mentioned there's some variance in the portfolio on Matting. Can you just talk about the growth trajectory for the businesses, which ones are tracking better? And any additional color you want to provide on Matting would be helpful. William Grace: Yes, yes, absolutely. Thanks for the question. So we saw broad-based strength in specialty again. Matting was affected in the quarter by a pushout of really one particular project that we had expected would benefit the fourth quarter. It's a large pipeline project that simply has been pushed out. So we've got the Matting contract. We know we're going to be on it and the pipeline itself is moving forward. But that was certainly something that we had not expected, and that's just the nature of some of the large projects they do, I'd say, in their specific verticals that can move. Otherwise, every vertical was up in specialty, very pleased with the results. And going forward, just as you think about Matting, on a pro forma basis, that business was up 30% for us in '25. It was up 55% as reported. When we bought Yak, we said our goal was to double the business within 5 years, and we're very happy to report that we're ahead of plan, and we've been very happy with the business. It's going to be a little lumpier, right? And they can have just the effect of timing shifts, and that's really what you saw in the fourth quarter. But as I said, we've been super pleased with the acquisition and the growth, the returns that that's providing, and we're really optimistic with the outlook there, both within their kind of core products or end markets, pipelines and transmission lines, but also as we extend those products into other verticals. Matt, would you add anything? Matthew Flannery: No, well said. The team is doing a good job, just a little lumpier than what you folks are used to seeing from us. Jerry Revich: Okay. Super. And then can I ask in general rental, we're seeing really strong demand for earthmoving equipment, but aerials really lagging. Is that a function of the large projects and data centers being less aerials intensive? And curious if you're seeing based on your customer checks an inflection in starts in retail and office that could be interesting as we head through '26. Curious what you're seeing on those fronts. Matthew Flannery: Yes. We're actually not experiencing that, Jerry. We've been pretty strong in our aerial usage and growth and really the whole project -- product portfolio has been strong. So we're not seeing a delineation there, separation between the dirt and the aerial. Maybe on the OEM side, there's some stuff going on that you're referring to, but we're not seeing it in our customers' demand needs. William Grace: And then, Jerry, in terms of your question about kind of office and retail, I can't -- I mean, there are projects that kind of come across the transom. I don't think we've seen any inflection. I would say, overall, the outlook for commercial is probably going to be relatively muted, and it's other areas of the nonres that are really going to drive -- continue to drive what we think will be strong growth. Operator: We go next now to Angel Castillo with Morgan Stanley. Oliver Z Jiang: This is Oliver on for Angel today. I was just curious on fleet productivity. Can you guys talk about what drove the year-over-year improvement this quarter? And if it's possible at a high level, what your outlook implies directionally for those factors, rate and time for 2026? Matthew Flannery: Sure, Oliver. So when we look at the 0.5% fleet productivity in Q4, there's a couple of things that I knew we need to handhold here because some things that aren't as apparent to you guys. So qualitatively, when we think about the construct of that, our full year fleet productivity was 2.2%. We're very pleased with that. That shows that we're outpacing the inflation. And just in the most simple terms, we're growing our rent revenue faster than we're growing our fleet. That's really what we're measuring here. In Q4, we had some impact. So if I think about the 2.0 that we had in Q3, which was more like a full year number versus the 0.5% in Q4, when I look at the factors, rate was positive. As a matter of fact, almost on top of each other of the benefit that we had from rate in Q3 versus Q4 in this we're exactly the same. Time was slightly less positive than we had in Q3. So that was a little bit of a drag. The big number here and why we're talking about it is mix. So just the Matting choppiness that Ted talked about, which is all bulk. That's why it shows up in mix. Those aren't serialized assets for those mats. That alone change from Q3 to Q4 was worth a point of fleet productivity. So that's the big mover there. We usually, frankly, wouldn't talk about an individual business segment, but we understand that this is unique and it was such a needle mover that we wanted to talk about it. Once again, pleased with the Matting business, but that lumpiness and because it's all bulk had a big negative mix impact on our fleet productivity. Otherwise, we would look much more similar to our full year and our Q3 numbers. Oliver Z Jiang: Got it. Understood. That's really helpful. And then maybe just one more, switching gears on competitive dynamics. I mean we were just curious if you've seen or heard any changes on the ground in terms of having a competitor recently IPO, whether that's potentially a positive or negative impact for you guys now and also longer term? Matthew Flannery: Yes. So a little bit different, right? As you can imagine, between Wall Street and Main Street here. That change of where they get their funding doesn't really change anything on the Street. We think the supply-demand dynamics are good. We think that's why you had asked earlier about what's implied. That's why we -- in our guidance. That's why we still expect to have positive fleet productivity next year. We understand the competitive nature of the industry, but we think the important part of it and probably being public will help that even more. We think the most important part of it is that the industry needs to continue to be disciplined because we've all absorbed price increases on fleet for the past few years. So the importance of the components of fleet productivity are still important, getting good utilization, getting strong rate improvement. These are all things that are must for the rental industry and certainly something that we are focused on, and we believe the industry is as well. Operator: We go next now to Jamie Cook with Truist. Kevin Wilson: This is actually Kevin Wilson on for Jamie. I wanted to ask about cold-starts. I think you're expecting 40 specialty cold-starts in 2026, which is healthy, but down a bit from the number you had 2025 and 2024. I am wondering if you could speak to the strategy there and just your strategy around the footprint over the medium term in the context of revenue growth coming from more geographically dispersed customer demand, maybe where you're finding the strongest opportunities for organic growth? Anything on the verticals within specialty you're targeting for those cold-starts this year? Matthew Flannery: All right, Kevin. So I'll take them one piece at a time here, and you'll have to remind me later if I forget. So the cold-starts specifically -- that's okay. The cold-starts specifically, we don't really look at these as we tell you about them on a calendar year, but I wouldn't read anything into the 40 versus the 60. I think we originally targeted 50 for 2025, and the team got ahead in the pipeline, but there continues to be a pipeline of markets they want to enter. And where that number ends up has to do with where do they find the right real estate and talent to open it up. And most of this is continuing to expand our one-stop shop, right? So most of these cold-starts are in specialty offerings, filling in the white space, specifically for one of the -- some of the new product lines. So we feel really good about that. As far as where is the organic growth coming from and we think about -- it's all the end markets we've talked about. We believe that the construct, as Ted had said earlier, of demand in 2026 is going to be similar to what it was in '25, where the large projects and specialty are going to drive most of the growth. We think that plays into all of our product lines. That's the whole point about the one-stop shop offering is that's going to create growth for gen rent and specialty. And outside of that in the verticals, it's the same stuff you guys would see. Power is still really strong. Nonres has been very resilient and strong. Even if you pull data centers out of nonres, it's still positive, strong. So we feel really good about that. And the ones that are still dragging would be the residential, which is not a big part of our portfolio and a little bit of petrochem, whereas I think you see the rig count in Q4, if I believe my memory is correct, was down 8%. So outside of that, there's nothing specific I'd call out. Kevin Wilson: That's helpful. And then just a follow-up on that with the growth coming from large projects. I guess like what can you -- what's embedded in the revenue guide in terms of local market demand? Can we still call that flattish, which is, I think, what you said last quarter? Or just what's your level of visibility? Matthew Flannery: Yes. Yes, you're on it, Kevin. We still think that's -- and it will vary market by market. But overall, in generality, we'll call that flattish. And with most of the growth, as I said in my opening remarks, coming from the big projects. That pipeline is as big as it's ever been in my 35 years. So it's going to be more of the projects, and this does not contemplate a big rebound in the local markets. But to be fair, not a deterioration as well. We think steady as she goes in the local market. Operator: We'll go next now to Kyle Menges with Citigroup. Randi Rosen: This is Randi on for Kyle. You guys mentioned that you guys alluded to another strong year of growth in large projects. I mean I'm just wondering, based on your recent conversations with customers and what you're seeing in the market, in your mind, what inning do you think we're in, in terms of this mega project spend? I mean it sounds like it's going to be strong this year, pretty strong this year, but more of a longer-term outlook would be super helpful in terms of how spend could go over the next couple of years. William Grace: Yes, I'll start there, Randi. I'd say the outlook for the so-called mega projects is very healthy. It's certainly hard for us to judge what inning we're in, but we certainly don't think it's later innings. And we base this on a lot of things. But frankly, we've got a pretty broad assortment of drivers within large projects. So we've talked about infrastructure. We've talked about stuff within technology. We've talked about power, certainly data centers. But at this point, we're kind of following, call it, 6, 7 or 8 tailwinds that we've been talking about for years. And when you aggregate the dollars that are expected to be invested in those areas, we think there's a very healthy amount of runway ahead of us. Randi Rosen: Got it. That's helpful. And then I guess just in reference to some of the cost actions that you mentioned in your prepared remarks to offset some of the headwinds this year. Can you just give us some color on some of those actions you're taking and what you might expect those to contribute to margins this year? Matthew Flannery: Yes. So we probably won't call it the contribution, but it's all embedded within the guidance. But what we're -- one of the areas you can imagine, we're really focused on is we've talked all year about these repositioning costs. Well, if large projects are going to keep driving the growth, we're still going to have those, but we've got a lot of actions in place. How can we mitigate those? How can we do it better? We can't eliminate them. It's part of driving great fleet efficiency and fleet productivity is moving those assets to places where the work is, but we're going to -- we got more eyeballs on it and we put some more tools in place. And then just any other hard cost actions we could take to help the team. So we'll talk about that as we achieve them as we go along. But we feel good that we've got an action plan in place to protect our margins and to make sure regardless how demand shows up, we -- as we said earlier, we believe in profitable growth, not growth for growth sakes, and we're going to make sure the team is focused on protecting margin here in '26. Operator: We'll go next now to Tim Thein with Raymond James. Unknown Analyst: Tim on for Tim here. So on the fleet productivity discussion earlier, I guess, kind of another reminder of some of the challenges of interpreting that number from the outside. But just is it -- and maybe I missed it earlier, but in terms of the plan for '26, just in terms of how you see the year playing out, it's still Matt, the expectation that your ability -- or you have the ability to outgrow that assumed inflation. Is that within the targets for '26? Matthew Flannery: Yes. Yes. Embedded in that guidance is that expectation that we'll at least reach that 1.5% hurdle. And where we end up in the guidance and where we end up on that will -- that deconstruct the revenue will be the answer. We might have some lumpiness, not -- hopefully not as severe in Q1 still with the mix. And that's why we don't really forecast this because the mix is a wildcard, right? That's the result of a lot of moving pieces there. So -- but the most important pieces of it, rate and time, we still feel good about. We may not have a huge time improvement, but we're running at really high levels of time utilization. So we'll stay tuned there, but we certainly continue to focus on rate and mix will be what it will be. And we think at the end of the day and embedded in this guidance is that will be positive fleet productivity to make sure we can offset that inflation. Unknown Analyst: Got it. Okay. And then just in terms of the -- your plan on fleet loadings and just CapEx in '26 from a timing standpoint, just given that you pulled forward a little bit more CapEx into 4Q, does that impact the timing in terms of how you expect to land that fleet in '26? Or is it more of a normal cadence... Matthew Flannery: Yes. I'd say more of the normal cadence, Tim. I'd say the -- in that 15% to 20% range in Q1. In the middle quarters, it will vary depending on how fast we're getting deliveries and how good the team is doing driving utilization, but we'll be in that 70%, 75% range and then the balance in Q4. So pretty similar to what we've been doing. Operator: We'll go next now to Ken Newman of KeyBanc Capital Markets. Kenneth Newman: Maybe to start off, Ted, I think you mentioned in your prepared remarks having to hold on to some high-time used equipment, which impacted used sales volumes this quarter. Can you give a little more color on that? And just what exactly were those categories kind of reflecting? William Grace: Yes, absolutely. So as you saw in our guidance, we initially expect or what we've consistently said is we expected to sell about $2.8 billion of OEC across the year, and we came in at about $2.73 billion. So you can see that shortfall really was in the fourth quarter specifically. And we had a number of regions that just ran busier with certain high-time assets. So you would think things that might reach high in the air. So it could be aerial products, telehandlers, things of that sort would probably be the most notable categories. And so obviously, those things were on rent. We weren't going to pull them from customers to sell them. And so that really kind of explains the deviation in terms of the used mess. Kenneth Newman: Got it. Okay. And then maybe just for my follow-up, I just wanted to circle back to the margin guide. It sounds like you expect some of these cost actions that you're implementing to help offset the ancillary and delivery mix as we go through the year. Just any help on how to think about the margin progression? Is that something that you expect to take place more materially in the back half? Or just -- is this going to be something that you expect day 1 here in the first quarter? Matthew Flannery: Yes. To your point, it's something that will progress. This isn't going to be a light switch. And specifically, when you think about some of the mitigation and repositioning costs, just by definition, more of that will happen when we have more activity. So in our peak quarters of volume is when the opportunity is. But then even some of the other costs that we're taking out, it will build up along with when the costs are usually achieved, so to speak, or actually not achieved. So we'll still have some noise here in Q1. And then as we work through the year, we believe we'll start to see the benefits of some of these actions. Operator: We'll go next now to Steven Ramsey of Thompson Research. Steven Ramsey: I wanted to touch on the growth CapEx number of $1.1 billion, I believe you said for the year. Maybe to remind us how that compared to 2025 and if the nature of the growth CapEx this year is similar to '25. William Grace: Yes. So if you look at what we did in 2025, total CapEx was, call it, with rounding $4.2 billion. Within that, there was probably something like $3.4 billion of what we would call maintenance. So that would imply something on the order of $800 million, $900 million of growth CapEx in the year. So I think in my comments, I mentioned there was an additional $300 million of growth CapEx. That will really focus on 2 areas. One is continuing to drive the growth in specialty and then taking care of large projects where we're going to need more fleet. Matt, anything you'd add there? Matthew Flannery: No, I think that covers it. Steven Ramsey: Okay. That's helpful. And then one other thing. I wanted to get some insights on the ancillary piece and if you are intentionally trying to drive this revenue on the ground and incentivizing it with the sales force? Or how much of that is a function of specialty having higher ancillary revenue that carries with it? Matthew Flannery: Yes. No, this is much more of a response to what the customers' needs are. And for some of it, it's actually setup. So think about if we're doing setup for a job trailer or some kind of setup for a power or HVAC setup. So a lot of this stuff comes with products that we're supplying, and it's just the need that the customer has where they like us to do it for them versus doing it themselves. So it's not really -- it's certainly not something that's driven by the sales team. This is driven by the needs of the customer along with the products that we're serving them with. Operator: We'll go next now to Neil Tyler with Rothschild & Co Redburn. Neil Tyler: I wanted to come back to the margin drag from the transportation costs and just sort of think about that bigger picture. Ted, I think you said it was 70 basis points in the fourth quarter, and it's really started to feature more significantly in the second half. So there's 2 parts to the question. Firstly, is there any aspect of these additional costs that reflects the change in the fleet being more specialized and so perhaps less fungible. I think you're probably going to cover that one-off quite quickly. But the second part of the question is, in the context of what you assume for flattish local small project growth, if that proves a little conservative in the back half of the year, particularly, would we -- should we expect the margin drag from transportation costs to disappear as a sort of natural effect of a pickup and a more broad-based acceleration in demand growth? Matthew Flannery: Sure, Neil. So I'll take the first part first. From a fungibility of fleet, this is not a fleet composition dynamic. There may be some exceptions to that, right, some specific assets that you might need to move for an LNG plant that's unique. But for the most part, 95-plus percent of our fleet is extremely fungible. And that's a big tenet of our business model and how we believe in. We don't really get into unique one-off kind of serving one end market products because the lack of fungibility and then therefore, productivity you can drive out of it. And your point about the local market is a great one. But I wouldn't call it conservative. The way we see today, we do not expect there to be big growth in the local market. If that changes, we'll react as always. But when it does, that will allow us to use the density of our network, right, our entire cost structure to help drive growth, and it will be more efficient as opposed to having to reposition fleet and some of the stuff that comes with mobilizing to these large projects. So your thesis, we agree with 100%. We don't expect that local market repair. It's not embedded in our guidance for 2026. Operator: We'll go next now to Scott Schneeberger with Oppenheimer. Scott Schneeberger: Just a quick follow-up first on fleet productivity. You mentioned the matting was a whole point that impacted the fourth quarter on a delay. Is that something that's going to appear as like an outstanding or unique fleet productivity impacting first quarter? Or is it a push out a little bit farther? Just anything we should look at that would be abnormal in that first quarter? Matthew Flannery: Yes. So I do think it's abnormal. Could we get some of that in Q1? Yes, we could. It depends on when these projects actually mobilize, right? It has -- some of these large projects do have a big impact. But -- so one -- as I said earlier, we don't forecast the quarters because that mix component is so volatile. I think more importantly, for the full year, which is what we buy the fleet for and what we measure fleet productivity on, we do expect to have positive fleet productivity. And I expect it to be positive in Q1, just may not be meet our expectations and time will tell. We could get surprised, things can mobilize quickly. So we're not as focused on the quarters there as much as we are making sure full year, the fleet that we're spending on the CapEx on is bringing us the returns, and we're utilizing it in an efficient, profitable way. Scott Schneeberger: And then just on -- you guys speak often to technology investments often in the same breath as cold-starts. Just curious, obviously, it's embedded in this guidance you provided for 2026. But what are some of the technology investment focuses that you've had in recent years? How is that going to look different in 2026? And is that budget going up or down within this implied guidance? William Grace: Yes. Definitely, technology spend will be up in '26 versus '25. I think like a lot of companies, we're investing in a lot of different opportunities and initiatives. Some I would describe as more elective and some are critical. So we continue to try to leverage more and more technology to drive greater operating efficiency. So we've got a number of projects that would be designed to help with fleet efficiency, frankly, with repositioning costs and delivery costs. There's other things that are mandatory like cyber and protection. So there's a lot of stuff that we're investing on, all of which we're excited about the ROI on it where it's critical like anything defensive like cyber. Matt, anything you'd add there? Matthew Flannery: No, no, I agree. Operator: Thank you. And gentlemen, it appears we have no further questions today. Mr. Flannery, I'd like to turn the conference back to you, sir, for any closing comments. Matthew Flannery: Great. Thanks, operator, and thanks to everyone on the call. We appreciate your time. Glad you could join us today. Our Q4 investor deck has the latest updates. And as always, Elizabeth is available to answer any of your questions. So until we talk again in April, please stay safe. Operator, you can now end the call. Operator: Thank you, Mr. Flannery, and thank you, Mr. Grace. Again, ladies and gentlemen, this brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Henrik Høye: All right. Welcome to presentation of Protector's full year '25 results. We will focus on the full year. The quarter is volatile. We say that all the time, focus on the full year result that is more interesting and says more about the underlying realities of the business. And before I go into the results, I always spend a little bit of time on who we are. And what we did this morning was to continue on looking at what the challenger should be in the future. And one thing that we care about is that we -- even when we are 700 people, even when we grow in a number of countries that we still act as one team, which is a bit contradictory to a performance culture where we compete against each other and also that we want local decisions and also that we want each individual in the company to make decisions because they are where it happens and they should know what decisions to make. So that's what the challenger is. It is about making everything we do, focused and simplistic. But when it comes to culture, we need to complicate it in order to spend time and really understand. So that we're on the same platform and the same grounds for the future because I think that's extremely important in order to stay who we are, the challenger. And then to the highlights, other than that 84.7% combined ratio and a 14% growth with an investment result of a return of NOK 1.5 billion, leading to NOK 31.7 per share in earnings. We have had some other activities in the quarter, one being the placement of the Tier 1 debt where -- bond where the market was good, so with good terms on that. Maybe the biggest other than the growth for 1st of January, which I come back to. News is that we have now been relieved of the maybe biggest mistake that we've made in Protector workers' compensation in Denmark, where we took on board a portfolio knowing that we didn't have the exact data we needed to underwrite it, but we underestimated the downside of that portfolio. And we have now sold that. So the agreement with DARAG is completed, and we can now focus on the lines of business and the business that we know how to do in Denmark. So that's very good. I'll get back to the reinsurance side and the growth later on. And speaking about the growth, I think that it is important, in particular, following the 1st of January with high growth. It's important to remember how the portfolio is put together. And what we see here is a development. The development is driven by disciplined underwriting. So we underwrite in all these segments. And remember that the commercial segments, so if you look at the segment distribution on the left of the cake diagrams here. Commercial sector in all countries is bigger than the public and housing sectors. And -- but we have grown more in the public sector. That is due to mostly market conditions being -- it's been more rational pricing in the public and housing sectors than what it has been in the commercial sector. So that's why public sector and housing has grown a lot also in the past 5-year period. And property and motor, by far, our biggest product, short-tail products. And U.K. is now close to half the business or at least 42% of the business. But it's also important to remember that the 1st of January growth is related to the Scandinavian markets or the Nordic markets and France, not U.K. And the market conditions are different in those two geographies. So it's been easier to grow in the Nordics and France than what it has been in the U.K. in the past year. So it's just a support so that you see what the inception structure in our portfolio was in the years from '21 to '25. Obviously, we don't know exactly how that will look in '26, but at least you then see that distribution. And when it comes to '25, what you have seen throughout the year is that from the U.K., we've had a good 1st of April in public sector and housing, but we -- I've also said and we've also experienced that the market has been softening. So rates have been going down, especially on the product -- the property product in commercial sector. So it is slightly harder to achieve price increases. It's slightly harder to renew clients and also to get new sales. But the churn in the U.K. during 2025 has been good. So we've managed to keep the churn at a good level around slightly above 10% and been disciplined in the new sales side. And then we've had strong growth in the other territories or in Scandinavia. And that is supported by good renewals, renewal rate of 95% in total for the company, it's basically the same in the Nordics. And -- but we've also had some new sales. So the markets there are -- it's good on the Norwegian business, which has the highest growth out of the Scandinavian countries on 1st of January '26. So a similar situation to what you see here. Denmark is #2 1st of January '26, but Sweden has a lower growth in '26. So Sweden is a market where there is still more competition and more competition that we view as irrational. And then you have the French business, of course, where not a lot happens in quarter 4. So most of it is old news of the start there. However, 1st of January is an interesting date because we communicated an estimated number of what we thought we would quote for 1st of January following quarter 3. And -- that number was roughly right. So what we have seen in the market for 1st of Jan in France is that we have won approximately 10% of what we have quoted in the commercial sector space, motor. And that's a lower figure than what we are used to in Scandinavia. It's more in line with what we are used to on the motor side in the U.K. And then on the housing sector, where most of the property volume from '25 comes from, we have basically won nothing 1st of January '26. So one of the big competitors, AXA has come in and lowered prices a lot compared to what they did in '25. So it's not a hat trick in France. We have not won volume in all the segments we're in, but we've got some traction on the municipality side, the public sector side, where the market situation is very different from the housing sector. And the interesting thing is that the housing sector is quite similar to what we know in the U.K., where there is low deductibles, lots of escape of water claims and calculating the price is not very difficult. So when we may make a mistake and the competitors that price lower than us, they may know something we don't. Absolutely, it's new. We're new in France. But at the same time, it's difficult to see that it's very sustainable those levels that we see in the housing sector now. So at some point, we believe that we can have success there as well. Maybe not in the same way as '23 in the U.K., but at least it's not on the public sector side, which is more about large loss and risk selection. Unknown Analyst: There are a lot of questions along the presentation. Henrik Høye: Sorry, I forgot to say that. So please ask questions during the presentation. Unknown Analyst: [indiscernible] France, after quarter 3, you said that -- at that time -- have been seeing around EUR 300 million in potential volume. And that your effective quotation rate would be around 70 to 75 [indiscernible] So approximately where [indiscernible] Henrik Høye: So it continued to grow, not a lot from that, but the quotation rate went slightly down, both because of capacity -- our own capacity. So we prepared as well as we could, but we didn't have enough manpower to do that with quality. So the actual number is very similar to what you could derive out of the 370 to 375... Any more questions on volume side? And please ask questions in writing as well. Okay. Again, when we look at the full year, we also bring out the longer picture here, and there is volatility in not only the runoff and the large losses, but also on the loss ratio below those large losses and without the runoff. The large loss situation in 2025 is lower than what we had said is normalized. And the comment on the top here going from 7% to 8%, I'll get back to when I speak about the reinsurance, but that goes for '26, not for '25. So for '25, it's still a normalized level at 7% approximately. So we're slightly lower than a normalized level in '25 and had some run-off gains, even though it's best estimate, but I've also said previously that following a period with uncertain inflation, you should expect that we -- that there is a bit more uncertainty and then there could be some runoff gains from that situation if we have been on the conservative side. And then when it comes to claims, I think the important message here is to say that if we compare full year '25 to full year '24, and you normalize for runoff and large losses, all countries are slightly better on the loss ratio side. So it's an improvement coming from the price increases where we have unprofitable products or clients. And that's the simple way of seeing it. The only country that is slightly up, but very much the same is Sweden. And then there are some technicalities, one of which is on the -- or related to the transfer of the Danish Workers' Comp portfolio. So the risk margin is reduced. It's a one-off of approximately NOK 80 million for the quarter and the year due to lower risk in the remaining portfolio, have changed that model. And then there is a small -- between the countries, it has nothing to -- or no consequence on the total loss ratio. But between the countries, there is -- we've changed from a standard, very old model of calculating the future claims handling costs and that changes the distribution with slightly lower cost, which is claims handling cost is on a loss ratio for U.K. So U.K. is slightly higher and then Norway and Sweden have had a bit more of that cost, and that's a one-off again. So they're slightly lower. And with that information, it's -- the conclusion is that all countries compared to '24 are slightly better, normalized for all of that. Any questions on the loss development side? You have all the figures on large loss in order to normalize on all these levels. So I won't go through each of them, but that's the total picture. So we have cost and quality leadership leading to profitable growth as our targets. The cost side is very flat. There is no or very limited efficiency improvements in what you see here. There are some effects that make this look -- '25 look higher than '24. But if you correct for the fact that the share price has increased, we've talked about that before, more than what it did in '24, and that is connected to incentive-based share program for some employees and France, then you'll get slightly lower than what we had in '24 on the cost side. But there is no or very limited efficiency improvement. And we do that consciously. But of course, we do want to see the effects of that investment we make. I think it's more likely that we see that effect in new opportunities for growth that we spend it on developing the company in -- on the growth side to grow then that we cut and slim down departments very quickly in order to get the low cost. And that takes some time, as you understand. So I think that there is no -- nothing very special to comment on here other than those comments I've already had, unless you have any questions on specific countries or the totality on cost. Now continue to the quality leadership. And last time we brought this up, we had the U.K. survey with the brokers where we got very strong feedback. We've also had the Scandinavian or the Nordic surveys out and had very strong feedback. And it's especially good to see that we are increasing the distance to our competitors in all the Scandinavian countries. And we are also winning more prices, external prices from the brokers. So the largest broker in Scandinavia. We are #1 in Sweden and in Norway. And we've also won other external surveys that support our own survey. But at the same time, and as always, the most important thing about this survey is to understand that feedback, use it as a basis to discuss with the brokers who are our best and only friends, how we can improve, what we should prioritize to improve in the future. So this is good news. It doesn't automatically mean that we will get more business from the brokers, but it means that we can -- we're in a position to require more from our best and only friends. And I think that's the important part that the long-term gain from this is that we can require better data, more data, we can require that they invest together with us in competing against the direct channels and that we can do those larger projects because we -- you say that we are the best partner for you. So that's a good thing, but it doesn't mean that we win more clients tomorrow. Yes, there is basically nothing I haven't touched upon here since we've talked about the cost previously as well. So I'll move forward to the investment side. And -- yes, when you see this, it's per 31st of December and does not then include the reduction from the transfer of the workers' comp agreement, which is for '26, and it does not include new growth, of course. So that's a change. But the results on the investment side are strong in absolute terms and relative, especially on the equity side, but also on the bond side in a very strong market. And the yield is down due to the reference rate, if you compare it to last year. Other than that, on the bond side, it's very similar portfolio. We steer interest rate towards our liabilities, and we have a slightly shorter duration in our reserves. So that's down. And then you see the comment at the end that we have the assets under management are reduced by the transaction amount of the reserves that we had on the Danish workers' comp portfolio, approximately NOK 1 billion. And on the equity side, I think it's right to say that it's both absolute and relatively strong result. There is some changes in the portfolio. You see that the discount to intrinsic value has reduced significantly from last year. Some of it is obviously that we've had the gain that we had. So the share prices have gone up, but there are also some companies or some sectors that have performed worse than what we have expected. So there have been some changes in the intrinsic value. So we're open as a value. So -- and this year, it has been some disappointments on certain segments and companies and some changes in that portfolio. But even though it's the same number of holdings, there have been some changes in the portfolio during 2025. And you'll see that in the annual report what we had at year-end '25. Any questions to the investment side? Microphone? Unknown Analyst: You managed to earn an annual rate of return on investments of like 14% over the last 10 years, which you saw on the last slide. How did you do that? And are you going to keep on doing it? Or is it going to be another number in the next 10 years? Henrik Høye: So Dag Marius is here and he's in charge of that, but I can answer that question in at least a simple way, and that is that we believe in what we're doing, and we will continue believing in doing that. So investment is core business for Protector as insurance is. And we will continue to step-by-step have improvements in our processes. And -- but what the future will give, that's very difficult to say. Our ambition is to beat the market over time. And we think that those processes are set to do so. So unless Dag Marius has anything to add. On the income statement here, we have a couple of comments. And I've touched upon one of them before, the change in risk adjustment, it's an IFRS element. So it's on top of the best estimate reserves. There is a risk adjustment in IFRS. And when a long-tailed reserve portfolio is out of our portfolio, then the risk in total for the rest of the portfolio is lower. So that's why we've made that change. It's a one-off, and it should be a stable number or fairly stable number in the future, depending on where the growth comes from. And then it's the larger change that we've made on reinsurance. And it's a bit complicated just because there are no figures that will exactly clarify what has happened on the reinsurance side in the accounts. But to make it simple, we see it from two sides. So I said that we increased the large loss -- normalized large loss rates by 1 percentage point from 7% to approximately 8%. So we're taking a bit more risk ourselves, buying less reinsurance on certain programs. I'll get back to that. And then on the other side, we pay less for that reinsurance. And we wouldn't have done that if we didn't think it was a good idea. And we've done that on the areas where we have a lot of data, so where we think that we're actually able to predict what those large losses will be over time. So that's -- so one angle is that we have increased risk, and that's -- that will mean that -- so it's the very large losses. And as you've seen over the last 5 years, our large loss rate is lower than 7%. And so these are the very large losses. So it's not something that will happen every year. It's -- this is a volatile element. It's a volatile part. It's long -- far out on the tail that 1 percentage point that we're speaking about. And then the reduction in cost is then higher than what that increase is. On the capital development side, on the own funds, we have the Tier 1 that we issued. And then as we're growing, we utilize more of the Tier 2 capital that we have issued previously. And then that's basically the same amount as the dividends that will be paid. So that's stable. And then on the requirement side, it's on the insurance side that there is a change and it's related to reinsurance. And that's the other angle to that reinsurance exercise that we -- so it's increased approximately NOK 300 million on the requirement side. And when we do that, and we have a target or a requirement of 20% return on that capital we need to hold for NOK 300 million insurance risk, which is higher than NOK 300 million, of course. Then our view is that has to be that it's much higher or higher than 20% return on that equity. And our estimation is that it is much higher than that. If not, we wouldn't have done it. So what we have done is to say that on what we call risk -- the risk program, that's basically fires that can be that large on the risk program. We have increased from 100 million Scandinavian kroners or 10 million pounds or euros to NOK 330 (sic) [ 300 ] million. And that's because we have very solid data sets to document and to calculate losses between or up to NOK 300 million and the price is too high. So let's not buy it. We can take that volatility. But obviously, there will be slightly more volatility in our results. But the economic realities of it is that it's the right thing to do. The cat is different. So natural catastrophes, that's different. Just like predicting the interest rate, I don't think we should believe that we are best in the world at predicting what the weather will look like and what climate changes will do. So to increase too much on that side, obviously, we have a view of both how we select risks when it comes to natural catastrophes. We have processes and data that aim to avoid the worst ones where there will be the most flood or the most windstorm damage. But to predict the consequence of weather-related damage to our portfolio is difficult. So we have increased retention on the traditional program to the same level or actually higher since it is in Danish kroner as on the risk side, but that's only for the first loss, then we bought more reinsurance that reduces that to DKK 100 million on the second loss. And the reason is basically that we don't think we know exactly how to calculate that. On the U.K. liability, it's just a too high price. So we -- then we say that you pay this price or we take it ourselves to the reinsurers and some wanted to pay that price or take that price and some didn't. So then we took a higher share of the layer between GBP 10 million and GBP 25 million on U.K. liability. And we are much more comfortable with that portfolio today than what we were when we entered the U.K. So that's -- yes. Any questions on the reinsurance side? Unknown Analyst: Henrik, one, I think that what you're doing sounds reasonable, absolutely, so we like it. What's your estimated or guesstimated increase in retention rate after this one? Because when we do our calculation, we end up that you estimate a large loss ratio to go up from 7% to 8%. And our estimation is that the retention rate will increase with around 2.0 percentage points. Is that a fair assumption, would you say? Henrik Høye: Yes, I think that's a fair assumption. And obviously, it depends on how the portfolio develops. But with the '25 portfolio, it's a fair assumption. Distribution policy, it is very similar to what we have had previously. What you do see is for the one who has studied it next to each other is that it is -- the arrow is slightly taller. The green starts slightly higher up and the box -- the blue box above 200 is slightly higher than the one below. And that is to reflect the process that we have where it's not really about these numbers, 200% or 150% is important. That's the bottom and then there are activities. But it's about the risks that we look at and evaluate every quarter on the different areas, mainly the insurance side and the investment side, but all the underlying risks from them and then the stress scenarios and what we have in a stress situation because what we always want to be sure of is that we are ready to act on profitable growth and good investment opportunities in a crisis situation, but at the same time, not to get lazy, obviously, and make sure that we don't think that we can make a lot more than you if we don't see those opportunities right in front of us. But that's -- it's a quarterly process or a continuous process with a quarterly decision, and it is -- it happens after we know what the results are, not before. Our long-term financial targets, no change in them. And it may seem a bit conservative to say 91% combined ratio with the history of the past 5 years. And the underlying realities is, when I say that they look good and we deliver 85%, they still look good. So -- but it is something about the growth -- Protector as the growth company. We -- profitability is extremely important, but we also have to face the fact that in order to find new markets, there is a bit more uncertainty and we need -- price is the deciding factor. So 91% is long term, a very good return on equity and the same there, conservative relative to those numbers, but I think that it is a good steering to have. And then we're back to the summary and any questions on the totality or the last part? Unknown Analyst: My name is [indiscernible]. I have a question, if I remember correctly, at the last quarterly presentation, you talked about the possibility of entering a new market in the U.K. within real estate. Could you say something about -- are you quoting for the 1st of April already? Or is it too soon? And could you say something about your volume expectations in this market? Henrik Høye: Yes. Good question. I should probably have said something about it on the volume side. So it's -- we have quoted very selectively so far in the real estate market. We have won a handful of clients in that market. But the selectiveness is due to the fact that we basically only quote what looks like what we have from before, housing, for instance, in the real estate sector. And in that part of the real estate segment and especially for the large clients, it seems like the rates are a bit too low. So we haven't won many of the larger clients there yet. But we have quoted very little so far, so that it's a bit unsure if the market intelligence is significant. But we're building those databases with data from the brokers. We're actually getting large databases from the brokers. And when we have a more granular model that can separate the different types of risks within real estate, we are very ready to make that a quoting machine. So we have -- there, we have the model, the people and the setup. So we're feeding that with data. And then we've said that it's approximately GBP 1 billion in that market for what we have risk appetite for. And over time, and I don't know what that is. I'd say it could be 3 years. If things -- if it's a hard market and a rational market, it could be 7 years if it's a bit up and down. But we should have a large share of that market, meaning at least double-digit percent or higher than that is quite obvious because there is a lot of attritional losses and cost will matter in that segment. It's very similar to what we do. So nothing in the figures for now. No good understanding of the market situation, but we're preparing, still preparing. 1st of April is not necessarily a very large date. It's more spread out on the real estate sector. Thomas Svendsen: Thomas Svendsen from SEB. So a question to your U.K. business, just to help us to try to calculate sort of the trajectory of the combined ratio there. So the business you have today, that's the back book and then you have the front book. So how many years do you think it will take before you have replaced the favorable business with the new maybe softer business? Henrik Høye: So it's -- I've commented on this before, and we haven't changed the view on it other than that -- the parts of the portfolio that should be out in 1st of April '26 is going to be smaller than what we estimated. So it's not coming out for tender. But basically, what you can say is that for all the business we wrote in '23, which is the big inflow as 1st of April '23. It will be some clients with -- then 3 years, but I'm saying that that's a smaller share than what is the normal. And then some clients with a 4-year before they go to market. And then -- so let's say that it's approximately, I think I said that before, 40% on 4 years and 40% on 5 years and then 20% on 3 years. And then maybe it's 42% and [ 42% -- 16% ]. Thomas Svendsen: Okay. Good. And just on your -- if you look away from France, but just on your combined ratio. So are you thinking -- are you prepared to go materially above or somewhat above 91% in certain of your established markets if some are below and you think about the average on your existing business looking away from France? Henrik Høye: I think on existing business, we are prepared to write contracts over time that can be slightly above 91% on short-tailed business, if it makes sense. And that can mean first year not to do a price system, but that it is necessary to come in on a higher combined ratio than -- or significantly higher than 91% on the first year with mechanisms and risk management initiatives that make it profitable over time. And we -- but maybe more interesting, I think, is that we then -- we're more interested in looking at new segments or going into business that we find data for, but that are new to us, which there is a bit more uncertainty around, but we have a strong book in the bottom. Unknown Analyst: [indiscernible] A question regarding volume in Sweden going forward. You mentioned that it's still somewhat irrational pricing there and as such, a bit harder to gain volume. Should we expect the coming years '26, '27 to be at approximately '25 levels? Or do you expect that to decrease or increase based on the market situation? Henrik Høye: I think that it's very hard to predict what the competitors will do over the next 2, 3 years. But I -- what we see now is that it is still more difficult in Sweden, and that probably doesn't change tomorrow. But there are a couple of market movements in Sweden that can give us more opportunities. So one of the largest players in Sweden is not -- they haven't officially run out with it, but they are not very interested in brokers, and that can give some better opportunities, more opportunities. There are also some large initiatives on facilities in the Swedish market that goes for the whole Scandinavian market, where we have a very strong position with the brokers to do that cooperation. And then we're in a game where it's more about finding an efficient way of dealing with clients that are slightly smaller and give them a good product through a broker, and that can grow the broker market share -- brokers' market share. And that's -- since the largest Scandinavian broker is headquartered in Sweden, they are furthest ahead there. So there are some market opportunities that can be bigger, but the competitive landscape is a bit volatile in Sweden. Unknown Analyst: You've probably been asked this question many times before, but why did you really choose France? Henrik Høye: Yes. So the short version of that is that we looked at many countries on a high level. Is it -- do the brokers have a good market share? And is the market large enough that we -- that it is interesting to us? Is data available in that market. And public sector has been important for us. That is a market that is -- has the same dynamics as we used to with public procurement regulations and a similar type of insurance purchase. And then we -- through the high-level analysis we started in Spain, we didn't get data in Spain. When we went to France, which was #2. And then we met the brokers, got data in France, and then we can go to the table and at least have a similar starting point as competitors when it comes to competence and understanding of the history. No more questions. Thanks for meeting or listening in. I wish you a good day.
Operator: Greetings, and welcome to the Fourth Quarter 2025 Meritage Homes Analyst Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to Emily Tadano, VP of Investor Relations and External Communications. Please go ahead. Emily Tadano: Thank you, operator. Good morning, and welcome to our analyst call to discuss our fourth quarter 2025 results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our homepage. Please refer to Slide 2, cautioning you that our statements during this call as well as in the earnings release and accompanying slides contain forward-looking statements. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2024 annual report on Form 10-K and Form 10-Q for subsequent quarters. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures. Share and per share amounts have been retroactively restated to reflect our January 2, 2025, stock split for all prior periods. With us today to discuss our results are Steve Hilton, Executive Chairman; Phillippe Lord, CEO; and Hilla Sferruzza, Executive Vice President and CFO of Meritage Homes. We expect today's call to last about an hour. A replay will be available on our website later today. I'll now turn it over to Mr. Hilton. Steve? Steven Hilton: Thank you, Emily. Welcome to everyone listening in on our call. Today, I'll begin with a brief overview of market trends and highlight our fourth quarter results. Phillippe will then discuss our strategy and provide an operational update. Finally, Hilla will review our financial performance and share our 2026 forward-looking guidance. The fourth quarter of 2025 ended the year marked by much softer-than-anticipated market conditions as affordability challenges persisted and buyer confidence deteriorated. Our fourth quarter 2025 sales orders totaled 3,224 and our average absorption pace was 3.2 net sales per month, reflecting Q4 sales seasonality, a pullback in buyer urgency and a strategic decision to hold the line on incentives. Despite the tougher conditions, our 60-day closing guarantee and healthy supply of nearly completed spec inventory contributed to another quarter with an exceptional backlog conversion rate of 221%. We delivered 3,755 homes and home closing revenue of $1.4 billion this quarter, which led to an adjusted home closing gross margin of 19.3% and adjusted diluted EPS of $1.67, both in line with our guidance range. We also increased our book value per share 7% year-over-year and completed $150 million of stock of share buybacks, returning nearly $180 million in total capital to shareholders this quarter via repurchases and dividends. Our full year 2025 sales volume of 14,650 homes was essentially flat compared to prior year as we grew ending community count 15% year-over-year to 336 communities, offsetting slower demand. On a full year basis, we achieved an average absorption pace of 3.9, which we believe was better than the broader market trends, demonstrating the benefit of our strategic focus, including our strong realtor engagement. We anticipate that in the near term, market conditions will continue to be impacted by elevated mortgage interest rates, job security concerns and greater macroeconomic geopolitical uncertainties. However, long-term housing demand remains supported by favorable demographics and undersupply of affordable homes in the United States. We believe our strategy allows us to effectively compete with existing home sales, which will continue to create a market differentiator for us. With that, I'll turn it over to Phillippe. Phillippe Lord: Thank you, Steve. First, I want to thank our Meritage team for their hard work and dedication this year. Through challenging conditions, they never wavered from our vision to positively impact the lives of our customers as evidenced by our industry-leading customer satisfaction scores for 2025, while still focused on generating value for our shareholders. I would like to emphasize our balanced approach to capital allocation. We strategically terminate certain land deals to redeploy our capital towards repurchasing additional shares and acquiring new land that will enhance our long-term portfolio. These decisions were influenced by several factors: our market outlook, the land market, growth targets, our current stock valuation and the evolving macroeconomic landscape. The resulting changes stem from a thorough review of our controlled asset pool, allowing us to make informed decisions about which deals to exit to better position ourselves for the future. While we always encounter a few deals that don't meet our criteria after due diligence, we do not anticipate this level of deal terminations to reoccur, assuming the current economic environment remains stable. The recent slowing demand environment has presented opportunities to enhance our land portfolio in specific submarkets. We observed land deals returning to the market, sometimes in more strategic locations and with more favorable structures. Although land prices have not significantly declined, we believe these alternatives will positively impact our long-term profitability in the coming years. Consequently, we have unwound some existing land contracts to reallocate capital towards additional share repurchases and new and future land deals. Based on our current view of our overhead this quarter, building on a multiyear technology initiative focused on automation and process efficiencies, we are now able to achieve improved back office productivity aligned with our move-in ready all-spec strategy. Our goal is to remain highly efficient and drive increased operating leverage of near-term macroeconomic conditions. Finally, as announced in Q4, we are committed to redeploying $400 million towards share buybacks in 2026, highlighting our view that the stock remains significantly undervalued. We repurchased approximately 2.2 million shares this quarter at an average discount of 12% to 2025 year-end book value per share. For full year 2025, we repurchased 6% of our outstanding shares. Our decisions have been thoughtful and intentional considering the current environment, and we believe the actions we are taking today position Meritage to continue to generate continued long-term value creation. Now turning to Slide 4. Fourth quarter 2025 orders were 2% lower year-over-year, primarily due to an 18% decline in average absorption pace, which was mostly offset by an 18% increase in average community count. The cancellation rate ticked up to 14% this quarter, but remained slightly below the historical average of mid- to high teens as we benefit from a quick sale to close process. Our fourth quarter 2025 ending community count of 336 was an all-time high, up 15% year-over-year compared to 292 at December 31, 2024, and up 1% sequentially compared to 334 at September 30, 2025. During the quarter, we brought 35 new communities online throughout all of our regions. For full year 2025, we opened over 160 communities. In addition, we are expecting another 5% to 10% community count growth in 2026. Given our robust growth in 2025 and further expansion in 2026, we believe Meritage is well positioned to gain market share, both near term and as macro conditions improve. Our fourth quarter 2025 average absorption pace was 3.2 compared to 3.9 in the prior year as we intentionally elected to not further lean into incentives where we experienced market inelasticity from weakened demand in order to balance margin and velocity. We remain committed to maximizing the value of every asset in our land book. Long term, we continue to target 4 net sales per month on average, the pace at which we are able to operate most efficiently and leverage our fixed cost. However, we are willing to temporarily moderate slightly from this target to optimize our business in the current demand environment. ASP on orders this quarter of $374,000 was down 6% from prior year due to an increased use of incentives and discounts as well as geographic mix. We don't yet know how the spring selling season will unfold, but we are encouraged by improved selling conditions in January when compared to the more difficult demand dynamics we experienced in December. We are also hopeful that lower mortgage rates will unwind some of the lock-in effect for existing homeowners who are looking to move up. Now moving to the regional level trends. In Q4, demand patterns were highly localized by market with a generally tougher selling environment nationwide. Across all regions, incentive utilization increased to get buyers off the fence. In our most favorable markets, Dallas, Houston, North and South Carolina, we maintained a strong absorption pace supported by resilient local economic conditions. Conversely, our teams faced lower demand and aggressive local competition in Austin, San Antonio, parts of Florida, Northern California and Colorado. We deliberately chose to hold our ground in these markets and accept lower sales volumes as we look to the spring selling season to work through our excess home inventory. Now turning to Slide 6. In Q4, to align with our current sales pace, we moderated starts, which totaled approximately 2,700 homes. 24% less than last year's Q4 and 12% lower than Q3. As our spec targets are a function of expected demand, our reduced cycle times allow us to quickly flex and ramp up starts pace if demand picks up in the spring selling season or slow it down if conditions were to erode further. With 63% of Q4 closings also sold during the quarter, our backlog conversion rate was yet another all-time high for the company of 221%, reflecting the benefit of our 60-day closing rate guarantee. As a result, our ending backlog declined 24% year-over-year from approximately 1,500 as of December 31, 2024, to approximately 1,200 homes as of December 31, 2025. With our improved cycle times, we are able to maintain lower inventory levels without compromising our 60-day closing commitment as labor availability and supply chains are stable and predictable. We reiterate our long-term backlog conversion target of 175% to 200%. We believe the most meaningful view of our inventory is the combined total of our specs and backlog as more than 50% of our deliveries consistently come from intra-quarter sales for the last 5 quarters. We had approximately 7,000 specs and backlog units at December 31, 2025, compared to about 8,600 units at December 31, 2024. We ended the quarter with approximately 5,800 spec homes, down 17% from approximately 7,000 specs in the prior year and down 8% sequentially from Q3. The spec count reduction was deliberate and intentional as it is not a constraint on our closing potential for 2026, given our faster construction cycle times and ample available spec inventory. The 17 specs per store this quarter was our lowest level since mid-2023. This translated to 5-month supply in line with our target of 4 to 6 months supply of specs on the ground and intentionally skewed slightly higher as we prepare for the spring selling season. In the fourth quarter of 2024, we had 24 specs per store or 6 months of supply. Our completed specs comprised 50% of our total spec count at December 31, 2025. This level is slightly above our target of approximately 1/3 completed specs, and we intend to bring this ratio down during the spring selling season. With that, I will now turn it over to Hilla to walk through our financial results. Hilla Sferruzza: Thank you, Phillippe. Let's turn to Slide 7 and detail. Fourth quarter 2025 home closing revenue of $1.4 billion was 12% lower than prior year as a result of both 7% lower home closing volume and a 5% decrease in ASP on closings to $375,000 per home. Our affordability focus is evident as our ASP was notably below the $411,000 median ASP on 2025 closings in the U.S. Our closing and revenue were slightly below our guidance range as we intentionally slowed our pace by limiting the layering of multiple incentives and preserving margin in markets with inelastic demand. Despite an increased focus on price and margin, overall ASP on closings was impacted by the increased take rate of incentives as compared to prior year and geographic mix shift as the West region with our highest ASPs comprised a smaller portion of closings this quarter. We anticipate elevated incentive levels will continue near term, although the cost of financing incentives is starting to moderate. Home closing gross margin was 16.5% for the quarter, and adjusted gross margin was 19.3%, excluding $27.9 million in terminated land deal walkaway charges, $7.8 million of real estate inventory impairments and $3.2 million in severance costs in the fourth quarter of 2025. This compared to fourth quarter 2024 home closing gross margin of 23.2% and adjusted gross margin of 23.3%, excluding $2.8 million in comparable terminated land deal walkaway charges. As Phillippe mentioned, we elected to terminate certain option land positions to release capital and topgrade our land portfolio as better opportunities become available. We exited land deals across all regions with approximately 2/3 of the $27.9 million in walkaway charges coming from the East region. Our impairment assessments are conducted minimally on an annual basis or quarterly during declining market conditions as we're currently experiencing. We evaluate the recoverability of all of our real estate assets, both owned and controlled as part of this review. In addition to terminating over 3,400 lots resulting in the walkaway charges, we also recorded $7.8 million in impairments this quarter on owned inventory as we adjusted pricing to local market conditions. Adjusted home closing gross margin was 400 bps lower in Q4 as compared to prior year due to greater utilization of incentives and discounts, higher lot costs and loss leverage, all of which were partially offset by improved direct costs and shorter cycle times. Our land basis in 2025 included elevated land development costs from work completed over the past several years, which will continue to impact our margins in 2026. However, we are hopeful that starting in late 2027, our lot costs as a percentage of ASP should start to return to historical averages and we reflect renegotiated land development costs and the lower land basis we expect to be able to acquire over the next several quarters. During the quarter, we had direct cost savings of nearly 4% per square foot on a year-over-year basis. More recent starts have lower direct costs, although the benefits will not be visible until later in 2026 as we continue to work through our existing spec inventory that was built earlier in the year. Our cycle times held to a sub 110-day calendar schedule, in line with Q3, but an improvement compared to prior year. Our long-term gross margin target remains at 22.5% to 23.5%. We expect to reach the target once incentive levels return to historical averages and market conditions normalize. SG&A as a percentage of home closing revenue in the fourth quarter of 2025 was 10.6% compared to 10.8% in the fourth quarter of 2024, primarily due to lower performance-based compensation, which was partially offset by lost leverage as well as higher external commissions and technology costs. Q4 external commission costs were higher year-over-year to help secure volume in a tougher selling environment. Our co-broke percentage remained similar to the first 9 months of this year in the low 90s percentage capture rate, which we believe is at or near the top of our peer group. We also continue to see an increase in repeat business from realtors, underscoring the strength of our broker relationships. Fourth quarter 2025 SG&A included $2.4 million of severance costs with no similar charges in the prior year. We maintain our long-term SG&A target of 9.5%, which we expect to achieve at higher closing volumes. The fourth quarter's effective income tax rate was 18.5% this year compared to 22.1% for the fourth quarter of 2024. The 2025 tax rate reflected our purchase of below-market 45Z transferable clean fuel production tax credits that reduced income tax expense this quarter. This was partially offset by fewer homes qualifying for energy tax credits under the Inflation Reduction Act, giving the new higher construction threshold required to earn tax credits this year. We expect a minimal impact in 2026 from the complete elimination of the energy tax credit by June 30 as we were not eligible for such credits in most of our markets throughout 2025. Overall, lower home closing revenue and gross profit led to a 30% year-over-year decrease in fourth quarter 2025 adjusted diluted EPS to $1.67 from $2.39 in 2024. There were $42.9 million in nonrecurring charges this quarter and $2.8 million in the prior year. As for full year 2025 results compared to prior year, orders were flat, closings were down 4% and our home closing revenue decreased 9% to $5.8 billion. Excluding $60.2 million in nonrecurring charges compared to $6.7 million in 2024, our full year adjusted gross margin of 20.8% was 420 bps lower than 25.0% last year, primarily due to greater use of incentives, higher lot costs and loss leverage. SG&A as a percentage of home closing revenue was 10.7% in 2025 versus 10.1% in 2024 as a result of loss leverage as well as higher external commissions, spec maintenance costs and spend on technology. Excluding $66.4 million in nonrecurring charges compared to $6.7 million in 2024, adjusted diluted EPS for 2025 was $7.05 compared to $10.79 in 2024. Before we move on to the balance sheet, I wanted to quickly cover our customers' fourth quarter credit metrics. As expected, FICO scores, DTIs and LTVs remain relatively consistent with our historical averages. While the financial strength of our customers has not materially changed, buyer psychology is driving the demand for higher incentives and discounts. On to Slide 8. Our balance sheet remained healthy at December 31, 2025, with cash of $775 million, nothing drawn on our credit facility and net debt to cap of 16.9%. As a reminder, our net debt-to-cap ceiling remains in the mid-20% range. Based on market opportunities to topgrade our land book that we already covered, we walked away from certain land positions this quarter. Further, in response to slower demand, we experienced fewer community closeouts, allowing us to phase land development into smaller parcels and conserve cash. These combined efforts translated to $416 million in land spend this quarter, 40% less than last year. Given current market conditions, we are forecasting land acquisition and development spend of up to $2 billion in 2026. We returned $179 million of capital to shareholders via buybacks and dividends this quarter, up from $67 million in the same period last year. In Q4, we accelerated share repurchases to over 2.2 million shares, spending almost 4x more than prior year in the same quarter. For full year 2025, we bought back a company record of $295 million worth of shares, reducing our outstanding share count by 6%. We ended the year with $514 million still available under the repurchase program. We have now repurchased nearly $836 million or 22% of our outstanding common stock since implementing our share buyback program in mid-2018. And as we shared in our November press release, we plan to programmatically buy back $100 million of shares in each quarter in 2026, assuming no material additional market shifts. We increased our quarterly dividend 15% year-over-year to $0.43 per share in 2025 from $0.375 per share in 2024. Our cash dividend totaled $29 million in the fourth quarter of 2025 and $121 million for the full year. We have returned nearly $270 million to shareholders in the form of dividends since we initiated this program 3 years ago. We will be evaluating the 2026 quarterly cash dividend amount next month, and we'll share the update publicly when available. In 2025, we returned a total of $416 million of capital to shareholders or 92% of this year's total earnings. On a cumulative basis, since mid-2018, we have returned over $1.1 billion in total capital to shareholders through both buybacks and dividends. Turning to Slide 9. Our net lot activity was a decrease of about 500 lots this quarter as our approximate 3,400 lot terminations exceeded new lots put under control. In the fourth quarter of 2024, we put nearly 14,400 net new lots under control. As of December 31, 2025, we owned or controlled a total of about 77,600 lots, equating to 5.2 years supply of the last 12 months closings. We also had nearly 14,600 lots that were still undergoing diligence at the end of the quarter. We remain focused on utilizing more off-balance sheet financing vehicles and target a mix of about 60% owned and 40% option lots, although we look to balance margin and IRR from such initiatives. About 72% of our total lot inventory at December 31, 2025, was owned and 28% was optioned compared to prior year where we had a 62% owned inventory and a 38% option lot position. Since our 3,400 lot terminations this quarter were all off-book controlled lots, our ratios are temporarily disproportionately skewed to owned at year-end. Finally, I'll direct you to Slide 10. I want to emphasize that our guidance is based on current market conditions. We're guiding to full year 2026 closings in line with our 2025 performance in both units and home closing revenue, assuming no changes in market conditions. For Q1 2026, we are projecting total home closings between 3,000 and 3,300 units, home closing revenue of $1.13 billion to $1.24 billion, home closing gross margin of 18% to 19%, an effective tax rate of about 24% and diluted EPS in the range of $0.87 to $1.13. With that, I'll turn it back over to Phillippe. Phillippe Lord: Thank you, Hilla. In closing, please turn to Slide 11. As we look to 2026 and beyond, I want to remind everyone about who Meritage has chosen to be, a top 5 builder focused on spec building with move-in ready inventory, streamlined operations, a diverse geographic footprint and a differentiated ability to compete against retail given our 60-day closing ready guarantee and realtor engagement. All of these attributes give us a clear competitive advantage to operate efficiently under all market environments. When combined with our community count growth and improved cycle times, I believe Meritage is well positioned to continue to capture market share when demand dynamics improve. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator? Operator: [Operator Instructions] We'll take our first question from Trevor Allinson with Wolfe Research. Trevor Allinson: First one is on your 2026 outlook. You mentioned historically, you saw that 4 absorption pace per month. Near term, you're willing to dip a bit below that level. I think the incentive environment has been challenging for a while now. So what drove the change in your approach here? And then what is the temporary new level of absorption we should expect you to operate in the current environment? Phillippe Lord: Thanks, Trevor. So let me just talk about what drove the temporary refocus on margin and not chasing incentives. As we rolled into Q4, we saw a lot of builders clearing the decks with aged inventory. And so we knew that incentives were going to be elevated in Q4 and intentionally chose at least for that quarter to not chase additional sales and operate at a slightly slower volume. As we look into Q1, I think there's still some noise in the system. There's still some builders out there, including ourselves, who are clearing inventory. So we'll see how it goes. But we do expect the spring selling season to be better, so we see opportunities for improved returns, both in the form of absorptions and margins in Q1 and Q2. So our goal is to try to do 4 a month throughout the year. But right now, we're hedging a little bit based on what the builder competition is doing and waiting to see exactly how the spring selling season will materialize. Hilla Sferruzza: Yes. We've not reset a different target. It's community by community, week by week. The goal is still an average of 4 net sales per store, which we achieved in 2025. We were just a share shy of it at 3.9%. Phillippe Lord: For the full year. Yes. Trevor Allinson: Okay. Okay. That's a really helpful clarification. And I think also a very smart approach in the current environment. The second question is related to specs. You've done a really good job of working down your specs per community. I think you mentioned they were down to 17 versus 24 a year ago. With that in mind, are you -- do you have those where you want them now? Do you expect a further reduction here moving forward? And then I think you may have mentioned it, but can you remind us what portion of those specs are finished? And where do you target finished specs per community in the coming quarters? Phillippe Lord: Yes. Thanks for the question. I think we're not quite where we want to be. We still have about 50% of our specs are nearing finished or finished. We'd like that to be more around 1/3. We like to have about 1/3 that can move in, in 30 days and about 1/3 that can move in 60 days and then the other 1/3, we're just starting. So we're getting close to that, but we have -- still have some areas where we're whittling down our finished inventory. As far as the 17 specs per community, that's pretty close to our target. It might go down a little bit if the market doesn't cooperate in certain places, but that's pretty reasonable. And we always like to carry a little bit more specs right now because we expect the spring selling season to be the strongest part of the year. And then we carry a little bit less specs in the back half of the year when seasonality were to occur. Operator: We'll take our next question from Alan Ratner with Zelman. Alan Ratner: First question, I just want to clarify, the community count guidance of 5% to 10%, your community count ramps pretty meaningfully throughout '25. So is that growth off of your year-end count? Or is that on an average for the year, which I think if it's the latter, I guess, would imply more like a flatlining from here. Can you just clarify that? Phillippe Lord: It's the growth off our current year-end. So it's not we'll have 5% to 10% incremental community count growth this year. Alan Ratner: Got you. Okay. Great. And then on the margin guidance, I think if I'm looking at this correctly, adjusting for the kind of charges this quarter, it implies about maybe 70 basis points of sequential pressure on an apples-to-apples basis in 1Q. And I think that's pretty in line with like your typical seasonal pullback in 1Q. Maybe Hilla, you could just refresh my memory. I believe there is some seasonality in your margins. So should I interpret that guide as kind of a flattish guide adjusting for seasonality? Hilla Sferruzza: Yes, you're exactly right. So when you look at the midpoint of our closing units versus where we were in Q4 for closings, we've typically said there's up to 100 bps of loss leverage in margins. So you're seeing that in the guidance for Q1. Maybe a little bit of an incentive environment in Q4, still closing in Q1, maybe some of the December noise. But for the most part, what we're seeing right now is holding steady with some hopeful green shoots from the spring selling season. Alan Ratner: Got you. So that seems pretty encouraging, I guess, just given the trends that we saw through '25, it feels like maybe things are firming up a little bit. And I'm sure a lot of that has to do with the gentle pivot you guys are making, maybe a little bit more balance between pace and price. But as we think about the remainder of '26, recognizing you don't give guidance, can you just kind of talk through what the potential headwinds and tailwinds could be, assuming you do solve for that flattish volume outlook, which feels more conservative than certainly the expectations you had coming into this year? Phillippe Lord: Yes. And absolutely. I think the biggest tailwind is our starting backlog. As we said, we intentionally chose not to chase the incentives in Q4 during a time of seasonality, consumer confidence fell weak. We saw a lot of builders trying to clear out old inventory, and we felt like we have a better return on our inventory in Q1 than we did in Q4. So that starting backlog is really what we're trying to overcome, even though we have higher community count growth, and we still expect to, on average, sell around 4 a month, trying to overcome that starting backlog is going to be the big goal. So if the spring selling season is better than we think and the incentive environment moderates and some of the competition stabilizes, I think that's the tailwind. The headwind is the higher rates that are still out there. Obviously, that's pressuring the entry-level buyer more than the move-up buyer. And then certain regional nuances as we look for better performance in Florida, better performance out West. So it's just a lot of still unknowns right now. And then the #1 headwind that everyone knows about is consumer confidence, which is ultimately, I think, a bigger deal than affordability right now. And hopefully, the consumer starts to feel better about things as we move throughout the year. Hilla Sferruzza: So I'll add 2 other points. And Alan, as you know, we don't guide full year margin at this point, so we can't give any specifics. But 2 things to consider, we've mentioned that we're already seeing some moderating in the cost, how expensive it is for us to buy rate lock. So assuming that trend continues, there's a potential improvement during the year. We can't sit here on the 29th of January and predict what rates are going to do. But if the trend holds or improves, I think that's an opportunity for margin. And then the other item we mentioned in our prepared remarks, we've seen some pretty fantastic savings on direct costs, 4% year-over-year as we close out the year. So as you guys know, we have quite a nice volume of existing inventory that we're going to go ahead and sell through Q1 and part of Q2. But as you see some of those newer homes coming through, their direct cost should be at the lower basis. So even holding everything else even, there should be some savings coming through on the lower direct. So again, there's no specific numbers that we're providing at this time. But directionally, those are 2 things that we can look to as we look to the rest of 2026. Operator: And we'll take our next question from Michael Rehaut with JPMorgan. Michael Rehaut: I wanted to first delve in a little bit to your statement earlier, Phillippe, where you said you were encouraged in January, maybe around demand trends. And you also kind of said that you hope or expect the spring selling season to be better. When you say better, I guess, I was just wondering if that's better than the fourth quarter, so in line with normal seasonality or better versus the spring selling season from a year ago? And also, what signs or data points are out there that give you that encouragement in terms of what's happened so far in January? Phillippe Lord: Sure. I think better than Q4. I'm not sure if it's going to be better than last spring selling season. last spring selling season wasn't too bad. We were selling well over 4 a month in Q1 and Q2 of last year. So I'm optimistic that we can get back to 4 a month here in Q1 and Q2. Why am I optimistic? I think Q4 was really bad, I would say that to start out with. But generally, as the year slipped, we started to see better prospects throughout our funnel. The realtor community indicated to us that more buyers were out. They had more people that they were working with. The first couple of weeks of January were much better than the first couple of weeks of November and December. And so for all those reasons, we felt pretty good. The incentive utilization out there seem to start moderating. We saw less discounting by builders. So there was a lot of good things that we saw out there that give us hope and optimism about the spring selling season. But it's just a little too early to tell if that's structural or temporary because people pulled out of the market so hard in Q4 and they're reentering in Q1. And obviously, the storm has really shut down a big part of the country as well. So we're -- it's hard to exactly see what's happening with that as well. Michael Rehaut: Okay. No, I appreciate that. I guess, secondly, I'd love your thoughts around some of the administration's comments with regards to share repurchase. I'm sure you've obviously seen the comments by Bill Pulte around share repurchase versus core investment. And if you have any additional color, if you have any contact with administration officials or any thoughts around those comments, specifically as it relates to your intention for a higher level of share repurchase in '26? Phillippe Lord: Yes. We obviously take the federal government very seriously. We want to partner and collaborate with them. Our whole strategy as a company is around affordability. We have one of the lowest ASPs in the industry. 90% of our product is below FHA. We carry a bunch of specs to solve the void of the lack of affordable housing. So we are all in on whatever we can do with the federal government to continue to unlock the buyers that are basically priced out of the market. But we also believe that buybacks are a big part of our balanced approach to investing in operational growth and returning capital to our shareholders. So we balance those things out. We're still growing our business. We're still carrying specs, but we also have the ability to return more capital to our shareholders, which is the responsible thing to do. When our stock is trading at a significant discount to intrinsic value, the best investment I can make for our shareholders is to buy our existing enterprise at a discount, and we're going to do that as long as the support is there and there's no unintended consequences, which currently I don't see. So that's what I know today. We're learning more each and every day. We're working with the federal government when they ask for our input and our perspective, and we'll continue to navigate it as best we can. Operator: And we'll take our next question from John Lovallo with UBS. John Lovallo: So the delivery outlook for the full year is essentially flat year-over-year. The first quarter is down about 8%, which seems to imply that we return to year-over-year growth in the second quarter through the fourth quarter. So I guess the question is, is it fair to assume that sort of the newer strategy of driving the highest volume and margins in the first quarter and the second quarter may be pushed out a bit maybe into 2027 rather than this year? Phillippe Lord: We'll see, right? I think we're going to see how the incentive environment evolves here over the next 5 quarters, if it stabilizes and we're able to go out and get 4 a month in a profitable way and not compromise our land book, we're going to go do that as quickly as we can. So we'll just see how things go. The real challenge with our 2026 outlook versus 2025 is just how we're starting out the year. The backlog is down. We just came off a pretty slow Q4, and we're intentionally thinking about Q1 a little bit more conservatively until we understand that incentive environment. But at the end of the day, we're looking to optimize our business at 4 a month in almost every scenario, except where it becomes so inelastic that the cost of that incremental demand on a community-by-community basis is too material. Hilla Sferruzza: I just want to clarify, there's a difference between sales and closings, obviously. So the spring selling season, that doesn't change. That's going to be the healthiest volume of sales per community. Again, community count is distorting the discussion a little bit. But per community, we should see the kickoff of the spring selling season in February kind of winding down in May. So you're going to see a healthy volume of sales in Q1 and Q2. Now when those sales convert into closings, that's typically Q2, Q3, right? So our sales in April and May are going to close partially in Q2, but also in Q3. So I think that you're going to see some of the volume from the spring selling season closing out in Q1, but more materially so in Q2 and Q3, although the sales volume should be coming through in those 2 first quarters. So hopefully, that helps. John Lovallo: Okay. Great. And then I guess the next question is I just wanted to talk about the community count growth, which has been you're very strong here for some time. And I'm curious if you're seeing what we would typically expect to be stronger kind of conversions within those newer communities than you are in kind of the existing communities. Is the absorption pace better as we would expect? Phillippe Lord: Modestly. I mean, probably not what we would see in a traditional housing environment with stable consumer confidence, reasonable affordability. I think we always expect to sell more houses when we first open a community, there's a certain fresh and new opportunity for people to own a home. People like to be the first in the community. But I would say over the last couple of quarters, it has been much more modest than we would traditionally see out of our new stores. So as we look at the new community openings in 2026, we're not modeling them with elevated absorptions to start out at the inception of the community. Operator: And we'll take our next question from Rafe Jadrosich with Bank of America. Rafe Jadrosich: I just -- I wanted to ask on the SG&A. Can you talk a little bit about the potential cost savings from the cuts you made in the fourth quarter? What's the annualized -- how do we think about like the annualized benefit from those cost reductions? Hilla Sferruzza: Yes. So we're not providing a full annualized benefit yet as part of it is a function of the performance in 2026. You can see that we mentioned that we had severance as a component of both SG&A and in margin depending on what type of employee was impacted. So we have a fairly material impact on a go-forward basis from those savings, although a lot of those savings are also just going to be coming from other opportunities. You've heard us talk about increased technology spend for the last several quarters, and we're starting to see the benefits of that technology spend on a go-forward basis as well, not just in lower spend, but in improved efficiencies in our back-office operations. So on top of all the regular things that most folks are also doing, we've cut any excess events or any SG&A that was more discretionary. The overhead count saves should definitely translate into some year-over-year SG&A leverage lift, even though we're guiding to the same-ish revenue, we are looking to see a saving in our SG&A leverage for full year 2026, but we're not providing specific guidance. Rafe Jadrosich: Okay. That's very helpful. And then just how do you think about the -- it's obviously good to see the step-up in share repurchase that you announced during the quarter. How do you think longer term about the right level of debt to cap? And is there an opportunity to increase off-balance sheet from where we are today? Hilla Sferruzza: Yes. So we're pretty comfortable with the low 20% net debt to cap as a long-term target. We've said if there's anything unique or unusual that temporarily takes us above that, and we can see a very clear path to coming back below it in a quick time line, we would consider it, although we're not all that close to it right now. So we're not contemplating going above that threshold. We definitely are looking at more off-balance sheet vehicles. We appreciate that there's an ability to continue to both reinvest back in Meritage and in shareholder returns. with an increased utilization of off-balance sheet vehicles. So it's something that we're very, very focused on and are looking to dig into deeper. Unfortunately, the ratio got a little bit off balance this quarter because of our intentional 3,400 unit lot termination. So our relative ratio at the end of the year looks a little bit skewed, but it's definitely our intent to double down on off-balance sheet partnerships and relationships, and you should see that percentage increase throughout 2026. Operator: We will take our next question from Stephen Kim with Evercore. Stephen Kim: First question, I'm curious about the margin impact we might be able to expect purely from volume deleverage if your closings per community move below 4x, 4 per community per month this year, which I think you said earlier in the call that you would do that on a temporary basis. So like if we assume that there's no change in incentives, is there a decremental margin on a per community basis or some other kind of rule of thumb that would help us quantify what the margin impact from sales per community moving below 4, let's say, they moved to like 3.5 from 4 or something. Is there some rule of thumb that we can think about that would quantify a margin impact from that deleverage? Hilla Sferruzza: Unfortunately, it's not that easy. Many of our communities share superintendents and there's some leveraging that can be picked up, especially with our cross-selling initiatives that we have some multiple folks working across several communities. I wouldn't expect a small pullback to have an impact. But if it was a larger pullback in your example from 4% to 3.5%, there would be some impact. I don't think it would be more than 20, 30, 40 bps if that was consistent for the entire year, but I don't know that there's a rule of thumb kind of like what we do for the leveraging between the first and the fourth quarters. Stephen Kim: Got you. Okay. That's a helpful framework. I guess the second question is sort of a broader one. It relates to the move-in ready strategy, the 60-day guarantee close and the reliance on realtors. I sort of think about that as a strategy, which was born out of an environment when there was an extreme scarcity of existing homes for sale. But if we were to see existing home inventory rise and let's say, return to sort of historically normal levels, in your view, would that diminish the attractiveness of the move-in ready strategy? And would you be open to changing it? Phillippe Lord: Well, we're open to changing anything if it makes sense. But I think it was less about what was happening over the last 5 years with the existing home market being locked in and more about the fact that other than location, why do people ever buy a used home versus a new home. And ultimately, when new homes are at such a great value to existing homes, even more so today than they've ever been before, you can get homeowners insurance, your warranty cost is lower, they live better, they are more energy efficiency. The idea that anyone could convince someone to buy a used home versus a new home just doesn't make any sense to the folks over at Meritage Homes. So our strategy is built around when that existing home market comes back, you have a compelling option to buy a new home with no compromise other than whether it's not in the school district you want to live. And so that is what the strategy is based on. It's not based on the lock-in effect. Hilla Sferruzza: Yes. I mean, you said it better, but it was designed for when the resale market returns, not for when it was not in place. Stephen Kim: Got you. Yes, it's more like saying that you can compete better against resales. So why not accentuate that? That's really the emphasis, right, basically? Phillippe Lord: That's correct. And that's the whole realtor piece because the realtor really influences that buying decision. And they're a big influencer of why people buy used homes instead of new homes, and we're trying to partner with them in a way where they would consider buying a new home over buying a used home and it's in the best interest of everybody. Operator: And we'll take our next question from Jade Rahmani with KBW. Jason Sabshon: This is Jason Sabshon on for Jade. When mortgage rates have dipped in the last few months, have you seen builders maintain mortgage buydown levels or reduce them in concert with rate? And do you think builders will pass along savings to customers or try to get better margins? Phillippe Lord: So as rates have ticked down a little bit, the cost of rate buydowns have definitely shrunk moderately. Some builders have chosen to buy rates down further when that happened, while other builders have maintained the rate buydown where it was, and therefore, that cost has shrunk. I think some builders have reallocated those incentive dollars to other incentives to continue to try to overcome consumer confidence. I believe if consumer confidence were to come back, I believe that builders would pull that back into either margin or additional savings for their customers depending on their particular community and their particular market. So I'm not sure I answered your question because the answer is probably all of the above, depending on who you are and what your strategy is and where your community is. Hilla Sferruzza: I would say if you look at margin guidance from the peer group for everyone that's already released, I don't think most folks are taking it back to margin, right? Most folks have guided to lower margins in Q1 with a moderating interest rate environment. So I think the expectation is to continue the status quo until we see a stabilization in demand and then you can make decisions. Jason Sabshon: Got it. That's helpful. Then separately, what drove higher other income during the quarter because we were expecting a dip due to lower rates. Hilla Sferruzza: Yes. It was actually a little bit of a combination of a higher-than-expected cash balance, and we were actually earning interest a little bit longer. And then we had some pickups in legal settlement. There's always ups and downs. It's a tough to model line item, which is why we kind of usually stay silent on it. Operator: And we'll take our last question from Alex Barron with Housing Research Center. Alex Barrón: I think I heard you say that the percentage of homes that are bringing in or using a broker is like 90%. If that's accurate, are you guys paying just the standard commission? Or do you guys use some type of incentive structure, bonuses or anything like that? Phillippe Lord: Yes. We pay market rate commissions. So depending on which market we're in, whatever everyone else is paying, we pay the same. We do have some incremental loyalty programs if you sold more than 1 home or 2 home or 3 homes, so that's -- but those are pretty small dollars. So generally, the increase in our cost is just the fact that we're at 90% versus whatever other builders are at. Otherwise, it's pretty much market. Hilla Sferruzza: Interesting data point we can share. 40% of our volume is repeat volume. So it's not a one and done. So I think that the benefit of our loyalty program and our intentional pivot towards a stronger relationship with the realtor community is definitely paying off since we're seeing very high volume of those realtors come back with customers more than one time. Alex Barrón: So what's the feedback they're providing to you as to why it's that high? Is it mainly the 60-day guarantee and the fact they get paid faster than build-to-order or something like that? Phillippe Lord: Yes, I don't want to give out all of our secrets over here. But I think, obviously, the #1 factor is that we're able to meet their customer on their time line, right? So when they commit to their customer being able to move, they're able to move at that point, and there's no negotiation there. The home is going to be done, done, done, you're going to move in. I think that realtors generally feel that, that's the same with realtor with existing homes. But the second is also just the transparency. The price is the price, and you're getting a good deal, and you can work with us in a way that feels like working with the existing home market. But yes, I mean, you nailed it. A big part of it is just delivering the home on time and guaranteeing that. Alex Barrón: That's great. If I could also ask on incentives that you guys did this quarter versus the previous quarter, like what percentage of ASP do they comprise? Hilla Sferruzza: Yes. Since we're 100% spec builders, we don't provide incentive detail. There is no base price and then you have some incentive off of that price. We just have an all-in price because our homes are sold to complete. So we don't provide that, although we'll share the same commentary that we've shared the last couple of quarters. We're running more than a couple of hundred bps above historical averages, which is why we have a good level of confidence that once things return to normal, our target gross margin of 22.5% to 23.5% is very realistic because that reflects -- the current numbers reflect that elevated incentive market. Phillippe Lord: Thank you, operator. I'd like to thank everyone who joined the call today for your continued interest in Meritage Homes. We hope you have a wonderful day and a wonderful weekend. Thank you. Operator: Thank you. This concludes today's Meritage Homes Fourth Quarter 2025 Analyst Call. Please disconnect your line at this time, and have a wonderful day.
Operator: Good morning, ladies and gentlemen, and welcome to the Colony Bank Fourth Quarter 2025 Conference Call. [Operator Instructions] This call is being recorded on Thursday, January 29, 2026. I would now like to turn the conference over to Brantley Collins. Please go ahead. Brantley Collins: Thanks, Danny. Before we get started, I would like to go through our standard disclosures. Certain statements we make on this call could be constituted as forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Current and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance but involve known and unknown risks and uncertainties. Factors that could cause these differences include, but are not limited to, pandemics, variations of the company's assets, businesses, cash flows, financial condition, prospects and other results of operations. I would also like to add that during our call today, we will reference our fourth quarter earnings release and investor presentation, which were both filed yesterday. So please have those available to reference. And with that, I will turn the call over to our Chief Executive Officer, Heath Fountain. T. Fountain: Thanks, Brantley, and thank you to everyone for joining our fourth quarter earnings call today. We are pleased to report our fourth quarter with strong operating performance. Our team has done a great job of delivering results and executing on our strategic initiatives. We're really excited about the legal close of the TC Federal merger, which occurred at the beginning of December, and we're on track to complete the systems conversion during the first quarter. Both teams have done a great job to get us to this point, and we're looking forward to the upcoming customer integration. We're also pleased to report that our financial targets for the deal are on track or better than expected, as Derek will discuss later on the call. Operating earnings continued to improve with an increase in operating net income of $675,000 compared to the third quarter. This was driven by continued increase in our net interest margin as well as a strong quarter in terms of noninterest income. As we mentioned early last year, our projections indicated achieving a 1% ROA latter half of the year and maintaining 1% or better going forward. We were able to hit that target in the second quarter and maintain it through the rest of '25. I'm proud of our team's accomplishments in being able to do this and report that we've achieved a 1% operating ROA for the 2025 fiscal year. We now set our sights on our next goal of a 1.20% ROA and believe that we can achieve that on a quarterly basis starting in the second quarter of 2026 once we get the full benefit of the TC Federal merger and expect to hit the 120 mark for the full year of 2026. In 2025, we saw core loan growth of 10.5%, excluding the impact of the TC Federal acquisition. Our outlook on loan growth for 2026 remains positive and our pipelines remain strong, but we are seeing a trend where we think we'll be closer to the 8% end of our 8% to 12% long-term target. We've seen an increased competition in lending across our footprint. However, we remain focused on growing core customer relationships. This strategy has allowed us to maintain a disciplined approach to pricing and credit while still achieving our growth goals. With expected loan growth and repricing opportunities, we project margin to increase at a modest pace throughout 2026 around mid-single digits each quarter. In addition, we feel good about the outlook on the noninterest income side and expect it to be slightly better in 2026 as we continue to see improvement in our lines of business and fee income. Deposits were up for the quarter and organically flat year-over-year, excluding the acquisition of TC Federal. We are driving deposit account growth and our team is focused on building the deposit first and relationship banking culture. At the same time, we're also focused on improving margin and have moved our interest-bearing accounts aggressively during the recent rate cuts this cycle, which has caused us to lose some non-relationship price-sensitive accounts. We carefully monitor this and believe we can grow the right kinds of deposit relationships. And as rates stabilize, we will become more competitive for interest-bearing deposits as well. In the fourth quarter, we executed a portfolio mortgage pool sale of around $10 million with a gain of a little over $100,000. Our loans held for sale balance also increased quarter-over-quarter, and we're expecting to sell another $30 million of portfolio mortgage loans in the first quarter of this year. There's a couple of reasons why we're doing this. First, the secondary market for non-agency loans has improved, and we're now able to push some previous quarter's mortgage production into the secondary market. Second, with the addition of TC Federal, we knew we'd be expanding our 1-4 family portfolio. So to manage that concentration, we feel it's prudent to trim some mortgage loan exposure. Operating expenses were higher in the fourth quarter as we have not yet realized all of the expected cost saves from the TC Federal acquisition. As we complete the systems conversion in the first quarter, we anticipate a majority of those remaining cost savings to occur after the conversion and be realized in the second quarter and going forward. Charge-offs were lower in the fourth quarter, but still elevated slightly compared to earlier quarters. Charge-offs have primarily come from our SBSL division, and we provide a breakdown of the net charge-offs on Slide 34 in our investor presentation. We saw some charge-offs from our marketplace loan partners in the fourth quarter, but do not expect that to be a long-term trend. SBSL and marketplace loans only represent about 5% of our total loan portfolio. And as you can see on that slide, bank net charge-offs remain at low levels and gives us confidence in the credit quality of our overall portfolio. We also outlined the yields in those categories, and it's important to note that both of these third-party marketplace loans and SBA loans provide higher yields, which offset charge-offs and provide for a nice risk-adjusted return. Additionally, of course, on the SBA loans, we've also generated significant gain on sale income on the guaranteed portion of those. Our performance in complementary lines of business are highlighted on Slide 19 on a pretax basis. SBSL and mortgage finished the year with a strong fourth quarter, and we continue to see improvement in Marine/RV-Lending as well as Merchant Services. We welcome the addition of 2 new proven financial advisers -- financial advisers to the Colony team in the fourth quarter, Glenn Ware in LaGrange and Tim Owens in Macon, and they have been successfully transitioning their client base to Colony. With the addition of Tim and Glenn, we've also begun the transition of our relationship with our broker-dealer, Ameriprise from a managed program to a dual employee model, where our financial advisers are employed by Colony and where we receive the majority of the revenue, but also bear the full expense load. As we more than doubled our assets under management from about $200 million at the end of 2024 to over $460 million at the end of 2025, we believe this transition will be beneficial for the long term and offers more flexibility for our advisers while maintaining the relationship with our broker-dealer. Overall, this structure will provide increased income opportunities going forward. Some of the related expenses to that occurred in the fourth quarter, and we expect to be fully transitioned by the end of the first quarter of this year. The building out of this platform is an important piece of our long-term strategy, and we are actively recruiting to continue to grow this line of business. Slide 23 illustrates the year-over-year improvement with Colony Insurance and shows significant increases in Items and Premium in Force. Bank referrals to insurance increased 20% in 2025. We've been in a very hard insurance market the last couple of years, facing significant rate increases from our carriers for our customers, which has had an impact on retention rates, but we are starting to see the market soften some and believe we will see improvements to retention and production in 2026. Yesterday, the Board declared an increase to our quarterly dividend to $0.12 per share, which is an increase of $0.02 on an annualized basis. Dividends are important to many of our shareholders, and we're proud to increase the dividend for another consecutive year. I'd also like to recognize that Colony Bank has been named one of American Bankers 2025 Best Banks to Work for. This is a tremendous accomplishment and reflects our commitment to culture and to our team members. I'm grateful for everything our team members do to support each other and the customers we serve. Colony was the only bank headquartered in Georgia to be recognized on this list in 2025. We continue to see opportunities to capitalize on the increased M&A activity in the industry and across our footprint. This includes opportunity for new customer acquisition, new talent acquisition and expanded fee income as we develop deeper customer relationships across our existing markets. As I mentioned earlier, our team is focused on the integration and core conversion with TC Federal in the first quarter. At the same time, we continue to see an increased level of activity from an M&A perspective, and we are actively having conversations with potential M&A targets. We're at a place where we feel comfortable moving forward with another opportunity, and we believe that given the level of conversations and activity we see in the industry, we'll have the opportunity to announce another transaction at some point in 2026. Slide 14 in our investor presentation lays out our approach to M&A opportunities. The strong momentum exiting 2025 positions us well as we enter 2026. We remain optimistic about the opportunities ahead and are focused on continuing to enhance performance through disciplined execution and ongoing improvement. With that, I'm going to turn it over to Derek to go over the financials in more detail. Derek Shelnutt: Thank you, Heath. From an operating income perspective, we saw net income increase $675,000 in the fourth quarter, driven by the completion of the TC Federal acquisition as of December 1 as well as continued increase in margin and solid results from many of our complementary lines of business. Operating pre-provision net revenue improved again in the fourth quarter and was a significant improvement over the fourth quarter of 2024. We continue to see positive improvement in our core earnings. Net interest income increased approximately $3.2 million compared to the prior quarter and was a product of continued improvement in earning asset yields, a reduction in cost of funds and the addition of TC Federal in December. Net interest margin increased 15 basis points to 3.32% in the quarter. Loan yields increased to 6.19%, up from 6.15% in the previous quarter and reflects continued positive loan repricing, the addition of 1 month of TC Federal loans and the related accretion income, which was slightly offset by the reset on variable rate loans due to the short-term rate cuts. The impact of the short-term rate cuts was captured in our overall cost of funds, which decreased to 1.96% for the quarter, and that is down from 2.03% in the third quarter. The short-term rate cuts from the Fed helped drive those fund costs lower in addition to the seasonal inflow of the lower cost deposits that we typically see later in the year. We may see some slight variability in accretion income depending on the timing of payoffs and paydowns from the acquired TCF loans. Going forward, as we receive payoffs of acquired loans that were marked to fair value, we are then able to deploy those funds at current market rates, resulting in minimal impact to overall interest income. We're still projecting a modest increase in net interest margin each quarter throughout 2026 as we continue to see repricing of cash flows from lower earning assets. Fourth quarter operating noninterest income was $11.1 million, reflective of a good quarter from many of our complementary business lines, particularly mortgage and SBSL. Slide 19 gives an overview of the pretax performance of our complementary lines with a noticeable improvement overall from the third quarter. Mortgage-related noninterest revenue increased $270,000 from the prior quarter. And as Heath mentioned, we did have a $108,000 gain from a sale of portfolio mortgage pool of about $10 million during the quarter. Marine/RV-Lending continues to improve on a quarterly basis in addition to improvement in our Merchant Services division. Heath also mentioned the conversion with Colony Financial advisers from a managed program to a dual program, along with the addition of 2 financial advisers. There are some upfront expenses associated with that strategy. And although we will see expenses increase with that change, the dual program will allow us to receive a larger share of dealer commissions, which will outweigh the increase in expense and ultimately improve the earnings power of that division, leading to increased net income. Typically, the fourth quarter is a lower volume quarter for Colony Insurance based on the timing of policy renewals and seasonality. We expect this to revert back to normal in the first quarter and improve into the rest of 2026. Operating noninterest expenses were $24.4 million, and the increase is attributable to the TC Federal acquisition. We're still carrying some TC Federal-related expenses until the systems conversion in mid-first quarter and then expect those expenses to drop off for the second quarter of 2026. This led to a higher net noninterest expense to average assets of 1.58% for the quarter and a little higher than our historical average. We expect that to be closer to our target of 1.45% in the second quarter as we capture the remaining cost savings for the merger. The focus of disciplined expense management relative to our growth and earnings remains a priority for us as we continue to execute on our strategic initiatives that improve operating efficiency across the organization. Merger-related expenses totaled $1.3 billion for the quarter and were an adjustment to operating earnings. Provision expense totaled $1.65 million for the quarter. That's an increase from $900,000 in the prior quarter. Net charge-offs for the quarter were $1.6 million, a slight decrease from the prior quarter. Charge-offs were primarily driven by SBA loans as well as some marketplace loans from our third-party partners. As Heath mentioned, SBA and marketplace loans represent about 5% of the portfolio. Slide 34 shows a breakout of charge-offs between those product types and the bank portfolio. And in addition, Slide 34 also provides a breakout of loan yields in those categories. As we look forward to 2026 in regards to SBA charge-offs, we feel that we will see improvement compared to the trends that we saw in 2025. That expectation is supported by the underlying collateral of classified SBA loans. Classified and criticized loans increased from the prior quarter and 68% of that increase came from TC Federal for criticized loans and 93% for classified loans. Nonperforming loans increased quarter-over-quarter. $6 million of the $9 million increase in nonperforming loans was due to the acquisition of TC Federal and any anticipated losses were captured through acquisition accounting. We early adopted the new CECL-related accounting standard, and this resulted in no CECL double count as part of the acquisition. The credit quality of TC Federal's loans were reflected in the adjustment to the allowance for credit losses as part of the purchase accounting. Loans held for investment increased in the quarter due to acquired loans from the TC Federal merger. Organic loan growth for the quarter was flat, but was due to fourth quarter payoffs of both Colony loans as well as some legacy TC Federal loan payoffs in December. There was also $50 million in mortgage loans reclassified from held for investment to held for sale as we continue to market those loans for a pool sale. Organic loan growth for 2025 was around 10.5%, and we anticipate organic loan growth for 2026 to be slightly less towards the lower end of our 8% to 12% target. Slide 35 shows the weighted average rate on new and renewed loans of 7.33%, a decrease from the previous quarter due to rate cuts and changes in the rate environment. We expect to see that yield fall closer to the prime rate. However, that still leaves room for loan yields to improve from loan repricing. Fixed rate loan roll-off for 2026 is below 6% and noted on Slide 28. Slide 35 highlights loans acquired through the TCF merger as of the acquisition date and also notes the early adoption of the new accounting standard related to CECL. Total deposits increased from the prior quarter, also a result of the merger. Excluding acquired deposits, total deposit growth was around $24.3 million in the fourth quarter and flat for the overall year. As Heath mentioned, when the Fed started cutting rates in 2024, we began to lower our higher cost deposit rates aggressively, and that continued with the rate cuts in 2025. This is reflected in our cost of funds, which was 1.96% last quarter compared to a high of 2.32% in the third quarter of 2024. We believe we have a lot of opportunity in both current markets as well as the legacy TC Federal markets to continue to develop core customer relationships that will drive deposit growth. We acquired the TC Federal investments during the quarter, which were marked at fair value. A small portion was sold at the acquisition date and did not generate an earnings gain or loss. We didn't sell any other securities during the quarter. We'll continue to evaluate the need for future sales based on market conditions and balance sheet needs. The fair value of the portfolio improved quarter-over-quarter and resulted in a positive impact to AOCI of around $2.5 million. Total share repurchases during the quarter were 47,000 at an average price of $16.50. And as Heath mentioned, this week, the Board declared an increase to our quarterly dividend of $0.12 per share. Our TCE ratio at the end of the quarter was 8.30% compared to 8% even in the prior quarter. Tangible book value per share increased to $14.31 from $14.24 in the prior quarter due to better AOCI position, favorable purchase accounting and the early adoption of the new accounting standard that removes the CECL double count. Slide 16 illustrates some of the highlights from the merger with TC Federal. We're on track to achieve our projected cost savings, and we'll see more impact from that in the second quarter. The deal economics remain strong and forecasts are better compared to what we projected in our earlier modeling. Tangible book value dilution was less than expected, and our original forecast for earn-back was less than 3 years. We now expect that earn-back to be less than 2.5 years. We've also provided projections on expected 2026 base case earnings impact from the accounting treatment on acquired assets and liabilities. That concludes my overview, and now I'll turn it back over to Heath before we take questions. T. Fountain: Thanks, Derek. And again, thanks for everyone to be on the call today. We're really pleased with the quarter we had and the performance, both for the quarter and the overall year. This wraps up our prepared remarks. And with that, I'll call on Danny to open up the line for any questions. Operator: [Operator Instructions] Your first question comes from Christopher Marinac of Janney. Christopher Marinac: Thank you for all the details in the presentation and in the press release. I wanted to look at the small business lending line and just sort of think out loud with you about -- does that business become a higher risk-adjusted business for you and perhaps you have a little higher charge-off going forward, but it has a better return. Is that how we should think about that? And then do you see that business being a bigger contributor as the next year or 2 unfold? T. Fountain: Yes. Great question, Chris. And I think if you look at the way that business operates, it's certainly higher risk lending and the team we have has done a great job. Going back a couple of years, we have the opportunity to do some higher volume of higher risk but higher return loans that have both high yields and low cost to originate with the Flash and Lightning programs. And then with some changes, those went down. So I think a lot sort of depends on the opportunities that the programs may have and change. I think the general, I guess, bread and butter kind of 7(a) and the little USDA business kind of remains constant, not a super higher than normal, but the opportunity potentially with -- like we took advantage of with the Lightning and Flash programs that had a higher return, but also a higher loss rate. So it kind of depends and could vary. I mean the challenge with that business is that the income is not as steady, but it's such a good ROE contributor that it's a really great business to have and be in. I don't know that we'll go back to the level it was a couple of years ago when it was -- we were originating all those small dollar loans, but we expect it to improve sort of from the run rate we had this year. Christopher Marinac: Great. And as you look at M&A as a line of business these next several quarters and years ahead, do you think that you'll have competition for some of the banks you're looking at? Or do you think they're more negotiated transactions where you can kind of pick and choose really where you want to be in various markets and various companies? T. Fountain: Yes. So our hope is in as many cases as possible for us to have the opportunity to do negotiated or what I would call limited marketing type deals where much like on the TC Federal, where the seller is looking for a buyer with alignment to what they're doing, where it's more of a partnership than just a true sale. And I think just based on the conversations we have and what we're seeing in the market, there'll be opportunity to do that. At the same time, there are bid situations that come up. Some of those look attractive to us. But I think our ability to execute on those will be fewer and further between because just from a pricing perspective, I think we're going to price those not as aggressively maybe as some others. So we may hit on some if the competition happens to be lighter because of capacity or market or whatever it may be. But I think the real opportunity and the way I would describe it is I think we're going to have opportunity to do plenty of M&A over the next several years. Our job is to make sure that it's the best possible deals that we can do for our shareholders, for our team for the combined companies. And so that means as many as we can be involved in being more of a limited process where they see the value and the upside partnering with Colony. And I think there'll be other opportunities to do that. And I think that's what Greg and the TC team saw. But that means more work on our part hitting the streets and getting out there and having conversations and being involved in things and just courting other bank management teams. Christopher Marinac: Sounds good. And just last question for me just has to do with sort of new hires within your footprint on the lending and deposit side. How does the flow of that? And what would be the outlook in general? T. Fountain: Yes. So a couple of things there. I don't see us being on a very aggressive hiring spree in terms of trying to add a certain number over the next period of time. I think that our current team can -- with the opportunities we have, there is plenty of opportunity for organic growth with our current team. That being said, we will be opportunistic for hires within our footprint, particularly as it comes to displacement from other M&A activity. And so I think there's going to be opportunities for that. But I would say they would be more in the one-off areas than big massive teams or looking to hire large numbers across our footprint, more in the handful, I think, type area. Operator: Your next question comes from David Bishop of Hovde Group. David Bishop: A quick question. I think Heath or Derek, you touched on the organic growth profile maybe slipping a little bit towards the lower end of the longer-term guidance. And obviously, the Southeast, the regional economy remains very strong, always very healthy pricing competition. Maybe just talk about some of the puts and takes in terms of the growth you saw this quarter on an organic basis and what you are seeing in terms of the competitive environment on the commercial side? T. Fountain: Yes. So it's definitely getting more competitive. I think that what we've been trying to do and what we've been able to do is price things from a relationship perspective, be willing to be disciplined on that, walk away from deals that don't hit return objectives for us, be very focused on relationships. And so that's limited the growth a little bit, but it was important and continues to be important for us to expand our margin and our profitability. And so we're just balancing those needs, I think, Dave, and trying to make sure that we continue to see margin improvement. We continue to price things attractive -- where it's attractive. But also, I think, reflective in our outlook and guidance and like what Derek talked about and what we think we're going to see loan yields come into, we're going to need to be a little more competitive on that front in order to get the kind of growth that we want from a pricing perspective, just given where the market is and where competition is. So we'll see that. I think Derek indicated coming down off of the [ 7.33 yield ] closer to where prime is on lending. And I think that's sort of what it's going to take. I think as rates settle out and they get more stable, I think the competitive range of pricing is going to narrow again, it's pretty wide right now, and we see some pricing where we just aren't going to price things. And so -- but I think as expectations for rate cuts kind of stabilizes and I think the market thinks will get maybe one more cut now, that's more stable. I think that range of pricing that we see out there narrows in as well. And so I think that, that will help. I also think another big positive is not just the economic environment is good in the Southeast, but also because of the M&A, I think we'll see some turnover of assets from some of the larger banks that are going through M&A. But at the same time, you've got a lot of banks wanting to participate in that. For us, if we can stay in that 8% to 12% and also see margin improvement, we think that's the sweet spot to where we'll drive the most value for our shareholders. If we have to start doing things that are going to stop the margin improvement to result in higher growth, we just don't see that as the right trade-off for the long-term benefit of our shareholders. So that's what we're trying to balance, and I think our team is doing a really good job of that, but it's just a constant push and pull. David Bishop: Got it. Appreciate that color. Maybe sort of staying on the converse of that topic. Obviously, there's the puts on the loan side. On the funding side, I think, Heath, Derek, you mentioned that some opportunities, obviously, to grow some core relationships there. What is your sense that you can organically fund loan growth with deposits this year? And what sort of trends are you seeing on deposit pricing given the aggressiveness you've had this quarter? T. Fountain: Yes. And I'll share some thoughts and then, Derek, if you want to chime in anything else. But I think you'll see similar, Dave, like I was talking about with the rates on the deposits. We've been very aggressive trying to get the full amount of each rate cut out of our funding -- underlying funding and sometimes more than that with the rate cuts and I think others have been doing that, but I think some others have been trailing and lagging. So I think, again, as we -- let's say, we're going to get more and more rate cut, I think you'll see the competition start to narrow their -- the range of the competition from market to above market will be slimmer. And so that will allow us to be more aggressive at a time when that spread from conservative to aggressive is less, which is better timing for us from a margin perspective. Our team is focused primarily on the noninterest-bearing and interest-bearing DDA that doesn't carry a high interest balance. And so that's where we're out trying to generate most of the relationships. But as those rates stabilize, our ability to use interest-bearing DDAs as a sweetener to go get relationships or to get our foot in the door with relationships. I think we'll be able to use that more in the future. And so I think our deposit pipelines continue to grow. We have a lot of effort and focus on that. Our incentive for our bankers is based largely on that and less on lending than it has been historically. So we're getting the right kinds of behavior that we want to see from our bankers. And as that's picking up steam, our banking solutions group, which is how we've combined our treasury, our merchant services, our credit cards, all our payment functions together, they're picking up traction. We're getting good business development out of that area, and we think there's opportunity there. In the meantime, as that's picking up steam, we've got a little time where we're continuing to see the roll-off in our investment portfolio, and we start to get that down to levels that we want it to be in the long term. So we can have some switching of assets on the balance sheet from investments to loans while deposit generation starts to pick up. We feel confident, we can bring that all together at the right time and grow organically deposits to fund loans over the next few years. That may not match up each quarter, but we think deposit generation is going to continue to be something that we find the ability to improve quarter after quarter. Derek Shelnutt: I agree. And then on the funding front, we have about $65 million base case investments rolling off in 2026, and that's coming off at a [ 3.10 yield ]. So that's going to be able to reprice upwards coupled with the deposit growth. But as Heath mentioned, on the loan and deposit side, we're seeing a little bit more competition with the banks. The spreads are kind of coming together a little bit, but that ultimately translates back to our kind of forecast and projection of that modest margin increase throughout 2026. David Bishop: And I assume that incorporates, Derek, the impact of purchase accounting accretion, correct? Derek Shelnutt: That is correct. David Bishop: Okay. Got it. And then finally, circling back to M&A, Heath, I appreciate the Slide 14. Just -- as you are obviously getting bigger in size, approaching the $4 billion to $5 billion asset range, do you get the sense that maybe the ideal target is moving close to that $6 billion to $1.2 billion range as opposed to the under $600 million range? And any -- would you look to seek to potentially go over state lines like in the South Carolina and Alabama and such? Just curious from a geographic perspective. T. Fountain: Yes. Dave, great question. And from a geographic perspective, let me tackle that one first. Basically, we look at it as Georgia and the contiguous states. South Carolina, given that we operate 2 markets, Savannah and Augusta that are right on the South Carolina line. We already do a lot of business in South Carolina. We would love to see the ability to expand that way. In Tennessee, we are right at the border of Tennessee. And so any opportunity to move in that direction will be a natural expansion. Alabama, same thing. We operate markets right along the Georgia, Alabama line and do business in that state. So we'd like there's opportunity there as well as in Florida, we operate in North Florida, and we'd love to see opportunities there. Of course, saying all that, the sheer numbers of bank opportunities are much higher in Georgia than they are in those other states. So the number of opportunities is going to drive some of that. And I'd say same thing with size. We would love to do more sizable transaction just because it's going to drive more meaningful financial metrics. However, when you move up in size, the chances of more competition comes into play. And so it's just a -- I think if you just look at the numbers game, Dave, certainly, $1 billion and below or really even maybe $750 million and below. The numbers would tell you more likelihood at those sizes. But we continue to have conversations with banks above that and look for opportunities there as well, and we are prepared to execute on what opportunities may come about. And there's just so many factors in M&A that are timing that you can't control that's on the side of a seller and you've got to be willing to move and execute based on that. The good news is in this environment, if you have an opportunity to do a smaller deal, and you don't have a larger deal pending, you can get that one in, get it done. Approvals are happening quickly, and we would not be opposed to lining up more than one at the same time. I think our team can handle that. I think from a regulatory perspective, we're in an environment where you can do a very close succession of deals. And so that gives you greater, I think, flexibility to create value by doing a smaller deal, whereas maybe a couple of years ago, we would have looked at that and said, well, we better not do that smaller deal because it may put you out of the game for 18 months. And so I think this environment sets up nicely the ability to execute on some opportunities that I think will be great in building a great deposit franchise and great earnings and the ability to grow organically. David Bishop: That's great color. And I got one final -- I promise last question. Derek, you said that net operating expense ratio, you're trying to get back to that mid-140s by second quarter or so. And then maybe just some thoughts on the effective tax rate. I know that can bounce around. I don't know if that's changed with the merger. Derek Shelnutt: Yes. Great question, Dave. Yes, we try to -- we think we'll be able to get back to that 145 later in the year. We still have a lot of the expenses from TCF that we're carrying. And then after the first quarter, typically seasonality in our noninterest income business lines will increase. And with the addition of -- we have the [indiscernible] coming. And so there are several components we think that will drive getting us back to that number. So I think we feel pretty comfortable about moving back towards that rate later in the year after we get the systems conversion behind us. And then on the tax rate, right now, we don't expect any changes from the prior year just with the merger and everything. We still expect to be around that 21-ish percent effective tax rate. Operator: There are no further questions at this time. I will now turn the call back over to Heath Fountain. Please continue. T. Fountain: All right. Well, thank you, everybody, for being on the call. Thank you for the questions today, and thanks for all your support of Colony Bankcorp. We appreciate it, and that concludes our call for today. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.