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Operator: Good morning. Thank you for joining The Sherwin-Williams Company's review of fourth quarter and full year 2025 results and our outlook for the first quarter and full year of 2026. With us on today's call are Heidi Petz, chair, president, and chief executive officer; Ben Meisenzoll, chief financial officer; Paul Lang, chief accounting officer; and Jim Jaye, senior vice president, investor relations and communications. This conference call is being webcast simultaneously in listen-only mode by Newswire via the Internet at www.sherwin.com. An archived replay of this website will be available at www.sherwin.com beginning approximately two hours after this conference call concludes. This conference call will include certain forward-looking statements as defined by U.S. Federal securities laws with respect to sales, earnings, and other matters. Any forward-looking statement speaks only as of the date on which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statement whether it is a result of new information, future events, or otherwise. A full declaration regarding forward-looking statements is provided in the company's earnings release transmitted earlier this morning. After the company's prepared remarks, we will open the session to questions. I will now turn the call over to Jim Jaye. Thank you, and good morning to everyone. Jim Jaye: Sherwin-Williams ended the year with strong fourth quarter results, driven by solid core performance and inclusive of the first full quarter of the Suvenil acquisition. Consolidated sales in the fourth quarter increased by a mid-single-digit percentage, inclusive of a low single-digit contribution from Suvenil. Reported gross margin was flattish year over year but expanded excluding the dilutive impact of the Suvenil acquisition. SG&A as a percent of sales decreased year over year, including severance and other restructuring expenses and Suvenil, reflecting our disciplined ongoing cost control measures. Adjusted diluted net income per share in the quarter increased by 6.7%. Adjusted EBITDA in the quarter grew 13.4% and expanded 120 basis points to 17.7% as a percent of sales. Free cash flow conversion in the quarter was 90.1%. In terms of our segments in the fourth quarter, Paint Stores Group sales increased in the range we expected, led by high single-digit growth in protective and marine, against a high single-digit comp. Residential repaint remains solid, and growth was just slightly below the mid-single-digit range, also against a high single-digit comp. Group sales included positive low single-digit price mix partially offset by a low single-digit decrease in volume. Segment margin expanded 90 basis points to 20.8%. Consumer Brands Group sales exceeded our expectations. Sales from the Suvenil acquisition and positive low single-digit FX were partially offset by price mix and volume, both of which were down less than a percentage point. Sales in the underlying business, excluding Suvenil, were essentially flat, which was better than we expected and drove the top-line beat. Adjusted segment margin decreased, including a negative impact from Suvenil and related transaction closing costs and purchase accounting items. Adjusted segment margin increased excluding these impacts. Within Performance Coatings Group, sales were at the high end of expectations, led by strength in packaging and auto refinish. Adjusted segment margin improved 150 basis points to 19%, driven by new business wins, as well as good control of SG&A, which was down mid-single digits. We also continued our strong cost control efforts within the administrative segment, where SG&A was down a low single-digit percentage in the quarter, including one-time restructuring costs of approximately $2 million. Excluding these restructuring costs and the non-annualized new building operating costs, administrative SG&A was down by a low teens percentage, improving on third-quarter results that were down low double digits, demonstrating our continued tight management of G&A costs. The slide deck accompanying our press release this morning provides more detail on fourth-quarter segment results. Let me now turn it over to Heidi, who will provide a few full-year highlights before moving on to our 2026 outlook and your questions. Heidi Petz: Thank you, Jim, and good morning. I want to start by thanking our 65,000 global employees for their dedication and determination to deliver a solid year during one of the more challenging operating environments our company has seen. Sherwin-Williams celebrates 160 years in 2026, and it's because of our employees and our culture that we're able to deliver sustainable results through all types of cycles. Our team continues to execute our playbook while finding new ways to help our customers become more productive and more profitable. I'm proud of what our team accomplished in 2025. At this time last year, we talked about the potential for a softer for longer demand environment, and that is exactly what we saw play out, as there was no meaningful improvement in demand across our end markets. Our team refused to wait for the market and instead focused on creating opportunities and controlling what we could control. We stayed true to our strategy, made targeted investments, focused on share gains, and executed on our enterprise priorities. We continued to deliver innovative solutions for our customers, and in a disruptive competitive environment, Sherwin-Williams stood out by being a consistent, reliable, and dependable partner. Our success by design approach resulted in our team delivering record full-year consolidated sales and record adjusted diluted earnings per share. Gross profit dollars and gross margin expanded. Adjusted EBITDA dollars and adjusted EBITDA margin also expanded. It was also another very strong year for cash generation, with net operating cash growing 9.4% to $3.5 billion or 14.6% of sales. This percent of sales is right in the middle of the most recent target range that we've previously announced. Free cash flow was $2.7 billion, and free cash flow conversion for the year was 59%. In terms of capital allocation, our policy remains consistent. We returned $2.5 billion to shareholders through share repurchases and our dividend, which we raised for the 47th consecutive year. We completed the acquisition of Suvenil, and we continue to make strategic CapEx investments, including our new global headquarters and global technology center, which opened at the end of the year. We've been talking about these buildings for years, and we are thrilled that we are here. The move-in is going extremely well, and I'm confident that this will continue to strengthen our culture of collaboration, innovation, and winning together. All in, we ended 2025 with a strong balance sheet and a net debt to adjusted EBITDA ratio of 2.3 times. Looking at our reportable segments on a full-year basis, Paint Stores grew sales by a low single-digit percentage. Protective and marine increased by high single digits. Residential repaint increased by mid-single digits and, for the third year in a row, meaningfully outperformed the market where existing home sales remained soft. Low single-digit growth in commercial reflects share gains and above-market performance, as multifamily completions were down significantly during the year. Share gains are also evident in property maintenance and new residential, both of which were flattish in a down market characterized by muted CapEx spending, high rates, and affordability challenges. Segment margin increased, reflecting operating leverage and solid returns on our investments. We also added 80 net new stores and 87 net new sales territories. Consumer Brands' full-year sales grew by a low single-digit percentage, driven by the Suvenil acquisition, as underlying sales decreased by low single digits, resulting from soft DIY demand in North America and unfavorable FX. Adjusted segment margin decreased, including a negative impact from Suvenil, as we previously described, as well as lower production in the segment's manufacturing operations to match softer demand, resulting in lower fixed cost absorption. Performance Coatings' full-year sales varied by division and geography and were flat overall, which outpaced a very challenging industrial demand backdrop. Acquisitions added a low single-digit percentage in the year, and FX was a slight tailwind, but these were offset by unfavorable price mix. Packaging grew at the high end of high single digits as we continued to win new business globally, including those complying with new non-BPA coding requirements. Auto refinish was flat for the year, with share gains becoming more evident in the second half, where sales were up mid-single digits. Coil sales decreased by low single digits, as meaningful new account wins were not enough to offset steel tariff impacts. Industrial wood and general industrial each decreased by low single digits, driven by soft housing and industrial markets, respectively. Adjusted segment margin remained in our high teens target range but was impacted by unfavorable geographic mix, as Europe grew by mid-single digits while other regions were down low single digits. As we close out 2025, I'm also pleased to share that we are reinstating our 401(k) matching program for eligible US employees effective February 1. We'll also be restoring the matching contributions that have been paused since October 1 by the end of our first quarter. As I described last quarter, the decision to pause the company match was made after we had implemented multiple cost savings initiatives and significant restructuring actions, driven by multiyear demand and macroeconomic uncertainty. Given what we anticipated back in July, and with the prospect of additional risks materializing, we faced a difficult decision: either pursue further workforce reduction or temporarily pause the 401(k) company match. While many companies chose widespread layoffs, we chose a different path. We chose to protect jobs, retain talent, and invest in the long-term health of the organization by keeping our teams intact. We also committed to restoring the match as soon as performance allowed, just as we have done in the past. Our teams responded exactly as strong teams do. We elevated our performance and focused on controlling what we could control, including winning new business, growing share of wallet, pricing discipline, and accelerating further cost reductions. We demonstrated what truly differentiates Sherwin-Williams. At the same time, some of the risks that we saw in July did not materialize or were less severe than expected, including the delayed realization of some tariff impacts. The combination of all these factors is enabling us to both resume and retroactively restore the match sooner than originally anticipated. Now moving on to our 2026 guidance. The demand environment feels much like it did a year ago. The softer for longer dynamic we described again back in October remains intact. While some conditions are gradually becoming more stable, many of the indicators we track, along with cautious consumer sentiment, provide little support for any broad-based or accelerated recovery at this time. This environment is likely to persist well into 2026. The slide deck issued with our press release lays out our key economic assumptions for 2026. I'd also like to provide you with some additional color that informs our outlook. On the architectural side of the business, residential repaint remains our single biggest growth opportunity, and we have and will continue to make investments to win here. Demand remains difficult to predict, with industry forecasts for existing home sales growth varying widely from slightly down to up double digits. The mortgage rate lock-in effect remains real. Harvard's LIRA Index is projecting very modest growth, and select retailers have forecasted flattish home improvement growth as a base case. Additionally, consumer sentiment remains muted. These same dynamics also signal another potentially challenging year for DIY. We expect the new residential market to be down at least in the mid-single-digit range this year, given negative single-family starts over 2025 and many forecasters' expectations for further softening in 2026. National Association of Home Builders sentiment levels were notably negative exiting 2025, and mortgage rates remain in the six-plus range. We welcome meaningful economic and policy proposals to address affordability and increase supply, though these will take time to finalize, implement, and take effect. We expect to outperform the market as we continue strengthening our homebuilder customer relationships. In the commercial segment, the Architectural Billings Index has continued its long run of negative readings. We do see a bright spot in multifamily starts, which were positive for most of 2025. However, these starts won't turn to completions in painting until late this year and into 2027. We are pleased with the share gains we are making here, as demonstrated by our above-market growth over 2025, and which we expect will continue throughout 2026. Property maintenance CapEx spending still appears to be idling and neutral, so we are well-positioned to capture pent-up demand when rates moderate. We expect flattish sales as we continue to grow our account base to help offset core softness. In protective and marine, the project pipeline remains solid, though the timing of starts and completions remain variable. We expect this business, along with residential repaint, to be the best sales performers in Paint Stores Group this year. On the industrial side, the US manufacturing PMI ended at its lowest point in the year in December after ten months of contraction. Brazil and the Eurozone PMIs are also contracting. Optimism is easing in China, and the PMI there remains below its historical average. We see a 2026 backdrop where our core business remains flat at best, but strong new account wins from last year and this year, along with positive price mix, will drive low single-digit sales growth in Performance Coatings Group. We expect modest growth in auto refinish, driven by share gains and price mix, with the industry remaining flattish to down given pressure on consumers and related softness of insurance claims. In coil, we expect flattish sales as the market remains under pressure related to steel tariffs. In packaging, share gains and our industry-leading non-DPA coating should drive flattish sales against a tough double-digit comparison. Our industrial wood and general industrial divisions have the strongest new account growth in the group last year. We expect these wins to drive low single-digit growth in both of these divisions, even as core demand remains very weak. In summary, for the third year in a row, the market is not going to give us much help. And for the third year in a row, we expect to outperform the market and grow sales and earnings per share. We'll continue to remain extremely aggressive with a focus on helping existing customers grow as well as winning new business and converting share gains. I want to be very transparent here. We're providing guidance that we believe is very realistic given this backdrop. We are also confident that if the market is better than we're currently seeing, we would expect to outperform the guidance that we are providing to start the year. The slide deck issued with this morning's press release includes our expectations for consolidated and segment sales for 2026. The deck also includes our initial expectations for the full year, where consolidated sales are expected to be up a low to mid-single-digit percentage. Diluted net income per share is expected to be in the range of $10.70 to $11.10 per share. Excluding acquisition-related amortization expense of $0.80 per share, adjusted diluted net income per share is expected in the range of $11.50 to $11.90, an increase of 2.4% at the midpoint compared to 2025 adjusted diluted net income per share of $11.43. I'll note that at the $11.70 midpoint, earnings growth will outpace the midpoint of our core sales growth, excluding the impact of Suvenil sales. Our slide deck contains several additional data points that provide important context that I'd also like to briefly address. Any comparisons described are year over year. From a sales perspective, I'll remind you that the Paint Stores Group implemented a 7% price increase effective January 1. Realization should be in the low single-digit range given market dynamics and segment mix. We are also implementing targeted price increases in specific areas with our other two reportable segments. We expect the market basket of raw materials to be up a low single-digit percentage in 2026, driven by tariffs along with select commodities also inflating. We expect to overcome these raw material headwinds and deliver full-year gross margin expansion given both incremental 2026 pricing and accelerated simplification efforts across our supply chain. We expect GAAP SG&A dollars to grow by a low single-digit percentage in 2026, inclusive of a low single-digit contribution from Suvenil. As we pointed out last quarter, interest expense will be up this year. This increase includes approximately $40 million related to the lease payments for our new global headquarters and approximately $35 million of interest related to the $1.1 billion one-year delayed draw term loan that we executed in September. It also includes approximately $15 million in increased interest expense related to refinancing at higher rates. We expect to end the year within our current long-term target debt to EBITDA leverage ratio of two to 2.5 times. We expect to open 80 to 100 net new stores in the US and Canada in 2026. We'll also continue adding sales reps in territories, accelerating innovation, and expanding our digital capabilities. Next month at our Board of Directors meeting, we will recommend an annual dividend increase of 1.3% to $3.20 per share, up from $3.16 last year. If approved, this will mark the 48th consecutive year we've increased our dividend. We expect to continue making opportunistic share repurchases. We'll also continue to evaluate acquisitions that fit and accelerate our strategy. In addition, our slide deck provides guidance on our expectations for currency exchange, effective tax rate, CapEx, depreciation, and amortization. Finally, I'll remind you that as our first quarter is a seasonally smaller one, we do not plan to make any updates to full-year guidance up or down until our second quarter is completed, at which point we will have a better view of how the paint and coatings season is unfolding. Sherwin-Williams is extremely well-positioned as we enter 2026. Again, while we expect little, if any, help in terms of end-market demand, our teams refuse to be discouraged by these near-term trends. We know stronger demand will return at some point, driven by powerful demographics and enduring market fundamentals. But we're not waiting for that moment. We're focused on winning today and securing our long-term future. We know the playbook. Stay true to our proven customer-first strategy. Control what we can control. And turn volatility into opportunity. That means relentlessly pursuing new accounts and share of wallet, innovating in and out of the can, investing where returns are clear, maintaining price-cost discipline, advancing our enterprise priorities, and driving accountability to ensure flawless execution. This is how we grow and create value regardless of market cycles. We're proud of what we've accomplished, but we're even more energized by the opportunities ahead. Across every business, we see room to grow, innovate, and lead. Our focus remains sharp: grow sales, drive returns on sales and assets, and generate cash. We'll continue to deliver unique solutions for customers and outperform the market. This is a great time to continue demonstrating what makes Sherwin-Williams so unique. We win when our customers win, and that is exactly what we plan to do. I'd like to end where I started by thanking our team for being truly the best in the industry. This concludes our prepared remarks. And with that, I'd like to thank you for joining us this morning, and we'll be happy to take your questions. Jim Jaye: Certainly. Operator: Everyone, at this time, we will be conducting a question and answer session. If you have any questions or comments, please press 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. We do ask that participants please ask one question. Once again, if you have any questions or comments, please press 1 on your phone. Our first question is coming from Ghansham Panjabi from Baird. Your line is live. Ghansham Panjabi: Yeah. Thanks, operator. Good morning, everybody. I guess, first off, on the performance coatings segment, the margin outperformance there relative to at least our expectations. The incremental seemed very, very high in 4Q, and I know you called out some of the more profitable businesses like packaging and auto refinish being up nicely, etcetera. But could you just give us a bit more color in terms of what drove that? Heidi Petz: Yes, Ghansham. I think what you're seeing there clearly is discipline on display. This is an organization led under Karl Jorgensrud, who has been in the industry for over thirty years, and I think this is an environment where we're in the fifth straight year of a challenging demand environment. The team stood tall and delivered. And you're gonna see this play out with a very clear aggressive focus on new business wins, taking market share, but also a lot of heavy lifting. And we talk about simplification in our enterprise priorities, taking complexity out of the business. I'm very pleased with some of the heavy lifting there. Having said that, we're early innings, and I'll hand it over to Ben here to jump in. Ben Meisenzoll: Hey, Ghansham. Ben Meisenzoll. Yeah. Adding to what Heidi said there, you know, I point to the two halves of PCG. Heidi called out simplification. SG&A has been a focus of this team here. They've consistently been able to keep their SG&A at a moderated pace considering where volumes are at. If I look at the two halves, I think that's a good way to look at it here. We were under pressure the first part of the year right after the election, and we started seeing some of the new policies take shape. There might have been some hesitation. The operating margin was backwards about 160 basis points in the first half. The second half, adjusted operating margin showed 20 basis points worth of improvement. The second half was at 17.9%, pretty close to where we ended 2024. Obviously, the 19%, you know, the good pop in the fourth quarter. And so I agree with what Heidi said there. It just comes down to discipline. Focus on SG&A. I think this is also a good example. We always talk about the operating margin and that looking just at gross margin or SG&A is a really good example of why we do that because we're able to demonstrate and grow operating margin as a really good SG&A controls. Jim Jaye: Thank you, Ghansham. Operator: Your line is live. John Roberts: Yeah. Good morning. Thanks for taking my question. And maybe kind of a decent segue from that last question. On the SG&A outlook for 2026, I guess, could you help us to think about what you're factoring in? What kind of level of growth we should be expecting? Because I know you continue to invest even when markets struggle. You've also got this 401(k) match coming back in. So I guess, could you help us to think about how that should play out as the year progresses? Ben Meisenzoll: Hey, John. Yeah. The way to think about that, and we called out, you know, Heidi talked about in her opening comments, with reinstating the 401(k) and doing our retroactive match, we're apples to apples 2025 versus 2024. And so the catch-up contribution as it relates to 2025 earnings, we're apples to apples there. And so because we did that, as you look at 2024, 2025, and then into 2026, there is no quarter-to-quarter or year-over-year 401(k) impact. If you look at broader SG&A, as we called out in the opening remarks, SG&A up a low single digit. That obviously includes the history of the restructuring costs that we took in 2025, then you layer on the incremental Suvenil, which is also a low single digit. So you can do the math there to figure out the core versus Suvenil. But really what we have, you know, embedded there is, you know, that low single-digit growth. Again, that points right back to the cost control, everything that we talked about throughout the year here. We had about $40 million in savings in 2025. You saw that our one-time restructuring costs were a little bit higher than what we guided to in October. Gonna give us the ability to upsize the other $40 million that we initially called out. That's probably closer to $46 million in savings in 2026. And so again, really proud of what the teams are doing to really control costs while volumes are challenged. Heidi Petz: John, give Ben a lot of credit. He uses this phrase to the team. And for those employees listening, I'm talking to you here too. We want to earn our SG&A. Right? And so we're gonna always pace that volume, and you're gonna see that discipline play out throughout the year. Operator: Thank you, John. Thank you. Our next question is coming from Chris Parkinson from Wolfe Research. Your line is live. Chris Parkinson: Great. Thank you so much. You know, should we talk about some of the things that are more or less in your control in terms of your guidance and just how you, Ben, and Al are thinking about in terms of the implied gross margin guide? Just perhaps just a quick comment on healthcare labor assumptions, the raw basket. Seems like there's some divergences between solvents, acrylics, and TiO2 asset utilization. Just kind of just what underpins that and what gives you the confidence that that is the correct framework at least to begin the year? Thank you so much. Jim Jaye: Yes. Good morning, Chris. This is Jim. I'll start with the raws piece of your question. So as you saw in our slide deck, we're guiding our raw material basket to be up a low single-digit percentage this year. That includes tariffs and some of the commodities inflating in particular. I'd say the areas where we're seeing the most pressure would be on the packaging side of our basket. Also, non-TiO2 pigments, extenders, things of that nature. Also, some pressure on resins, and I'd say that's a little bit heavier weighted on the industrial side of the basket. But those are the things that are driving the raw material guidance that we're laying out. Ben Meisenzoll: Yeah. Chris, I'll add on to the SG&A side and just the overall cost side. You think about, we've called out in the admin segment, interest expense, you know, being a headwind for next year. And so when you look at the growth that we have in our admin spending next year, about half of that is going to be interest expense, and then half of it is normalization of other non-operating costs and just your general SG&A. And you called out healthcare. We've all seen the headlines, healthcare up, you know, double digits. We're in that camp. We have things that we can do to mitigate that. So what we're passing on to our employees isn't as meaningful as that. So we're trying to be, you know, really diligent there. But, you know, we continue to try to keep that cost low. If I go back and point to some of the opening comments on the admin SG&A, the core SG&A, we've been able to keep that down low double digits, you know, down low teens, and that just demonstrates again the levers we're able to pull to make sure we can keep that cost in check knowing that, again, we're in that lower volume environment right now. Jim Jaye: Thank you, Chris. Operator: Thank you. Our next question is coming from Greg Melich from Evercore ISI. Your line is live. Greg Melich: Hi. Thanks. I wanted to follow up on price mix. In the fourth quarter and then also the 7% price hike on January 1. I guess it looks like it was 3% to 3.5% price mix in 4Q. And with the price increase coming in, in January, why wouldn't we expect that to be more going into the first quarter in 2026? Heidi Petz: Yeah. Greg, I'll start, and I'll hand this over to Ben to give a little bit of color. But I'll take you back to some of the comments I said in my prepared remarks relative to market dynamics. And, you know, we are looking at the competitive environment. I would frame it more as a jump ball environment, to be honest with you, and so we're going to continue to be, as you would expect, extremely aggressive as it relates to chasing volume right now. And so there's a balance. The team is very prepared. There's a lot of tenure in the organization. They know how to strike that right balance, but I'm very confident that when we get some of our customers in, I'm very confident in the team's ability to work with them to add value and continue to, you know, trade them into more premium products that ultimately is gonna make them more productive. Let me hand it to Ben to comment on the quarter. Ben Meisenzoll: Yeah. I agree with everything Heidi said there. And again, we've talked about that price mix, you know, looking at incremental pricing and, you know, mix of some of the business as well. And so you may have, you know, a little bit of noise in there. But Heidi hit the head on it with volume. I mean, we've talked about, in this environment, prioritizing volume. And so as our teams know that high effectiveness is critical, you know, for us to get to the high end of our guide. We're gonna continue to, you know, put the pressure on there to capture as much price as we can, but we're not gonna put volume at risk to do that. And so, yeah, that may be what's a little bit different than what you've seen in the past. But still very confident when they're in our gross margin targets that we put out, and we're going to hold to that. Operator: Thank you, Greg. Thank you. Our next question is coming from David Begleiter from Deutsche Bank. Your line is live. David Begleiter: Thank you. Good morning. Heidi, can you discuss the impact of the severe winter weather on your current demand trends? And does that mean that Q1 EPS could be down year over year just because of the weather impacts? Thank you. Ben Meisenzoll: Hey, David. It's Ben. Let me make a couple of comments here. I mean, I realize right now in the midst of, you know, watching the storm go through this week, we have weather every quarter. I mean, it impacts us every year. If you remember last year, you know, we had the Gulf winter storm. It had all the classic ice, you know, wind, snow, everything that you would expect with a winter storm like that. But our Southeast division, our Southwestern Division, they deal with weather this time of year every single year, and so no concerns there right now. Operator: Thank you, David. Thank you. The next question is coming from John Roberts from Mizuho. Your line is live. John Roberts: Thank you. In your packaging coatings performance is impressive here. Have we recovered to new highs since the correction you had? And how much more is left in terms of the conversion of the industry? Heidi Petz: Yeah. Good morning, John. I would tell you, you know, we've essentially recovered a lot of what we said was kind of temporary share loss, but that doesn't mean that we're happy with where we are. There's still a lot more to go get. I really like our position here with our leading technology. We continue to win and demonstrate value. We've got some, obviously, dynamics playing out. EFSA, the European Food Safety Association, ban on BPA. That's gonna be taking effect in Q2. We know that that will continue to drive more customer conversions for us. So really like our position here, so we're in good shape. Jim, maybe if you could comment on a few of those areas. Jim Jaye: Yeah. I would add to that, John, that in terms of how much is left to go, I would say that in Asia and LatAm, there's still quite a bit to go. You know, North America and, as Heidi just pointed out, Europe are farther ahead on that. But in terms of that conversion, those other regions still have quite a ways to go. Thanks for the question. Operator: Thank you. Your next question is coming from Aleksey Yefremov from KeyBanc Capital Markets. Your line is live. Aleksey Yefremov: Thanks. Good morning. Heidi, I wanted to come back to your comments on focusing more on volumes than price this year. I guess, typically, this could lead to a bit of a zero-sum game where your competitors would also focus on volumes. Is there something that's different right now about the competitive environment? Maybe your competitors cannot afford lower prices, so they have to raise their prices and cede some volume? Or is there another dynamic that kind of makes your strategy of being more volume-focused the right one this year? Heidi Petz: So, Aleksey, let me reframe what I heard you say. I think you said not putting volume above price. And I would say it's not putting volume above price. It's being very balanced in our view here. And so in this, it's a jump ball competitive environment. There's a lot of market share up for grabs right now, and we're not going to lose our mind, lose our way. We're very disciplined when it comes to pricing. But we want to make sure that the teams are empowered out in the front line to convert some of these larger, bigger customers that weren't in the Sherwin-Williams family before. We're gonna be dog on a bone and chasing that business. Ben Meisenzoll: Aleksey, I'll add to that. You know, we've always talked about volume as one driver of our operating margin. And so when you look over the long term, getting that wider base of business, getting that share of wallet and new accounts in, and even when we bring them in, we have ways in our stores, wherever the customer is in their journey, to help get them up into those premium products and other ways that that flows into that price mix as well. But we recognize over the long term, you know, that securing the volume, the right volume that we want, is how we get to our midterm and long-term goals. Heidi Petz: One piece Ben just said, and I think it's really important to emphasize, when we bring our contractors in, the confidence we have in treating them up to premium is they are making more money as a result of working with these higher-end, better products. And I'll remind you, the total cost labor comprises 85-87% of their total cost. So their willingness to pay a premium to get on and off of job sites faster, have less touch-up, less quality issues, especially in an inflationary environment, it plays to our strength. Operator: Thanks, Aleksey. Thank you. Our next question is coming from Jeff Zekauskas from JPMorgan. Your line is live. Jeff Zekauskas: Thanks very much. Your residential repaint sales were up low single digits, but your prices were probably up higher than that? So were residential repaint volumes flat or down? And have they decelerated through the course of the year? And if so, why? Ben Meisenzoll: Hey, Jeff. If you look at the fourth quarter, we were last year, we were up against a really strong comp in residential repaint. We were up a high single digit, and so that had a little bit of impact on what you're seeing here for the third quarter. Remain very confident in residential repaint. This is where, you know, we made a lot of investments. We're at the biggest opportunity for share gains. We're very confident with that segment with our pricing realization. And so I think we continue to be very happy with where residential repaint is. And obviously, as you look forward into 2026, that's a segment that we're gonna continue to count on and invest in. Heidi Petz: This is also a segment we have a lot of confidence in because we continue year over year to outperform the market. And so I wouldn't characterize it, Jeff, as slowing. I think, if you go back into some of our history, the last two years, there was a surge as we continue to focus on taking that Kelly-Moore share. That's now in our history and behind us. Probably seeing a little bit of that. But in terms of what is out there, the amount of market share to be gained is extraordinary, and we're gonna chase it. Operator: Thank you, Jeff. Thank you. Our next question is from Vincent Andrews from Morgan Stanley. Your line is live. Vincent Andrews: Thank you, and good morning, everyone. Wondering if you can help us bridge Consumer Brands from the fourth quarter performance on the top line up about 25% with Suvenil in the mid-20s to your expectations for 1Q. And for the full year with 1Q up low to mid-teens now and the full year up high single to low doubles, recognizing that you have to comp Suvenil late in the year. But what does that imply that, you know, the existing business is gonna do from a volume price mix perspective? And then what is your FX assumption within there as well? Thank you. Ben Meisenzoll: Hey, Vincent. Yeah. So going from the fourth quarter into next year, I mean, you nailed it. We got the annualization. That's obviously gonna have a sizable impact through the third quarter of next year when we annualize. The underlying business, I mean, as Heidi talked about in her opening comments, there's still a lot of challenges with the North American DIY market. We don't expect that to be an overperformer for us until we see some of the housing catalysts really catch. You asked about pricing. All of our businesses have some level of pricing embedded in their guide for next year. And so even though we don't go out all at the same time like we do for Stores Group, you should expect that there are some targeted price increases not only for Consumer Brands Group but also for Performance Coatings Group that could differ by the different business units or by region. And then FX, when you look at a full-year basis, I mean, we do have Consumer Brands Group down a low single digit because of FX. That's mainly gonna come in the second half of the year, and that's mainly coming from headwinds that we anticipate in Latin America. Heidi Petz: And I'll mention on the Suvenil piece because I can't help it. We're really excited about this acquisition and the progress that we're making. It's obviously early, but the teams are laser-focused. We've got our dedicated integration team so that our commercial teams can remain laser-focused on our customer and business continuity. I think that we're certainly pulling out the Valspar playbook, the rigor behind customers and employees, and making sure that we're keeping the happening in the market is going to be really important here. We got an opportunity to demonstrate why these brands are better together, why these teams are better together so that we can drive innovation with a market-leading brand. And I'm very confident in what we're gonna be able to do in Brazil. Operator: Thank you, Vincent. Thank you. Our next question is coming from Josh Spector from UBS. Your line is live. Josh Spector: Yeah. Hey. Good morning. I was trying to go through all the macro assumptions you have in that slide, which is very helpful. When I put that all together, it seems to say that maybe you're thinking the market and your Paint Stores Group is down something like 1%, maybe 2% next year. If I look at your Paint Stores Group guidance, you know, you're flat. Your store addition is typically at a point. So to me, that implies that you're basically saying you do closer to in line with the market versus outperform by a point or two. I'm just curious if you disagree with any of that framing. Is the market lower? Are you assuming more? And just square that with the comments you've been talking about earlier about focus on gaining volumes of share gains. Thanks. Heidi Petz: Josh, respectfully, I disagree. The market is down. I think it's probably hard to characterize it, but I would say it's down more than that. And where we look at our performance base case, we've guided to down single to up single. And the controllable in that space. And I'll point to residential repaint, where we continue to take share in a down market. We're gonna continue to make the investment, putting a new store in every four days, continue to invest in dedicated reps. We're investing in innovation. In fact, at the end of the quarter, we're gonna be launching zero VOC plant-based interior coating that will be the best paint we've ever made. And it's because we're that confident in our ability to convert share with residential repaint. I'll hand over to Ben to speak to any of the other segments here. Ben Meisenzoll: Yeah. I mean, if I take it to, you know, you're talking about, you know, volume here, I think one thing to point at in Paint Stores Group is the ability, even in, you know, a challenged volume market, to still, you know, grow incremental margins. And you look at what happened in the fourth quarter with volumes down low single digit, with Stores Group, good cost control, you know, we're able to generate, you know, almost a 50% incremental margin. And if you look at the full year, I mean, it's almost 40% again in a volume-challenged environment. And so we're gonna continue to find ways in, you know, despite what's happening in the market, to continue to drive margin. Jim Jaye: Thanks, Josh. Operator: Thank you. Our next question is coming from Mike Sison from Wells Fargo. Your line is live. Mike Sison: Hey. Good morning. Heidi, you mentioned that you'd welcome some, you know, policies or proposals to help affordability increase supply. You know, what do you think would be helpful in terms of maybe sparking a recovery in paint demand this year? And then quick follow-up in Protect the Marines. Had another good year. Is that mostly the protective side? And does it go into data centers, and if it does, you know, how big, and what's the potential there? Thank you. Heidi Petz: Great. Well, Mike, I thought you were gonna offer up a policy recommendation. So, yeah, we look at this kind of a three-legged stool, if you will. I don't know that it's gonna be one without the other. I think it's a combination of household income rates and affordability. And so as we come into, you know, a year of a midterm election, we'll see what moves there. But at the end of the day, our builders, our partners are still, you know, still hesitating and waiting to see for some of those things to be solved. I think we're in an environment here where, as we partner with these, our builders, and I remind you we've got a pretty healthy position with some of the largest builders from an exclusive standpoint. So our ability to lock in with them, help them see around the corner, and plan is gonna be important now more than ever. I'll move on to the PNM side. And, yeah, it is higher on the protective side than the marine side. And you said it right, Mike. This is where Sherwin-Williams is so exceptionally well-positioned because of the boom we see with AI infrastructure. As you look across that PNM division and the healthy pipeline that the team is working on and what we can bring to market, these data centers, for example, you look at every coating that every surface that needs to be coated, we've got a solution. Our high-performance flooring, that we just made some acquisitions in recently, puts us in a market leadership position. And you're gonna see us be extremely bullish as we move forward. Ben Meisenzoll: Yeah. Mike, I'll add just one more thing. I mean, going back to, you know, the first question in the policies and delayed that out well. You know, what that all means to us as it relates to our outlook, you know, if there are things that happen, if there are policies that are implemented that become tailwinds for us, the plan that we have built, you know, is gonna enable us to capture those and win from those. And so I know we outlined on slide nine of the presentation to see if there are policy, you know, some of our economic assumptions. And so we're gonna be watching adjustments that could turn some of those metrics better for us, and in turn, you should expect our performance to mirror that. Operator: Thanks, Mike. Thank you. Our next question is coming from Patrick Cunningham from Citi. Your line is live. Patrick Cunningham: Hi. Good morning. So, Heidi, throughout the past year and a half, you talked about capitalizing on opportunities, disruption in the industry, and given the recent mega merger announcement, there's potentially some fresh disruption. So how would you characterize the opportunity set maybe within more of your industrial-facing businesses? Heidi Petz: Yeah. It's a great question. I think the word disruption is the right word. When you think about what's in play there, obviously, it impacts several of our divisions. And the teams are gonna continue to be very aggressive out there. I think it's safe to say that. But when I step back and look at the big picture over the last few years, by and large, there's been a lot of shift across the competitive set on both architectural and industrial. And what I'm most excited about is the stability of our strategy. We've got a rock-solid strategy. We've got the playbook. We've got the management team, the team out in the field every day. Clarity about how to execute that playbook. And so we mentioned earlier that there's, you know, we think volatility is an opportunity to create opportunity, whether that's in the macro or in the competitive landscape, and we're gonna do just that. We're gonna continue to stay close and get closer to our customers. Find new ways to solve their challenges, and we're gonna come out winning. Operator: Thank you, Patrick. Thank you. Our next question is coming from Arun Viswanathan from RBC Capital Markets. Your line is live. Arun Viswanathan: Great. Thanks for taking my question. Hope you guys are well. I guess I just wanted to understand the element of potential conservatism in the guide here. And maybe what could get you to the upper end. It sounds like, you know, you will be implementing that price increase. Maybe you get two to three points out of that. And then, you know, would it be mainly volume in Paint Stores Group? I mean, we have seen some improvement in existing home sales over the last few months. And are you kind of assuming continued softness in commercial and new? Maybe you can just kind of go through some of the verticals within Paint Stores Group and see how, you know, maybe some of the different scenarios could play out and maybe get push you towards the upper end of that guide. Ben Meisenzoll: Hey, Arun. I'll start with saying that, you know, when you look at our outlook, I would call it realistic. And if I point back to the presentation deck and the economic assumptions that are the foundation of our guidance, you can see how, you know, we're framing that out. And I'll point to a couple of the indicators. You know, if you look at existing home turnover, there's a wide varying range of assumptions next year. You have some people that think it's gonna be back one to 2%. You've got some that are reporting it could be as high as 14%. And so I think what's important for us to share and the reason that we put that slide together so you could anchor on see where we were anchoring our basis for our midpoint guidance. And so we feel in that example with existing home sales, it's more realistic to be, you know, in that low single-digit range absent any major policy shifts or anything else that we talked about. And so the basis of that foundation, I think we feel very comfortable and confident with. And as I mentioned earlier, if those indicators get better, if we see, you know, rates trend lower, if existing home sales turnover is higher, consumer confidence affordability gets better, you should expect that our results are higher than the midpoint that we're providing. Operator: Thank you, Arun. Thank you. Our next question is coming from Duffy Fischer from Goldman Sachs. Your line is live. Duffy Fischer: Yeah. Good morning. Could we go back to Consumer Brands Group? I just want to understand the margin implication of Suvenil coming in and the cost-cutting programs. So do we need to kind of model a 2% decline year over year until we anniversary Suvenil? And then, you know, it kind of bounces back up towards normal or how to think about playing out throughout this year. And then once we've anniversaried it, what does it look like? Ben Meisenzoll: Hey, Duffy. Yeah. If you think about the fourth quarter, it's generally a lower margin quarter, you know, for us anyway. And as we talked about, you know, coming out of our second-quarter call, you know, we Consumer Brands Group, we have some supply chain built in there, and that was, you know, due to targeted production volume reductions as we're trying to manage our inventory to the end of the year. With Suvenil, I know there's a lot of noise there with Suvenil coming in. That doesn't help as well. But what I will tell you is that, you know, from an operating margin point of view, we should expect to see, you know, similar core business to our existing Sherwin business. We will have some integrating costs, as you can imagine. You know, a deal of that size, the integrating activities that are gonna be required, the system integrations, etcetera. We're gonna have some costs, you know, as we go through 2026. But, you know, from a margin point of view, yeah, until we anniversary that in the third quarter of next year, you know, you can expect it to be maybe a little muted, say the same degree that you saw in the fourth quarter. Operator: Thanks, Duffy. Thank you. Our next question is coming from Mike Harrison from Seaport Research Partners. Your line is live. Mike Harrison: Hi. Good morning. You've talked in the past about the periodic repaint of houses occurring every five to seven years. A lot of demand was pulled forward into the 2021 time frame. So we should be getting into a period where we should start to see more repaint activity. In your view, Heidi, what is preventing that piece from playing out? Is it the cost of labor and maybe availability of paint contractors? Is it the cost of the paint itself? You know, when you think about consumer sentiment and, you know, just propensity to repaint periodically, what could conflict with that prevailing view of repainting every five to seven years? Heidi Petz: Yeah. And you're right. It is, we say it's kind of a five to six to seven-year cycle, and we are coming off of that post-COVID. I do think there are some natural governors in play right now because we are in an inflationary environment. Consumer confidence is absolutely impacted. When you think about home improvement in general, though, what I love about our position is that we're one of the most affordable and most quick to update your home versus larger kitchen and bath projects. And so I do believe as we continue to monitor a lot of these indicators, we're gonna stay very close to it. But we'd like to see more tick up happen faster. I do think it's gonna still be a bit choppy throughout the year. And I'll remind you too, the DIY segment represents about 40% of the available gallons out there. And so when it starts to move, you're gonna wanna come along for the ride, but we just need it to start moving. Jim Jaye: I think Ben's point that he mentioned a minute ago is important too, Mike, around the existing home sale outlook. I mean, that range of some saying existing home sales could be down low single digits to up 14%. That gives you a really good view, I think, into the uncertainty that's out there in terms of demand. So whatever way it goes, though, we expect to outperform, and we're very well-positioned to do that based on the investments we've consistently made over the last two years. And thanks for the question. Operator: Thank you. Our next question is coming from Kevin McCarthy from Vertical Research Partners. Your line is live. Kevin McCarthy: Yes. Thank you, and good morning. Heidi, in the prepared remarks, I think you commented regarding the 7% price increase that you'd expect realization to be in the low single-digit percentage range. I'm not sure if that was a near-term comment or if that's where you would expect to be in the fullness of time. But maybe you can elaborate on what that trajectory does look like over the next few quarters. And what I'm really trying to get at is the nexus between this realization versus your historical realizations against the backdrop of, you know, your aggressive pursuit of volume? Will it be lower this time, or do you think ultimately it will be the same? Heidi Petz: We've said it's gonna be in the historic range. It may be the low end of the historic range, but I would look at this again because of this unique competitive environment that we find ourselves in. When I look at the low single-digit guidance, I would think of that, Kevin, as a full-year guide, and I'll invite Ben to jump in on any other details. Ben Meisenzoll: Yeah. Kevin, I think what's important to know here, you know, that the teams are engaged. We're getting after the effectiveness, you know, where we can get it. There might be some delayed realization as you have, you know, different accounts that go a little later than January. And so we're gonna continue to monitor this. We know how to do this well. There's a high degree of confidence in our stores group teams to get the price where they can, and we're gonna manage it that way. Operator: Thank you, Kevin. Thank you. Our next question is coming from Matthew Dio from Bank of America. Your line is live. Matthew Dio: Yeah. Good morning, everyone. To build a little bit on Pat's question, would you look at or participate in any asset sales on the backs of the kind of the pure merger going on? I mean, I know it's a bit of a broad question, considering there's a pretty diversified portfolio, but say, for example, powder coatings. Right? Would new market entry be interesting to you or expansion in some of these other more core industrial segments? Heidi Petz: Well, Matt, we love to grow, and we love expansion. Having said that, you know, the way we look at our growth strategy, obviously, we start with an organic focus. When we consider inorganic activity, it's a very disciplined review of our portfolio, which you just said. And so when I think about what's in play there and as stewards of your capital, you know, we're always going to look. But there are a few of those businesses that if they fell out of the air and into our laps, all day long, yes, we would love them. But right now, we're just focusing on growing organically and competing in the market. Jim Jaye: Thank you, Matt. Operator: Thank you. Our next question is coming from Garik Shmois from Loop Capital. Your line is live. Garik Shmois: Oh, hi. Thank you. As you made the decision to bring back the 401(k) match, you cited delays in tariffs as one of the drivers that helped you decide to reinstitute it. I was wondering if there's anything else specifically that you're looking at that gave you confidence. And just on the flip side, you're talking to a number of choppy macro indicators and, you know, trends that don't seem to be, you know, flipping anytime soon. I was wondering if there's any incremental cost that you're looking to implement this year? Heidi Petz: Right. So, Garik, I'll start, and then I'll hand this over to Ben. I think your point and your recognition and our recognition that the tariffs are going to have a delayed realization. So I'll have Ben comment on that here in a moment. But I do want to take a minute just to address this. I think we said this in the prepared remarks, but this decision was not made on a single quarter or any short-term optics. And we all know this period of elevated and prolonged uncertainty. We had one objective in mind, which was protecting the operating strength, the stability, and the long-term health of our company by protecting jobs. And I'm really proud that we've been in a position to restore that. But here's the reality, and I share this with you just to bring you into how I'm thinking about this. When you have a differentiated strategy that you believe in and it's clearly working, and you've got a world-class team that knows how to execute through all types of cycles, your number one focus is on execution. And so I think now more than ever, you've got customers that are dealing with so much uncertainty. They are looking for partners that can be stable, reliable, and predictable. And when you've got a winning strategy, you've got customers that need you, you're gonna invest in that execution capacity. So which means we're gonna continue to not only attract and hire but it's in our best interest to retain this talent. So we've seen a lot of widespread layoffs out there in and out of our industry, and I said earlier, we chose a different path. It was to maintain and preserve these jobs. And I think that making sure that we have that execution capacity is what has rewarded our shareholders very well over the last few decades. But let me hand it back to Ben to talk more about 2026 implications. Ben Meisenzoll: Yeah. I mean, just one comment there, and I'll remind you back in July, when we gave our guidance, we were operating in an environment of high uncertainty, and Heidi talked about, you know, us wanting to make sure we preserve that financial flexibility. And so it didn't materialize the way that, you know, we had planned out. Part of having that flexibility and pulling that 401(k) lever is, you know, if it since it didn't play out the way that we had thought throughout the year, it gave us that ability to reinstate that. And even though it was quicker than we had expected, it's great that we were able to do that. As we go into 2026, it doesn't mean that, you know, the pressures that we see have alleviated. There are still tariff pressures. It's part of our single-digit raw material guide that we're gonna have to contend with this year. And that delayed realization is something that we're going to have to contend with this year. You've seen us on the cost out and pulling, you know, levers for, you know, some of the big needle movers. We have confidence that our teams are gonna continue to do that. And we see our cross-business unit teams working really well together to unlock cost in areas that have been harder to get at in prior years. And so our confidence in them being able to do that also helps our decision, you know, to make this and get it reinstated, get this behind us. And we're gonna find ways to continue to overcome the volume challenges. Operator: Thank you, Garik. Thank you. Our next question is coming from Chuck Cerankosky from Northcoast. Your line is live. Chuck Cerankosky: Good morning, everyone. I want to take a look at the Paint Stores Group and see if there's any insights to be gleaned by how the non-coatings sales are going, especially with the professionals' basket when they're in your stores. Heidi Petz: Chuck, we're gonna need a little bit more on the question, if you don't mind. When you say non-coatings, what specifically are you referring to? Chuck Cerankosky: I'm thinking about the supplies, brushes, sprayers, things like that. That might indicate now where the pro's head is at and what you folks might be looking at to change in their baskets. Jim Jaye: That was helpful. Jim's gonna start off here, and then I'll jump in. Jim Jaye: Yeah. Chuck, I was just gonna say, you know, one of the things you may be thinking about is spray equipment sales, and I'd say those have been, you know, flattish reflecting the environment that we're in. Especially, those are, you know, areas we've talked about new res being under pressure. That'd be an area where you might see some more of that activity. Heidi, did you have anything else you wanted to add? Heidi Petz: Just flat. I mean, it's flattish. And, Chuck, the way we think about that, and we call it AP, applied products, is just obviously can be more of a leading indicator. Spray equipment's a really good example, but I would just characterize it as flat is what we're looking at. Operator: Thanks, Chuck. Thank you. Our next question is coming from Eric Bosshard from Cleveland Research. Your line is live. Eric Bosshard: Good morning. On the DIY market, could you just frame a bit of what you're seeing in terms of perhaps your performance in terms of volume and what's going on with price mix? In 4Q and the expectation in '26? Heidi Petz: Yeah, Eric. Volume continues to be very choppy. Obviously, this is similar to the comments I made earlier. I wish it was a different environment. Having said that, you know, we've got a unique distribution because we service this DIY customer in two areas. One, through our paint stores, and we love the margin accretion on that side of the business. That's more of a more discerning DIY customer that's looking for a higher level of service. But our partnerships through, you know, a lot of our strategic retail partners are extremely important here. And in this environment, we say don't let a downturn go to waste, making sure that we are aligned, thinking differently about, you know, what's on the shelf, how we can compete across the street. And so there's a lot of good momentum in terms of planning. We just need the catalyst to come to realization. On price mix, I'll hand it over to Ben. Ben Meisenzoll: Yeah. Eric, I mean, you've seen in our stores. I mean, our DIY performance has been a little bit better in the quarter here. If I look at DIY in total, though, a lot of what you see there is maybe the premium gallon push. We talked about that on our third-quarter call with some of our channel partners. We're seeing better premium gallons, so that's obviously a component of the price mix bucket that you see there. And that's a win for our customers because that's, you know, putting them in a position where they could be more efficient for, you know, for the projects that they're doing in their homes. And so that's about what, you know, we're seeing there. Obviously, in our stores, again, if we're changing pricing, that's a segment where maybe we can be a little more effective, but that'd be my only comment there. Operator: Thanks, Eric. Thank you. Our next question is coming from Laurence Alexander from Jefferies. Your line is live. Laurence Alexander: Good morning. Could you give an update on what your net price tailwind is expected to be going into 2026 and how that compares to how you think about trend pricing absent a sharp cyclical improvement? Ben Meisenzoll: Hey, Laurence. Yeah. I mean, we're gonna annualize our pricing. We went out January. And so by the time, you know, we did our pricing January 1 in stores this year, we've annualized that. There might have been a little bit of pricing that we captured later in the year. But our expectation is, hey, we've lapped last year's price increase. The timing, you know, coincides pretty well with the new price increase. And so as we've talked about a couple of times here this morning, you know, we'll be managing high effectiveness in that pricing as best we can as we work through 2026. Heidi Petz: Maybe just a final comment as it relates to pricing, I think, and the discipline just to put a bow on this. I think we are in a very unique position. There's a lot of inflection happening across the industry. And I'm very confident in our strategy, our leadership team, and confident in where we're taking this company. And I'm excited for what's ahead, and we just need the market to help us a little bit. And we're having a very different conversation. Jim Jaye: Now just add to tie that all up, Laurence. Again, if you look in the slide deck that we put out with some of the guidance, you know, we're talking for the full year in '26. We've got low single-digit positive price mix in all three segments, and that gives you a positive low single-digit price mix on a consolidated basis for the full year. Jim Jaye: And thanks for the question. Operator: Thank you. That concludes our Q&A session. I will now hand the conference back to Jim Jaye for closing remarks. Please go ahead. Jim Jaye: Thank you, Matthew, and thank you, everybody, for joining our call. And thanks to all the employees of Sherwin-Williams for all their continued hard work. Clearly, you heard today we're continuing to operate in a very challenging demand environment. And we expect that to continue well into the year. But as Heidi mentioned, Ben mentioned, we believe the guidance we're giving today, this initial guidance is realistic, given all the economic assumptions that we laid out in our slide deck. And, you know, quite frankly, should the market be better than we're seeing today, we'd expect to outperform that guidance. So regardless of the environment, you can count on us. Our strategy is clear, which is providing those differentiated solutions for our customers. I will close with a save-the-date request for everybody for our 2026 financial community presentation. It's gonna be in Cleveland this year on Thursday, September 24. And it will include the opportunity for you to see our new global headquarters and our new global technology center. So we're excited for all of you to experience this amazing investment that we've made for our customers and our people. That date again is September 24, and we'll have more details on that later in the year. As always, we'll be available for your follow-ups here, and thanks again for your interest in Sherwin-Williams. Have a great day. Operator: Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.
Operator: Good morning and thank you for standing by. Welcome to International Paper's Fourth Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, you will have an opportunity to ask one question. As a reminder, due to time constraints, we ask that you limit it to one and one question only. Press one. To withdraw your question, press 1 again. It is now my pleasure to turn the call over to Mandi Gilliland, Senior Director of Investor Relations. Ma'am? The floor is yours. Mandi Gilliland: Good morning and good afternoon, and thank you for joining International Paper's Fourth Quarter 2025 Earnings Call. Our speakers this morning are Andrew K. Silvernail, Chairman and Chief Executive Officer, Lance T. Loeffler, Senior Vice President and Chief Financial Officer, and Tim Nichols, Executive Vice President and President of DS Smith. There is important information at the beginning of our presentation, including certain legal disclaimers. For example, during the call, we will make forward-looking statements that are subject to risks and uncertainties. These and other factors that could cause or contribute to actual results differing materially from such forward-looking statements can be found in our press releases and reports filed with the US Securities and Exchange Commission. We will also present certain non-US GAAP financial information. A reconciliation of those figures to US GAAP financial measures is available on our website. Our website also contains copies of the fourth quarter earnings press release and today's presentation slides. Beginning on Slide three, before we jump into the presentation, I want to provide clarity on what will be discussed on the call today. We will begin by walking through the separation announcement for the EMEA packaging business. Then we will discuss our 2025 full-year and fourth quarter results followed by our outlook for Packaging Solutions North America and Packaging Solutions EMEA. We will close out the call with Q&A. So now let me turn the call over to Andrew K. Silvernail, who will start on slide four. Andrew K. Silvernail: Thanks, Mandi. Good morning, good afternoon, everybody. Thank you for joining us to discuss the next steps in our transformation journey. Today, I'm excited to announce our plan to create two publicly traded scaled regional packaging solution leaders in North America and EMEA. I recognize that this action is understandably a surprise to most of you. But during this call, I'll walk you through why this is the right step to accelerate value creation for both businesses. My objective today is to answer a few critical questions: What, why, and why now? We look forward to helping you understand how this swift decisive action is a continuation of our 8020 focused strategy and an accelerant toward our ambitions and supports our ultimate objective, which, as always, is to maximize long-term value for our shareholders. But first, turning to Slide five. I want to anchor you in our core strategy and how we operationalize it through our 8020 performance system. While our portfolio is changing, the core strategic principles and the operating model are not. 8020 is the driver for our transformation. The lens we use to determine where to play and how to win, and it guides us on how we operate each day. The four elements of 8020 are simplify, segment, resource, and grow, and they ensure that resources are focused on the highest value areas across geographies, customers, and products. The 8020 methodology is also how we drive sustainable value creation through our virtuous cycle as we build an advantaged cost position and a high relative supply position all delivered for a world-class customer experience. I'm now on slide six. The acquisition of DS Smith strengthened our regional footprint and positions both businesses in North America and EMEA to advance our virtuous cycle. Through the application of 8020, we have made significant progress on building an enhanced cost position. Executing $710 million of cost-out actions through 2025 on a full run rate basis. Which includes synergy benefits, that'll be realized in 2026 and 2027. This was achieved through actions such as optimizing our footprint in North America, streamlining and reducing structural organizational layers in EMEA, and exiting lower margin segments. The combination also advanced our competitive positioning. Our voice of the customer surveys show that we have achieved the highest customer satisfaction among direct competitors in North America and leading scores on customer experience relative to the other top players in EMEA. The improved positioning and bolstered operational capabilities will provide ongoing benefits for each independent region going forward. Moving to slide seven. So why separate and why now? The combination of IP and DS Smith enabled important steps forward in terms of cost and relative supply positions, and enabled superior customer experience as demonstrated by a high and increasing in-region Net Promoter Scores. Since the combination, our teams have made tremendous progress rapidly integrating the businesses within each region implementing our 8020 roadmap. I'm proud of how our teams have embraced the challenge. And because of these efforts, it has become clear that each business is at a positive inflection point. By acting now, we can more fully enable the full potential of each business. Taking this action will allow both businesses to accelerate progress toward maximizing long-term profitable growth through greater speed, agility, and differentiation as well as enhanced focus on their different regions and targeted investment approaches. Creating independent companies will further enable the businesses to win in distinctive competitive markets through focused leadership, tailored commercial strategies, independent balance sheets, and flexible capital allocation aligned to attractive, but different in-region opportunities. The separation will also give each business the ability to customize their messaging for regional customers without diluting the message for a global audience which is a very small portion of the customer opportunity. I'm now on slide eight. Overall, we are playing in the two most attractive global profit pools, significant and increasing demand. After the combination of IP and DS Smith, the regional integration of the legacy positions of both businesses each of the regional businesses is better equipped to compete and win in their respective geographies. However, there are key structural differences in the competitive and commercial landscapes that will require tailored commercial and capital allocation strategies going forward. North America is more integrated, and resilient in terms of supply positions and buyers, has a high degree of supply integration and steady demand growth. EMEA, has more localized dynamics at the country level and relatively higher demand growth. Customers in EMEA value different product and supplier traits as well with greater emphasis on sustainability. Consequently, it's important that each business unit tailor its strategy to best meet the distinct customer expectations in their markets. Creating two separate businesses will enable each region to accelerate its path to long-term profitable growth. I'm now on slide nine. I want to address what is changing and what is not. As we discussed, our 8020 methodology starts with simplify. Which we have been working toward over the past year deemphasizing or exiting select businesses, markets, and functions and then redirecting our resources to a sharper focus and higher value. The action we are discussing today is the next step in the 8020 performance system. Segmenting the business to further optimize resource allocation and enable long-term profitable growth. While these actions separate the businesses from one entity into two discrete highly focused companies. Both businesses will continue to emphasize the powerful operating discipline of 8020 and our three strategic pillars. Our 8020 approach with a clear focus on cost optimization and operating efficiency strategy execution, customer centricity will remain core to both businesses. The independent scale businesses will benefit from true alignment to the characteristics of their distinct customers and regions. Local leadership, and optimized capital allocation strategies without regional trade-offs. Most importantly, both companies will continue to be customer-driven organizations focused on delivering exceptional customer service with attention to detail around on-time delivery, quality, and engagement. Turning to slide 10. Let me provide an overview of what the post-separation International Paper will look like. IP will be the leading, scale sustainable packaging solutions provider in North America, relentlessly focused on customers with an advantaged cost position and leading innovation capabilities. The business will be comprised of the current Packaging Solutions North America, including both legacy IP and DS Smith assets. As you can see from the pro forma results on the slide, the business that will become stand-alone IP had full-year '25 net sales of more than $15 billion approximately $2.3 billion of adjusted EBITDA that is poised to accelerate rapidly over the next twenty-four months. The sharper regional focus will enable IP to further accelerate value creation for our shareholders. We have already made significant progress executing our transformation strategy, and expect the benefits to flow through adjusted EBITDA over the coming year. We'll provide more detail about that in the earnings portion of the presentation. Additionally, we expect that the acceleration of our transformation to result in expanded margins growing free cash flow, which will support disciplined investments in organic and inorganic growth opportunities. We have a robust plan in place to continue delivering our strategic ambitions, you can see on Slide 11. This is a continuation of our 8020 approach in our virtuous cycle. We will continue to assess our mill and plant footprint and transform day-to-day operations. Deliver differentiated customer service, and develop and deploy local commercial strategies. These actions will enable strategic reinvestment in the business to accelerate organic growth drive productivity, support disciplined bolt-on acquisitions. This will all be supported by a strong investment-grade balance sheet and capital structure that supports an attractive dividend. Our ultimate goal will continue to be to provide customers with the best possible solutions and create value for our shareholders as a preeminent packaging company in North America. I'll now turn the call over to Tim to talk about the post-separation EMEA packaging business. Tim Nichols: Thanks, Andy. I'm on slide 12. I'm excited to talk to you about the post-separation EMEA packaging business. Which will continue to be a leading provider of innovative, sustainable packaging solutions across Europe. The new independent company will be defined by its strong customer relationships, high-performance operations, and best-in-class innovative solutions that help our customers meet their sustainability goals. The business will be comprised of IP's current packaging solutions EMEA business including the combination of legacy DS Smith and IP assets. As you can see from the pro forma results on the slide, the business will become the standalone EMEA business at full-year 2025 net sales of approximately $8.5 billion and approximately $800 million of adjusted EBITDA. Over the past year, we have created and begun to implement an 8020 road map. Based on the proven 8020 performance system. We are still at an early stage of the transfer to optimize our footprint structurally reduce cost, and extend our innovation leadership but we expect to begin seeing the benefits of these actions in 2026. The separation will enable us to accelerate this progress enhancing the new company's ability to make both organic and inorganic investments into our business to further improve our cost position and enhance customer experience and relative supply position. You can see the priorities for the post-separation EMEA packaging business on slide 13. A key area of focus is to continue using our 8020 approach to complete the integration of legacy acquisitions made by DS Smith prior to the combination with IP. Transforming our footprint and aligning resources to drive value. We will remain laser-focused on our customer-centric mindset rigorously aligning our resources and investments with the needs of our key customers. As we execute our strategy and 8020 road map, we'll be focused on delivering organic growth and structural cost reductions. In order to expand margins and drive strong cash flow and returns. We expect the post-separation EMEA packaging business to have a strong investment-grade balance sheet and a dividend policy that is supported by strong operational profit and high return organic and inorganic investments. Our goal is to meet our customers' needs with the best possible packaging and to create value for our shareholders by delivering operating performance at the top of our peer group. Our transformation will continue in 2026 and we believe that by the time the separation is complete, we will be making significant progress against our financial targets and toward more definitive market leadership in sustainable packaging solutions. I'll now turn the call over to Lance. Who will go over the details of the transaction. Lance T. Loeffler: Thanks, Tim. Moving to slide 14, let me walk you through some of the specifics of the separation. First, we expect the transaction to be structured as a spin-off of the EMEA packaging business to shareholders. With International Paper retaining a meaningful ownership stake in the new company. Second, whether the transaction will be tax-free to US shareholders will depend on the ultimate terms of the transaction. The percentage of ownership retained, and other factors. Third, we expect the separation to be completed within the next twelve to fifteen months. Subject to satisfaction of certain customary conditions and regulatory approvals. With plans for the company to be listed on both the London and New York Stock Exchanges. As part of the management plan, Andy, Tom Hammack, and I will continue in our respective roles at International Paper. Following the separation, Tim will serve as the CEO of the publicly traded EMEA packaging business. As many of you know, Tim previously served as CFO of International Paper has been leading the EMEA packaging business during the past year. Overseeing EMEA's 8020 implementation and strategic transformation. The International Paperboard has confidence that he is the right person to continue leading EMEA's transformation. Also, David Robby is expected to be appointed as chairman of the board. David has a wealth of experience having served on the former DS Smith board as senior independent director until joining the International Paperboard in 2025. In order to position the EMEA packaging business for success, following the separation, we plan to invest approximately $400 million in EMEA, throughout the course of 2026 to fund the ongoing transformation of the business and 8020 implementation. As mentioned earlier, we intend to create strong investment-grade balance sheets for both businesses and we'll continue to provide updates and additional information on our progress as the details of the separation materialize. I'll now turn the call over to Andy to discuss our full-year results and fourth-quarter performance. Andrew K. Silvernail: Shifting now to our full-year and quarterly earnings update on Page 15. In North America, we made significant progress on implementing our 8020 plan, executing our strategy this year, achieving approximately 37% year-over-year adjusted EBITDA growth in 2025. And we expect our volume growth to outpace the underlying market by three to four percentage points in the fourth quarter. Which is well ahead of where we thought we'd be earlier last year. Throughout the year, continue to advance our cost improvement strategy. Delivering approximately $510 million of run rate cost benefits. The ongoing transformation resulted in approximately $110 million related to footprint optimization in 2025 and we expect to have similar amounts in 2026. We'll share more detail on these dynamics for North America in a moment. In EMEA, moving decisively on a transformation of the packaging business. We have actioned 20 site closures impacting approximately 1,400 roles with another seven sites and 700 roles in work council discussions. We have a clear road map for applying our commercial and structural cost levers and expect to see the benefits of our cost and commercial actions accelerate through 2026. Turning to our enterprise results for full-year 2025. Which reflect the steadfast commitment of the entire IP team to execute our transformation plan continue to deliver best-in-class customer experience, and create value for shareholders. We continue to drive strong growth from integration and 8020 in the year significant transformation. We expanded adjusted EBITDA margin by two thirty basis points. Our adjusted EBIT and EPS were impacted by $958 million accelerated depreciation our footprint optimization and higher levels of depreciation and amortization related to the DS Smith acquisition. As anticipated, our investment in the transformation resulted in negative free cash flow of $159 million As a reminder, I would note that the enterprise earnings numbers have been restated to exclude GCF and we are pleased that we closed the transaction at the end of last week. Now I'll turn it over to Lance to take you through the drivers of North America performance including what drove the year-over-year improvements and what to expect in 2026. Thanks, Andy. I'm on slide 17. I'd like to begin by reiterating the progress and momentum we've built in North America. in a challenging environment. Our teams delivered meaningful improvement across the business And the results reinforce our strategy is working. Notably, we have gained commercial momentum through focused service and reliability efforts increasing on-time delivery percentage to the upper nineties, which has allowed us to win the trust of both new and existing customers. Also, our investments in our commercial team adding new sales reps and upskilling the existing team, has supported customer excellence across our national and local accounts. Evidenced by our above-market volume growth the 2025 as well as strong price realization. We continue to optimize our box footprint while rolling out our lighthouse model to shift decision-making and strategy closer to our customers. We've now installed this in 85% of our box plant system. Our mill investments are paying off. And we're beginning to see reliability improvements as we've expanded our lighthouse learnings to all our mills this year. The combination of our 37% year-over-year EBITDA improvement and 340 basis point margin expansion gives us confidence in our road map and our ability to achieve results in North America. Moving to slide 18. As a reminder, we are using adjusted EBITDA for our bridges as a better comparative metric during the company's transformation. Now let me walk you through the sequential variance for the fourth quarter. Volume was $87 million unfavorable largely in line with our expectations. Due to an almost $60 million impact as a result of exiting the nonstrategic export business. As well as the impact of three fewer shipping days in the quarter. Which was partially offset by continued momentum in onboarding our strategic customer wins. Operations and costs were $3 million favorable. The cost-out benefit from the mill closures was offset by the timing of spending across the business. Including transitory costs as we optimize our network in line with our new footprint, as well as higher seasonal labor costs. Maintenance and outages were $41 million unfavorable as we continue to invest in the reliability and quality of our mill system. And input costs were $24 million favorable for the quarter primarily due to minimizing the impact from the natural gas curtailment at our Valiant mill early in the quarter. Which has now been resolved. All of this leads to an adjusted EBITDA for North of $560 million for the 2025. Turning to Slide 19. And looking ahead to 2026, our EBITDA growth will be primarily driven by approximately $100 million of commercial benefits as well as $500 million of cost benefits. Key drivers to this include strategic customer wins in the commercial front. As well as cost-out benefits across footprint optimization, productivity, supply chain, sourcing, and overhead. Those benefits will be offset by approximately $200 million of nonrecurring transformation costs related to our ongoing investments in reliability and capacity. Primarily driven by the Riverdale mill conversion in the 2026. These investments are critical to support our profitable growth ambitions and bolster our lightweight capabilities to meet customer demand. This year, we also expect inflation to rise by approximately $200 million we continue to optimize our sourcing and procurement to minimize the impacts. The takeaway here is that we remain confident in our trajectory to deliver on our 2026 targets of 2.5 to $2.6 billion with the assumption that the industry growth is flat to up 1% and we outperform the industry by approximately 2%. Our 2026 target does not include the impact of any future pricing realization. As we do not forecast price until it publishes. However, would expect to see an incremental adjusted EBITDA impact approximately $90 million for every $10 per ton price move on an annualized basis. Now moving to slide 20. We wanted to provide additional visibility into how we anticipate this year playing out with our planned transformation investments. There are a few factors driving the shape of 2026 that we wanted to be very clear about. In the first half of the year, we expect to see typical seasonality and one fewer shipping day. However, the main driver of our anticipated year-over-year decline comes from our planned investments in reliability, capacity, and capabilities. This manifests itself in higher maintenance outages and costs related to our Riverdale mill conversion. Altogether, these represent approximately 165,000,000 of nonrecurring timing impacts that will unwind in the second half. Normalized for these one-time impacts, we remain on a strong growth trajectory with approximately ten percent first-half year-over-year EBITDA growth. In the second half, we expect our performance to materially accelerate driven largely by non-repeating items from the first half and realizing the additional momentum from our 2025 transformation activities. To add some more color on the sequential jump, approximately $200 million will come from returning to a normalized outage schedule, approximately $80 million associated with Riverdale non-repeating items and margin benefits, and a $75 million benefit from second-half volume seasonality. The remaining $200 million in our plan will be achieved through commercial and operational productivity actions as a part of our 8020 transformation. The main drivers here are from continued footprint optimization, mill and box productivity improvements from rolling out the lighthouse model, as well as supply chain efficiencies procurement initiatives, and the winding down of ongoing mill costs. on executing against this plan Our team remains laser-focused and we have high confidence in our ability to deliver. Moving to the first quarter Packaging Solutions North America outlook on Slide 21. Price and mix are expected to improve by $51 million primarily due to seasonal mix improvement following a heavy e-commerce fourth quarter as well as favorable mix related to our smaller but more strategic export customers. We believe volume to be unfavorable by $68 million The sequential seasonal decrease as well as the exit of nonstrategic markets more than offset the increased volume from our strategic wins and one additional shipping day. All in, our first quarter 2026 outlook for North America is approximately $534 million of adjusted EBITDA. One more note before we move on. The first quarter outlook I just shared does not include any impact from the winter storm that moved across The United States Southeast this past week. We are currently assessing the impact And at this point, we're estimating that the total impact could be in the range of 20 to $25 million for the first quarter. That wraps up our review of North America performance and outlook. And with that, let's move on to EMEA. Turning to packaging solutions EMEA. Slide 22. We delivered a solid fourth quarter with sequential EBITDA growth of $19 million The improvement was primarily driven by favorable pricing on key inputs, including fiber, and natural gas, along with benefits for some of our early 8020 cost actions. From a demand standpoint, the market remains soft but broadly stable. With continued pressure on board pricing. Overall, while we are still in the early stage of our transformation in EMEA, we are starting to see the benefits of our strategy materialize and are very confident of the path ahead. Now on slide 23 looking at a full year 2026, our adjusted EBITDA growth in EMEA will be driven by $200 million of commercial benefits. Primarily driven by above-industry growth with continued momentum of flow through already captured from 2025 growth with our strategic customers. In addition, we expect approximately $200 million of cost-out benefits. Primarily driven by footprint and headcount optimization. As well as cost improvements across procurement, distribution, and our mill and box systems. We expect these benefits to be offset by approximately a $100 million of inflation impact. Overall, we continue to build momentum on our transformation, and we'll continue to act decisively to optimize our footprint and operations while strategically investing in reliability and quality to best serve our EMEA customer base. Moving to slide 24, I want to take a moment to share additional detail on recent actions we've taken to improve our cost position and focus resources on the most attractive markets. In 2025, week action closures across 20 sites, reducing headcount by more than 1,400 positions. While we are engaged in ongoing consultation on our additional seven sites more than 700 roles. We expect this to deliver run rate cost savings of more than $160 million At the same time, it's important to recognize these actions affect people and their families. We do not make these decisions lightly, and I want to thank the employees across these facilities and offices for their professionalism, dedication, and contributions to the company. Turning to slide 25. And our outlook for the first quarter. We expect EBITDA to be roughly in line with the fourth quarter. We anticipate price and volume tailwinds of approximately $33 million driven by favorable mix and continued benefits from our strategic wins in 2025. Ops and costs are higher by $42 million primarily driven by the timing of energy subsidies typically received in the second half of the year as well as costs related to accounting policy changes. We continue to build momentum with our strategic actions while managing through ongoing market volatility and focusing on those things that we can control as we execute our plan. Now let me turn it back over to Andy, who will close it out with some key takeaways from today. Andrew K. Silvernail: Thank you, Lance. Turning to slide 26 and our full-year 2026 targets. We are confident in our trajectory. Our plan for the coming year, and our ability to execute against our targets for 2026. We're projecting enterprise net sales of 24.1 to $24.9 billion with adjusted EBITDA of 3.5 to $3.7 billion and free cash flow of $300 million to $500 million As for the first quarter, including corporate, we're guiding to $740 million to $760 million of adjusted EBITDA. Importantly, as Lance mentioned earlier, our guidance does not include the impact of price actions. The enhanced positioning and greater efficiency that we've realized through our strategic actions and 8020 implementation have us well-positioned for 2026. And we expect that we will begin to see that flow through in the coming year. We discussed today, we are taking swift and decisive action to create long-term value for our shareholders. The combination of IP and DS Smith created two regional powerhouses that are leading providers of sustainable packaging solutions with significant scale and strong customer relationships. Our 8020 actions over the past year have reduced complexity in each region. And the next step to continue the transformation is to segment the businesses so they can realize their full potential. Separating the businesses will provide each with the ability to best align capital and resources to distinct regional opportunities. Market environments, and customer needs. Each business will have the necessary ingredients, including strong investment-grade balance sheets, to execute its 8020 plan the virtuous strategic cycle in the most effective way possible. We believe this is the most certain path to deliver our 2027 target of $5 billion of EBITDA and enables each business to achieve best-in-class performance and best-in-class valuation as we create long-term value for our shareholders. At this time, let's open up the line to questions. Operator: Thank you. If you would like to ask a question, simply press 1 on your telephone keypad. To withdraw your question, press 1 again. Our first question is going to come from the line of George Staphos with Bank of America. Please go ahead. George Staphos: Hi, everyone. Good morning. Thanks for the details. My question in your free cash flow guidance of $300 to $500 million, can you give us some of the other important assumptions that are in there I don't believe price is in there, but if you could confirm that, related is are you out with a price letter to customers And then more most importantly, terms of the question, if you wanna just take this $305,100,000,000 dollars doesn't cover your dividend, Andy, with the spin, might you consider reviewing a dividend policy over time? Thank you. Andrew K. Silvernail: Thanks, George, and good morning. First, yes, we are out with a price letter. We have done that earlier this week. And so that will play itself out in the normal course of business. As you noted, no. There is no inclusion of price in the numbers that we have provided today into the guidance that we have provided to the incremental price to come through. And as Lance said in there, each $10 price that sticks is worth about $90 million of price realization into the market. So that I think that covers that question there. Lance T. Loeffler: Yep. George, the second part of your question? George Staphos: Just the dividend. The dividend, a billion, and the free cash flow, $305,100. Lance T. Loeffler: Might the spin be an opportunity to review the policy? And how do you feel about it? Thank you. Andrew K. Silvernail: Yeah. Sure. So, you know, we've said all along that covering the dividend was about 3.6 to $3.7 billion of EBITDA is the breakeven. Obviously, in 2026, we have substantial restructuring costs that are going in and some one-time costs that don't fit into the restructuring line. So you've got a combination of those things. We are maintaining our dividend policy as it is through 2026. And, of course, you know, through any process like this, you're gonna review that work in conjunction with shareholders to, you know, make sure we get to the right place on a dividend post spin. And we'll evaluate that throughout the year in conversation with shareholders. George Staphos: Thank you so much. Operator: And our next question is going to come from the line of Mark Weintraub with Seaport Research Partners. Please go ahead. Mark Weintraub: Thank you. I have a couple of real straight good good morning. A few really straightforward quest one is so some of the slides it's says, like, at the segment level, it's doesn't exclude that it excluding corporate. And then on the final slide, it it doesn't sort of say anything about that. So just one clarification. How should we be thinking about corporate relative to the the various numbers you're putting out there, the 3.5, 3,700,000,000.0. Is that included in talk? Lance T. Loeffler: Yeah. So the guide that Andy gave on a total company basis, seven forty to seven sixty includes the impact of corporate. If you take what we gave you on the region slides, and the difference between that should cover the corporate line item. Mark Weintraub: Yep. Same thing for the for the year, Mark. Andrew K. Silvernail: Okay. And it with the spin, is there any meaningful change to what you expect corporate costs would go to? Lance T. Loeffler: Well, they would go to their independent regions but in terms of it being an overall increase, no. They would not be. Mark Weintraub: Okay. Very good. And then second, any specific reason why and and maybe this is normal course of both normal course, but why twelve to fifteen months to complete this process? Seems like a long time. To me, but maybe I'm just wrong. Andrew K. Silvernail: Yeah. I'd I'll touch on that. You know, there's the you got the mechanics, frankly, of accounting. Right? There's just it's a it's a heavy lift from an accounting perspective. What we don't have here is is kind of, you know, large legal entity issues or things like that. And, obviously, we're gonna move to do it as quickly as possible, Mark. But the best guidance that we've been given and and the precedence are usually somewhere in that twelve to fifteen month time frame. Lance, anything you'd to that? Lance T. Loeffler: Yeah. No. I would say I would echo Andy's comments. I think, you know, this is this is a little different than if you look back at the Silvamo exercise we went through several years ago that had a lot more operational tethering that we had to to unwind, to get that to where it needed to be. This is this is largely an accounting exercise that we're gonna start off you know, today in in in real haste to to try to get this thing done. By the end of the year. But right now, we're contemplating twelve to fifteen months. Mark Weintraub: And and one last one, hopefully not an unfair one, but so you've you've got this big step up in the second half of next year, particularly in in North America, and and you you lay it out very clearly. It does include that, you know, a a big cost takeout acceleration, that 200,000,000. And if we look back you had a great first quarter. Relative to expectations, etcetera. And then then the last three quarters, though, you you've fallen shy. Yep. On ops and costs. And so may maybe talk a little bit about why you have a lot of confidence that, you know, you get back on track and you can deliver a really big number 2026. Andrew K. Silvernail: Yeah. A few things in there, Mark. So first and foremost, that the vast majority of what we're talking about are things that have been actioned. And the tail here are the cost of finalizing that. So as an example, closures and the lingering cost of finalizing those closures, those those tails start to fall off as we get through this year. That's a big one. Second, we've got more actions. They're not the large scale actions that we've seen so far. But we're starting to get much more into the nitty gritty around things like supply chain and procurement Distribution. Rolling out the lighthouse models throughout the mill system. And the productivity investments that we're ramping up going into that. And so a lot of intensity that happened last year and certainly throughout this year. Gonna continue to drive those. So those benefits start to accumulate more and more as time goes on. You know, through there. So you know, the key to it is it's literally the costs have gotta be counted you know, down to the penny in terms of facilities, impacted people, which is always unfortunate. But a tough reality and a transformation And that's the level of granularity we're operating at. And that's both in North America And you saw for the first time today that we were able to now that we've gotten past a bunch of the consultation periods, to lay out the granularity in Europe. And you could see the magnitude of what we're doing in Europe. That we will accelerate throughout the year. So this is extremely granular. You know, look, I'm also realistic. There's a lot of moving parts. There's no doubt about it, but we are executing quite well. Mark Weintraub: Thanks so much. Andrew K. Silvernail: Thank you, Mark. Operator: Your next question comes from the line of Charlie Muir Sands with BNP Paribas. Please go ahead. Charlie Muir Sands: Yeah. Thanks very much, guys. Good morning. Andrew K. Silvernail: Hey, Charlie. Charlie Muir Sands: Hey. Just firstly, if I could just ask on volumes. You're late to your break, you don't share second half of the year in North America. Seems likely a bit around the industry data yet. You just talk about the relative possibility you're seeing on those new ways versus the old the business you lost. And also, I think you could suggest you do something similar in the EMEA. I wonder if you could share any kind of like for like course of pro forma volume performance you've achieved in that region? Thanks. Andrew K. Silvernail: Charlie, I apologize. You're you were pretty muffled on that call, so I'm gonna do my best where I think I heard the question which is really around the the the volume wins and the quality of profitability. Around those volume wins, if I understand it right. Charlie Muir Sands: Yes. Andrew K. Silvernail: Correct. They're they're very good. As you recall, back a couple of years ago, we really started to to reset our discipline around assuring that we were pricing to market and we've obviously kept that discipline. And if you look at the volume wins we've had in North America, they have been absolutely at those quality levels that we've been talking about. And so I feel really good about the business that we're winning and coming on. You know, again, we won substantial market share here in North America in the back half of the year. You know, we were we were three or four points above market. We'll find out where the market actually settled, you know, later on here, but we feel very confident given the the other results that we've seen that we have one quality market share. And you can see the expanding margins at the same time. In Europe, right, the market has been softer in Europe. And just like in The US, you have to play where the market is. We have been really disciplined about making sure that we are bringing value to the market, and we're not chasing bad business. That's very important in a softer market, and we have not been doing that. And, again, you can count it by meters or you can count it by tons. We can see where those winds have have come in and then how they'll be layered into into the year. So we feel good about the wins that we have. We feel good about the commercial momentum in both regions. Particularly in North America where we won substantial market share. And our work is to keep that momentum continuing. Operator: Your next question comes from the line of Philip Ng with Jefferies. Please go ahead. Philip Ng: Hey, guys. Thanks for all the great Bye bye. Thanks for all the great call. A lot to unpack. I guess, kinda kick things off, the 2026 guidance, Lance, last quarter, you guys gave us a nice slide deck calling out 600,000,000 upsell pulp and commercial efforts. Certainly, there's feels like there's some movement, but, you know, the guide itself, does it account for any incremental cost actions that has yet to be announced? So or is that kinda accounted for? Second, I think on the commercial front, certainly better in North America and Europe, and I correct me if I'm wrong, Lance. The North America piece accounts for the exports. Kinda commingled it. So where are you seeing some some of the wins on the commercial side, whether it's North America, and Europe? I mean, Europe, I'm particularly curious just given I thought the commercial side of things were quite good, but it was more on the cost out. So help us kinda tease through, some of those, dynamics. Lance T. Loeffler: Yeah. So I'll start with the I'll start with the cost out. Side. Yeah. So what we described, I think, infamously was, like, slide 15 on the on the deck on the third quarter call where we talk about a lot of the the momentum that we had in carrying over things that had already been announced in 2025 and what that impact would be. I think that the $500,000,000 you were characterizing. We are gonna continue to optimize in North America around our 8020 transformation. So it's a incremental $200,000,000 of of cost benefit that should be accruing to us as we continue to to execute that plan as we look to to '20 in the '26 and in the 2027. On the commercial side, we're really pleased with the amount of progress that we've made about know, we're we're ahead of schedule, I think, as Annie mentioned, in terms of North America and our exit this year in the fourth quarter, And we thought we'd be at market. We're clearly ahead of that. And we're excited about onboarding some very important customers that allow us to to achieve those to achieve those metrics. And, we're excited about the wins that we've got in Europe. You know, we expect to outperform You know, we believe the market next year will be up 1.7% I believe, next year. And or excuse me, in 2026. And we believe we'll outperform by about 50 basis points ahead of that. So we're excited about the momentum that we've got in that market as well. Philip Ng: Got it. So just so if I heard you correctly, Lance, the upside on cost out, the 200,000,000, that's incremental cost actions you haven't taken in the in the '26 that you still need to execute, Lance T. Loeffler: Yeah. We'll be we'll be executing Yeah. So, Phil, those will be those are that that amount and those actions are stuff that was not announced or actioned in 2025 that we will continue in terms of our momentum into 2026. Philip Ng: Okay. And and the other piece I wanna tease out, perhaps for you, Andy, Mark kinda teased it out already. Last year, a nice beat in the first first quarter in the Q2 to Q4 was a little uneven. Just wanna get give us some comfort that the framework you've laid out accounts for any hiccups along the way just because it's it's a choppy environment. So, like, how you kinda laid out the framework where is this conservative, or are you baking, like, a lot of stuff kinda has to kinda stick to landing just because you got a lot of moving pieces. Andrew K. Silvernail: Yeah. I I think the range that we've given provides a pretty decent margin in there in terms of the $740,000,000 to $760,000,000 in the quarter. And the $3.05 to $3.07 in the year. You know, in terms of kind of I'll just call them, you know, good guys, bad guys, you know, how do you think about that over the year? You know, on the on the the good guy side, the year has started strong. And I will certainly say that January was strong. Obviously, the ice storm, that's gonna be on the bad guys. Side to see kind of what that impact is gonna be. You know, it's a super thumb thumbnail sketch of 20 to 25,000,000. It's just hard to know. Right? You you could you could make that up. But, certainly, you know, mill shutdowns certainly some of the areas that were hit hard in terms of box the bauxite will come back, you know, fast. But you got some mill impact. That we'll we'll see how that plays out. Because that's a pretty modest bad guy. That's out there. Again, you know, the the January has has started strong. We've seen that in our daily numbers. We'd expect that to even off throughout the year. And, again, we said we thought the North America market would be flat to up one. We'll take a couple of points of market share in there. In terms of other good guys, right, we have we don't have anything in here for price. You know, and and we don't normally do that. We don't normally guide that. And and so we've kept to that practice. But depending upon what happens with pricing, that's a pretty substantial, good guide that's not in any of our numbers here. Know, the the real, you know, big bad guy is is potentially out there. We don't know with what we face last year was was the global economy. And, you know, again, right now, things have started well. But, you know, that's hard to predict throughout there. So I feel good about where we are. I think that they're given the pricing, there's more upside than downside. You know, in terms of opportunity. And so we feel like we played it down the middle. Philip Ng: Okay. Appreciate the color, Andy. Thank you so much. Andrew K. Silvernail: You bet. Thank you. Operator: Our next question comes from the line of Michael Roxland with Truist Securities. Please go ahead. Michael Roxland: Yeah. Thank you, Andy, Lance, Mandi, and team. For taking my questions. Some calls in North America appear to be more sticky like, like, no reliability, etcetera. I mean, your volume's up for 2% in 4Q, better than you expected, yet EBITDA missed. Wondering if you can speak to cost in North America, which ones are more problematic, stickier, how you intend to tackle them, and was the cost structure in North America part of calculus in terms of deciding to spin out Europe? And what I'm what I'm trying to get is if you have to deal with the cost structure a little bit more challenging than you expected, it's it's harder to tackle that plus having a European arm as well. So, any any call you could provide would be helpful. Thank you. Andrew K. Silvernail: Yeah. So on the cost side, look. I'm really happy with what we've done. We've taken out over $700 million in total cost when you look at the execution on that. So I'm very happy with the progress that we've made. On that. The things that are harder to get at that, there's really two. Right? One is the speed at which you take things down and all of those costs go away. Right? So as you close a mill, there tend to be lingering costs during the shutdown and ultimately into the final closure and then potentially the sale or disposal of of the property. Those tend to linger a little bit. And then on the reliability front, it's as we have described, which is you've gotta get in there, and you've gotta make the investments consistently over a period of time to drive the reliability and not have things pop up that can be very expensive in any given period. I mean, you know, a singular mill struggling can be a $100 million hit in a year easily. If a mill is really struggling. And so we are putting aggressively investing back into our mill system in North America. And that's if you look at the expanded CapEx, if you look at the onetime accelerated transformation costs, even the lighthouse roll Those are all things that we are doing, to drive that reliability. Absolutely showing up for the customers. They're feeling that positive reliability, and it's showing up in their customer satisfaction numbers. It's showing up in our cost numbers. But it is. That's a slug fest. And you gotta stick with it. And the team is doing an excellent job. On the European side, you know, look. You know, what Tim and team are doing in Europe is pretty exceptional. They are tackling structural costs in a way that's very unusual in the European marketplace. And you can see from the magnitude of what was on that one slide that we're getting after it. And so we're getting after it fast, and we'll continue to do that throughout 2026. Michael Roxland: Got it. Just one quick follow-up. I mean, so it sounds like you know, with respect to Europe, the costs are the harder to get at and taking a little bit longer. So was that part of what was factored into your what was that what you consider in terms of the spin? Was that a huge factor in terms of your consideration for spinning Europe? Because then when I get back to your investment Andrew K. Silvernail: No. Not at all. The real driver for this decision is the fact that the value is really in the regions. When you get right down to it, and you look at where value is created, the acquisition and the combination, what it did was it created two regional powerhouses. That really have very, very, very little overlap. I'm talking almost zero overlap in terms of how those businesses are structured in the market, how those businesses go to market, with customers, and how you execute all the way from inputs, fibers, all the way through the market They're really distinctive markets. And so, you know, using 8020 as the lens and as the mindset wanna simplify. Right? You wanna take the complexity out. You wanna focus on where the value is in the discrete markets. And then you wanna get capital and people aligned and focused to those best opportunities. And that's really the driver there. The exciting opportunity in Europe is even with the headwinds that the business had. All of last year, with a combination of the war in Ukraine and trade tensions and the softness in the market, is the business performed well relative to the marketplace and is getting after the changes in a way that's really distinctive to that marketplace. And this business coming out as a stand-alone business is gonna have a great balance sheet, It's gonna have great positioning in the market, you know, top of its class in terms of customer satisfaction, and the ability to direct and align people and capital to that unique mission. And that's really what this is all about. So I'm super excited for what team and the Tim and the team have lined up. And as an independent company, I believe it's gonna thrive Having that focus and that that aligned capital allocation. And the same thing in The US. And this really allows us for each to realize its unique mission and really drive incredible value. Michael Roxland: Got it. Thank you very much. Operator: Your next question comes from the line of Anojja with UBS. Please go ahead. Anojja: Good morning. How are doing? Andrew K. Silvernail: Morning. Anojja: I just wanted a quick clarification. So, clearly, the price increase is not built into commercial initiatives in North America. I get that. Read you loud and clear. But in EMEA, the commercial initiative bucket is now 200,000,000 in contribution I think in Q3, it was a 100,000,000. So what happened there? And can you confirm that if price goes down in Europe, that whether that's already in that bucket or not? Andrew K. Silvernail: Yeah. So specific to yes, you're correct on North America First. There is nothing in there in terms of price. In EMEA, same thing. It's only things that have been executed and we have line of sight too. So you have the underlying assumption of market growth. In there, which, as Lance said, was was 1.7%. And then you got a half a point, which are wins that we know that we have today. And so we do not have incremental price that has not been that has not settled into the market built into there. So there's no price. Now that being said, as I mentioned in my remarks, just as there's a $70 price increase in North America that's been put out the marketplace by us to our customers. In Europe, there have been a lot of activity, and there's about a €100 paper price increase that's gone out in most markets. And what we don't know is whether, you know, kind of what's gonna stick. It's a more dynamic market. In The US, on an annualized basis, if you got every penny of that, a little over $600,000,000, about $630,000,000. And in Europe, you got every penny of that, it would be about 300,000,000. Incrementally from what we're talking about today. But in neither case, do we have those built into the numbers? Anojja: Perfect. That's very helpful. I'll turn it over. Thank you. Operator: You bet. Your next question comes from the line of Detlef Winklemann with JPMorgan. Please go ahead. Detlef Winklemann: Morning, guys. Just if I can ask two. Maybe the first one, regarding your commercial improvements year on year that you've guided for now, it looks like about $100,000,000 in North America. If I go back to third quarter, it was sitting at about 300. Based on your bridge that you gave. Just wondering if anything has changed and why the delta Lance T. Loeffler: Yeah. I don't know. I have to go back and look. I nothing rings a bell. I mean, I think nothing has really changed other than the the relationship that we've described. I think that extra 100,000,000 is incremental. To where we were in the third quarter. But, you know, we do have some commercial trade offs that we've talked a lot about in North America about leaving the export business and the closure around Savannah. Andrew K. Silvernail: Yeah. That that might be part of what you're looking at there. Is is that that that 100,000,000 if we're talking about North America, right, that is netted against the trade offs with the export business that we have exited. Detlef Winklemann: Do we have to get you that list? I wanna make sure we have Yeah. Yeah. I think so. It was kind of a net zero right in the beginning now to net a 100,000,000 if I if I we'll correct you understand. And if I can ask one more follow-up. I mean, right in the beginning on your Investor Day, you were very helpful in giving an EMEA and a North America split all the way to 2027. Now I know, you know, partway through the year, you said demand is a bit worse, pricing came down a bit from your initial expectations. So I think you were talking about maybe Europe coming down a bit from that initial guide of, call it, dollars 1,800,000,000.0 to 2,000,000,000 I'm wondering given the context of your $5,000,000,000 guide now, what Europe plays a part of in that if you can share. Any color would be great. Yeah. We haven't broken out specifically, but generally, you're talking about kinda three five in North America. Andrew K. Silvernail: And one five in in Europe. Detlef Winklemann: Okay. Perfect. Very much. Operator: Our last question today is going to come from the line of Matthew McKellar with RBC Capital Markets. Please go ahead. Matthew McKellar: Good morning. Thanks for taking my question. Just following up on questions from Charlie and Phil, apologies if I missed it. But is the 2% outperformance versus the North American industry or expect in 2026 based solely on those customer wins you've seen so far, mostly in the back half of 2025? Or have you assumed further wins and share gains as the year progresses as part of that outperformance assumption And I guess with that, could there be upside to that number as the year progresses given improved service quality and customer experience metrics you've highlighted? Thanks. Andrew K. Silvernail: Yes. So those are that's a great question. Those are based on what we have line of sight to today, so business that we have won. So we don't need major incremental wins, in, in this year to move the needle. And to be fair, the what will move a needle in a short period are gonna be local wins. Right? The national business tends to be more on a contract cycle And and so know, we know what we won in 2025. It's now showing up at 2026. That's what we're communicating here. And then you'll have the local piece of business, which is much more day to day, much less contractual in there. So if we were to win incremental business, you know, throughout the year, obviously, that would be an upside. Matthew McKellar: Thanks very much. I'll turn it back. Andrew K. Silvernail: Great. Thanks. Operator: You. I'll now turn the call over to Andrew K. Silvernail for closing comments. Andrew K. Silvernail: Well, thank you very much. I appreciate everybody joining us today. This is an important and a very exciting day for International Paper. The decision to split into two public companies, to build two powerhouses that we have put together from the legacy pieces of international paper and the legacy pieces of DS Smith. Now have two regions that are that are number one in their regions have an exciting strategy in terms of cost position, how we're working with customers, how we're building our relative share position, and ultimately, the financial upside that we see here. All of the hard work that's been put in the focus on 8020, making really tough choices around assets and reinvesting back into the business aggressively, to drive the customer service experience that we're seeing today winning share, aggressively taking cost at cost out, and maximizing return on invested capital. When I look at that, I see two businesses that will stand on their own with great balance sheets, with the ability to invest in their future, with the ability to make dynamic capital allocation decisions to maximize maximize value for shareholders. I'm very excited about that future, and I applaud the team for all the incredible work that they've done. I thank our shareholders for for your interest in the business and what this can become. I'm incredibly excited about the future. Again, the year has started strong. We've seen a nice pickup in business here. And, and we're excited for the year to come and, in the years to come. So thank you very much. Take care. Operator: Once again, we'd like to thank you for participating. International Paper's fourth quarter 2026 earnings call. You may now disconnect.
Tina: My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bankwell Financial Group, Inc. Fourth Quarter 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. To ask a question, simply press star 1 on your telephone keypad. To withdraw your question, it is now my pleasure to turn the call over to Courtney E. Sacchetti, Executive Vice President and Chief Financial Officer. You may begin. Thank you. Good morning, everyone. Welcome to Bankwell Financial Group, Inc.'s fourth quarter 2025 earnings conference call. Courtney E. Sacchetti: To access the call over the Internet and review the presentation materials that we will reference on the call, please visit our website at investor.mybankwell.com and go to the events and presentations tab for supporting materials. Our fourth quarter earnings release is also available on our website. Our remarks today may contain forward-looking statements and may refer to non-GAAP financial measures. All participants should refer to our SEC filings, including those found on Forms 8-K, 10-Q, and 10-Ks, for a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements. And now I'll turn the call over to Christopher R. Gruseke, Bankwell Financial Group, Inc.'s Chief Executive Officer. Thanks, Courtney. Christopher R. Gruseke: Welcome, and thank you to everyone for joining Bankwell Financial Group, Inc.'s quarterly earnings call. This morning, I'm joined by Courtney E. Sacchetti, our Chief Financial Officer, and Matthew J. McNeill, our President and Chief Banking Officer. Appreciate your interest in our performance and this opportunity to discuss our results with you. Our fourth quarter GAAP net income was $9.1 million or $1.15 per share, which includes a $1.5 million one-time adjustment to the income tax provision associated with various state tax filings and changes in estimated tax positions. This adjustment relates to both current and prior year tax estimates. Excluding this one-time adjustment, operating income for the quarter was $10.7 million or $1.36 per share on an operating basis. A reconciliation of GAAP operating results is included in our materials, and we encourage you to review both metrics together. Courtney will walk you through these results in more detail in a moment. Pre-provision net revenue return on average assets was 180 basis points for the quarter, an increase of 10 basis points from the prior quarter and a 75 basis point increase over 2024. This improvement reflects continued expansion of our net interest margin as well as strong growth in non-interest income, driven primarily by our SBA division. We also made further progress in reducing our asset balances during the quarter and maintain a constructive outlook on credit quality heading into 2026. While our net interest margin has continued to expand this quarter, as we've previously signaled, the pace of that expansion has moderated. This is a result of our intentional increased exposure to floating rate loans. We ended 2025 with floating rate loans comprising 38% of our total loan portfolio, compared to 23% at the end of 2024. On the funding side, we've taken advantage of the lower rate environment to issue $1.2 billion of time deposits this year and have also reduced rates on key non-maturity interest-bearing deposits. In addition, the mix of our deposits continues to improve. Average low-cost deposit balances increased by $22 million or 5% over the prior quarter and by $86 million or 21% versus 2024. As we note in our investor presentation, low-cost deposits include non-interest-bearing accounts plus NOW accounts with a deposit rate of 50 basis points or less. Loan production remained strong in the fourth quarter. We funded $240 million of new loans, bringing total funded originations for the year to $758 million. Net loan growth for the quarter was $122 million, and for the full year, we generated $134 million of net loan growth or 5% annual loan growth. With the end of the government shutdown and the reopening of the SBA in November, our SBA division was able to fully resume both originations and sales. As a result, gains on sale increased to $2.2 million for the quarter, bringing full-year realized gains to $5.1 million. SBA originations totaled $24 million in the fourth quarter, resulting in $68 million of total originations for the year. As SBA activity has normalized post-government shutdown, we anticipate this business will remain a meaningful and growing contributor to our diversified revenue base and overall profitability. Credit trends in the portfolio continue to improve. Nonperforming assets as a percentage of total assets fell to 49 basis points compared to 56 basis points last quarter. This improvement was driven by the sale of a $1.3 million OREO property and the collection of $400,000 on an SBA guarantee. Finally, our efficiency ratio improved to 50.8% this quarter compared with 51.4% in the prior quarter, underscoring the operating leverage created by faster revenue growth relative to expenses. I'll now turn it over to Courtney for a more detailed review of our financial results. Courtney E. Sacchetti: Thanks, Chris. We closed the year on a strong note, delivering fourth quarter GAAP net income of $9.1 million and a reported EPS of $1.15. Pre-provision net revenue for the quarter totaled $14.9 million or 180 basis points of average assets. Net interest income reached $26.9 million, while non-interest income increased to $3.4 million, driven by $2.2 million of SBA gain on sale income. Fourth quarter net loan growth of $122 million brought full-year loan growth to $134 million, representing 5% growth over year-end 2024. For the full year, we originated more than $900 million of loans, including approximately $68 million of SBA originations. Net interest margin expanded to 340 basis points, up six basis points from the prior quarter. The improvement was driven by a 15 basis point reduction in deposit costs, which declined to 3.15%. These funding benefits more than offset pressure on asset yields, which contracted 11 basis points in the quarter to 6.23% as certain rate-sensitive assets reset lower. Since late September, we responded to the Fed's 75 basis points of rate cuts by adjusting our deposit pricing. We lowered offered time deposit rates by 50 basis points, priced approximately $250 million of index deposits at a 100% beta, and reduced rates on roughly $700 million of non-maturity deposits by an average of 22 basis points. As a result, we exited 2025 with a total deposit cost of 3.08%. We expect $1.2 billion in time deposits to reprice favorably over the next twelve months, with an average rate reduction of 32 basis points. This repricing is anticipated to provide an annualized incremental benefit of roughly $4 million, about 12 basis points of net interest margin. These estimates do not incorporate the impact of any other future rate changes. Additional detail on our balance sheet repricing and rate-sensitive assets and liabilities can be found on Page 10 of our investor presentation. Non-interest income of $3.4 million, an increase of 35% versus the linked quarter, was largely driven by $2.2 million of SBA gain on sale income, representing an approximate $800,000 increase quarter over quarter. As shown on page 13 of our investor presentation, non-interest income now represents 11.4% of total revenue compared to 4.6% in 2024. Asset quality continued to improve during the quarter. We've reduced nonperforming assets by $1.9 million, bringing the NPA to assets ratio down to 49 basis points. We recorded modest net recoveries and a provision for credit losses of approximately $600,000. Our allowance for credit losses stands at 108 basis points of total loans, while coverage of nonperforming loans increased to 188%. Our financial position remains strong. Our balance sheet remains well-capitalized and liquid, with total assets of $3.4 billion, up 3.6% versus the linked quarter. The holding company and bank remain well-capitalized, with our estimated consolidated common equity Tier 1 ratio now at 10.2% and bank total capital ratio of 12.9%. Our tangible book value per share also increased, reaching $37.84, representing 11% growth over 2024. As previously noted, we recorded approximately $1.5 million of non-recurring income tax expense this quarter. This reflects an $855,000 expense related to a true-up of prior year's state tax estimates based on final return filing. It also includes a $692,000 P&L impact related to an addition to our FIN 48 reserve for uncertain tax positions driven by a change in estimate and the company's expanded state-level footprint. These adjustments represent a one-time true-up to certain current and prior period estimates. Our 27.4% effective tax rate for full-year 2025 reflects this one-time expense. On a go-forward basis, we would expect our effective tax rate to be approximately 25%. Finally, in addition to fourth quarter operating net income of $10.7 million or $1.36 per share, we delivered an operating return on average assets of 1.29%, versus our reported 1.11%, and an operating return on average tangible common equity of 14.32% versus our reported 12.31%. Now I'll turn the call back to Chris. Christopher R. Gruseke: Thank you, Courtney. 2025 was a year where our team demonstrated the ability to execute and make meaningful progress across every dimension of our strategy. We entered the year with a clear set of priorities: strengthen credit, improve the funding mix, build non-interest income, generate high-quality growth, and embrace an innovative mindset as we continue to invest in our people and in technology. I'm pleased to say that we delivered on each of these priorities. Nonperforming assets ended the year at 49 basis points of total assets. We've continued to improve the profile of our funding base, reducing our dependence on higher-cost sources and growing our relationship-driven lower-cost deposits. Our focus on building diversified recurring sources of revenue is bearing fruit with the successful growth of our SBA division. And despite a year of heightened prepayment, we ended 2025 with year-over-year loan growth of approximately 5%. Finally, we continue to invest in the people, technology, and capabilities that will carry us forward. We've strengthened our teams both in key client-facing and operational roles, and we're seeing the benefits of those investments. While making these investments, we've also increased scalability. We believe the work done throughout 2025 sets us up for even better results in the coming year and are providing the following guidance. For 2026, we expect loan growth of 4% to 5%. We anticipate net interest income in the range of $111 to $112 million. We also expect non-interest income to increase to approximately $11 million to $12 million. We estimate total non-interest expense of $64 million to $65 million, which incorporates a prudent level of ongoing investment in our people, infrastructure, and operational capabilities. Before we open the line for questions, I'd like to thank our entire team for their commitment and professionalism throughout the year. Their work has allowed Bankwell Financial Group, Inc. to finish 2025 in a position of strength to enter 2026 with confidence for an even better year ahead. Operator, we're ready for questions. Tina: At this time, I would like to remind everyone to ask a question. Simply press 1 on your telephone keypad. And our first question comes from the line of Feddie Justin Strickland with Hub Group. Please go ahead. Feddie Justin Strickland: Hey. Good morning. Just wanted to start on loan growth. Great to see you're expecting a pickup there in '26. Think it's a little bit above what I have previously modeled. Can you talk about the extent to which payoffs versus new originations drive the net new growth number? Christopher R. Gruseke: Yes, Feddie. This is Chris. It was pretty lumpy during the year, we were paying catch up as you know. And now we're primed for that sort of payoff. I'll let some more detail on that. Matthew J. McNeill: Exactly that, Feddie. You know, the volume of payoffs in '25, especially in the first part of '25, was somewhat unexpected. Change the way that we were thinking about our were able to catch up quarter. Now that we're you know, the new normal is anticipating that runoff back to be able balance sheet a little earlier in the year. Just, you know, build pipeline. To, you know, anticipate, you know, more volume. Christopher R. Gruseke: Yeah. Feddie, I'd just add to that. And not take away from the question time. I think what we've shown is that if there's a number we want to get to, we can get to it. It was a matter of priming the pump. And we can generate we have enough demand for loans that we can get to a number when we're ready for it. So within the constraints of capital, etcetera, obvious. Feddie Justin Strickland: Okay. Great. And I apologize if this is in your answer. It was a little choppy on my end, but just wanted to ask what the makeup in the loan pipeline was today as well. Are you looking for a segregation between, like, C&I and investor? Matthew J. McNeill: It's C&I heavy. Let's say it's sixty forty C&I. You know, we've steadily brought down investor created capital over the past, you know, several years. You know, we anticipate, you know, continuing to be strong C&I real estate originators in 2026. Feddie Justin Strickland: Got it. That's it for me. I'll step back in the queue. Thanks for taking my questions. Christopher R. Gruseke: Thanks, Feddie. Tina: Your next question comes from the line of David Joseph Konrad with KBW. Please go ahead. David Joseph Konrad: Yes, thanks. Good morning. A couple of quick questions. One, what do you expect the low-cost deposit growth to be this coming year? I don't think we've got a number on guidance. Christopher R. Gruseke: It's for that. We obviously expect steady improvement. We've hired people. We've got our own teams. We're making headway. So I don't think we're gonna guide you a number, but don't what we have for the what was our number for the year? Courtney E. Sacchetti: Well, if you look at, just looking to the right page, but page eight of our investor presentation, our average low-cost deposits grew 5% from last quarter, but 21% from the '24 on an average basis. So we were able to to put up a good growth on an average basis for the year over year. Mean, we certainly like to repeat that again. Christopher R. Gruseke: Right. But I but it it seems also very likely without pay the loan growth. Matthew J. McNeill: I'd say the loan growth I think the way we're looking at is loan growth is a function of deposit growth plus, you know, how capital ratios. So the you know? And then, of course, you know, with more deposit growth, we could pay down brokered. Courtney E. Sacchetti: Correct. I'll point out, David, that the 5% of low-cost deposit growth is on an average basis for the year. So it's very likely that this is a conservative growth number. David Joseph Konrad: Got it. Okay. And then on the fee income side, kind of with the SBA kind of dominating the number. Just wondered should we think about in the guide for the total year any seasonality of that quarter to quarter? How should we base that out? Christopher R. Gruseke: I think that we'll we'll see smooth production throughout the year, and we would unless there's a government shutdown. Courtney E. Sacchetti: Or a government shutdown. Yeah. David Joseph Konrad: Right. Right. Okay. Appreciate it. Tina: Our final question comes from the line of Stephen M. Moss with Raymond James. Please go ahead. Stephen M. Moss: Good morning. Maybe just following up on the SBA stuff. On the SBA stuff here, in terms of just what are your thoughts and I apologize if I missed this, for originations in SBA in 2026? Courtney E. Sacchetti: I think I think the way the math works out is to achieve our non-interest income number to it's about a 100 SBA. Stephen M. Moss: Okay. And we we No. Okay. We finished twenty '5 with 60 and that this was the real the the first full year of the SBA division. Functional. So we think hundreds vary. Courtney E. Sacchetti: I think 25,000,000 in final quarter. Right? Christopher R. Gruseke: Yeah. 20 yeah. Just under 25. So $5.20. Stephen M. Moss: 25,000,000, it was down a quarter of 2,025. Correct. Stephen M. Moss: Okay. Just wanted to to temperature check that, but appreciate that. And then in terms of the outlook here, just kind of curious what you expect to be the drivers on expense growth here in 'twenty six? Christopher R. Gruseke: The people and processes. I mean, we've definitely added, you know, across the bank, you know, in in client and non-client facing. As we said on the call, our headcount went up by more than 10% last year. From about a 145 to a 170. FTE in the expenses that you see that we've guided to. We have some further growth in that. And I just point out that, you know, we're aware that we that we put out a a larger expense number, but we want we want know, shareholders and you all to have you know, complete transparency as to what we're doing. But the number the guide on on revenue and, you know, income and and profitability has these numbers baked in. So, you know, our approach is not well, if you can if you build it, they will come. We're making these investments while we're putting up you know, operating ROA for the quarter is a 129 basis points in the guidance. We have out there probably gets you depending on what you use for allowance. You know? Somewhere north of one twenty. Yep. Next year. So, we're we're making the investments, but our our profitability is growing. Stephen M. Moss: Right. Okay. Appreciate that color there. And just in it's just what you we have a strong opinion that if you don't invest, stay current. You're out of business. So we wanna make sure that we're always ready for the future. Stephen M. Moss: Right. No. Definitely, definitely appreciate that dynamic. And and I guess the other thing in terms of just kinda loan pricing here, you know, curious you know, how are, you know, new origination coupons holding up these days? If there's been any spread compression just any color you can give on that front. Courtney E. Sacchetti: No no recent spread compression. You know, we generate a a reasonable amount of floating rate loans. As indices fall, the, you know, the origination coupon on a floating rate loan goes down and you know, we price our fixed rate primarily off of treasury. So as as those fall, you know, the coupons down, but the credit spread itself we we have seen people requesting and showing us offers at other other FIs with lower credit spreads, but we typically are able to to keep our due to loan demand, we're spreads in time. Stephen M. Moss: Okay. Great. I appreciate all the color here. Nice quarter. Thank you. Christopher R. Gruseke: Thanks, Steve. Tina: With no further questions in queue, this does conclude today's conference call. Thank you for participating. You may now disconnect.
Operator: Greetings. Welcome to the L3Harris Technologies Fourth Quarter 2025 Earnings Conference Call. At this time, participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, as a reminder, this call is being recorded. It is now my pleasure to introduce your host, Tony Calderon, Vice President of Investor Relations and Corporate Development. Thank you. Tony, you may now begin. Tony Calderon: Thank you, Tiffany, and good morning, everyone. Joining me are Chris and Ken. Earlier this morning, we issued our fourth quarter earnings release outlining our results and our 2026 guidance, along with a presentation available on our website. Before we begin, please note that today's discussion will include forward-looking statements subject to risks, assumptions, and uncertainties that could cause actual results to differ materially. For more information, please refer to our earnings release and SEC filings. We will also discuss non-GAAP financial measures, which are reconciled to GAAP measures in the earnings release. With that, let me turn it over to Chris. Christopher E. Kubasik: Thanks, Tony, and good morning, everyone. We wrapped up 2025 by continuing to execute with speed and discipline, meeting our customer commitments, improving on-time delivery, and investing to increase production capacity while delivering strong fourth quarter and full-year results. We ended the year with a record order book and strong demand signals from our customers. All of this is positioning us for sustained growth going forward. We are equally focused on how we evolve our business. Over the past six years, we have aligned our portfolio to the fastest-growing defense priorities, with a vision of the future of warfare. As a result, we have acquired and divested billions of dollars of businesses, including our recently announced sale of a majority stake in our civil space propulsion and power business. 60% of this business is being sold to AE Industrial Partners. AE's multiple investments in space assets make them an effective steward to scale the business and unlock its value for our shareholders. This transaction enables us to sharpen our focus on our priorities for the Department of War and our allies. We have continued to improve our operational agility and market position. We reorganized our businesses from four segments to three in order to align technology and business models. And we announced our intention to pursue an initial public offering of our missile solutions business in 2026. The Department of War is the anchor investor, creating a $4 billion-plus revenue majority-owned public company with sustainable double-digit growth. This new company will deliver critical propulsion systems at unprecedented speed and scale, as well as other missile solutions such as air-launched effects, IR seekers, and weapon release systems. This is an example of the strategic partnerships we have pursued to drive business growth and address critical needs for our customers. We spent time in the Pentagon and listened to the DOW's needs to significantly expand missile production. And we responded by negotiating a novel partnership structure that benefits the warfighter, taxpayer, and our shareholders. We, along with our supply chain, will build production capacity faster than anyone in the industry to meet the demand signal. The US government is planning to make a financial investment in a new company critical to our national security. Their stake is solely economic. They want greater capacity quickly and a return on their investment. The strategy is straightforward. Construction began last year to expand capacity on large solid rocket motors and certain tactical rocket motor programs. The government invests now, allowing us to further increase capacity for critical interceptor programs such as THAAD, PAC-3, and standard missile. There is no waiting for contracts or acquisition funding. The investment gives us the confidence to build today while the long-term contracts are being negotiated and finalized. Capacity is now the most important capability. Our actions are deliberate. We are leading the industry to meet the needs of our customers. We are strengthening the industrial base, reinvigorating competition following decades of consolidation, and unlocking value for our shareholders. In our industry, the year unfolded against one of the most demanding defense and security environments in decades. It was complex, competitive, and rapidly evolving. Speed and execution mattered. Against that backdrop, our workforce delivered. So thanks to them for our best year ever. We met our commitments to warfighters, to customers who measure value in deliveries and not intentions, and to the DOW by strengthening the supply chain that underpins national security. Delivering on our commitments resulted in record orders, solid organic growth, expanding margins, and strong cash flow generation. Doing what we say we are going to do is fundamental to how we run the company. Our portfolio is directly aligned with the fastest-growing customer missions: space sensing, missile defense, resilient communications, aircraft ISR missionization, and kinetic effects. That alignment is deliberate and informs where we invest, how we come to market, and how we engage with customers. Our mission relevance is seen in our record order book and strong organic growth. We executed on our programs, stabilizing challenging space programs, clearing delinquent rocket motor deliveries dating back to the time of our acquisition, and realizing efficiencies through LHX NEXT. These outcomes reflect disciplined execution, technical credibility, and our ability to deliver at speed and scale in direct alignment with evolving customer requirements. Undoubtedly, what stood out the most in 2025 was the pace and urgency of customer demand. Threat environments evolved faster than recent history, and expectations shifted just as quickly. Customers require advanced capability at speed and scale. We have the competitive advantage in this environment as the agile trusted disruptor. We also deepened our role as a trusted international partner. We won key awards in Europe and Asia, leveraging a global supply base, and investing in local industry to scale capacity. We have localized production across the globe, enabling us to meet customer needs during production and during the long sustainment tail. These efforts reinforce our commitment to strengthening global security through interoperable solutions and partnerships. We secured awards that reflected the full breadth of our capabilities and our ability to consistently bring the right technologies to the table and translate them into customer-aligned solutions. These wins underscore customer confidence in our technical depth, disciplined execution, and our ability to deliver integrated mission-ready capabilities. All of this resulted in a record backlog and order book this year, with an overall book-to-bill of 1.3 and backlog in excess of $38 billion. Let me highlight a couple of our key wins this quarter. At the start of the fourth quarter, we secured a landmark $2.2 billion award from South Korea for next-generation airborne early warning mission business jets. Also during the quarter, we were awarded an international weather set satellite program for approximately $200 million and multiple international tactical communications and software-defined radio orders in the quarter totaling over $200 million. At the end of 2025, we strengthened our leadership in space-based missile defense with the award of an SDA contract valued at approximately $850 million to deliver 18 satellites for the tranche three tracking layer. Building on a proven track record as the only company awarded contracts across all four tranches, this milestone reinforces our alignment with national defense priorities and underscores our ability to deliver trusted, resilient, integrated spacecraft architectures. The continued technology maturation for this contract, as well as production synergies, positions us very well for the HBTSS award. And following the quarter, we were selected to deliver multi-aircraft special mission business jets for an international customer with a potential value of over $2 billion. An initial order of over $700 million will be booked in 2026. Our 2026 guidance exceeds our ambitious targets for revenue, margin, and free cash flow that we laid out at our last Investor Day in December 2023. Our record backlog and robust order outlook underpin our 2026 industry-leading 7% organic growth. We also exceeded our LHX NEXT $1 billion savings commitment one year ahead of the plan. Many doubted our ability to meet these targets. But today's guidance exceeds the 2026 financial framework and is a result of our relentless focus on leadership, talent, accountability, culture, operational excellence, and disciplined execution. Our 2026 guidance that Ken will take you through momentarily is the foundation for a new 2028 financial framework that we will announce at our upcoming Investor Day in February. With that, I'll turn it over to Ken. Kenneth L. Bedingfield: Thanks, and good morning, everyone. Turning to the financial results for 2025. Revenue was $21.9 billion, up 5% organically with growth in all four segments. Adjusted segment operating margin was 15.8%, up 40 basis points, reflecting continued cost efficiencies and strong program and product delivery. Non-GAAP EPS was $10.73, an increase of 11% over 2024. Adjusted free cash flow grew to $2.8 billion, representing an increase of greater than 20% driven by earnings growth, effective working capital management, and the benefit associated with favorable tax planning strategies and tax reform. For the fourth quarter, revenue was $5.6 billion, up 6% organically with a segment operating margin of 15.7%, up 40 bps. Non-GAAP EPS was $2.86, up 10% year over year. Turning to our segments results. For 2025, CS delivered revenue of $5.7 billion and margins of 25.2%, 4% growth and 50 bps of margin expansion. In the fourth quarter, CS delivered revenue of $1.5 billion, up 3% driven by increased international deliveries for software-defined resilient communications, as well as next-generation Jammer program ramp. Q4 operating margin increased to 24.9%, up 50 basis points. CS margin benefited from LHX NEXT. In 2025, IMS delivered revenue of $6.6 billion, 8% organic growth, and margin of 12.2%. In the fourth quarter, IMS revenue was $1.7 billion, up 11% organically due to ramping activity on classified ISR programs and our airborne early warning and control aircraft for The Republic Of Korea. Q4 operating margin was 11.1%, down 270 basis points with the reduction largely reflecting the CAS divestiture and unfavorable program performance in Maritime. For 2025, SAS delivered revenue of $6.9 billion and margin of 12.3%. For the fourth quarter, SAS revenue was $1.7 billion, up slightly primarily driven by increased FAA volume admission networks, partially offset by lower classified program volume in space, and Intel and cyber. The government shutdown delayed awards and limited additional revenue growth in the quarter and the year. Q4 operating margin increased to 13.7%, up 290 basis points reflecting stabilized performance on classified space programs and LHX NEXT benefits. For 2025, Aerojet Rocketdyne delivered 12% organic revenue growth, with revenue in excess of $2.8 billion and margin of 12.5%. For the fourth quarter, AR delivered another strong quarter with organic growth of 12%, marking its third consecutive quarter of double-digit growth. Performance was driven by higher production volumes across key missile and munitions programs and the continued ramp of new awards. Q4 operating margin expanded by 130 points to 11.8%, benefiting from higher volumes and LHX NEXT. Great results by each of the segments. Now I'd like to highlight key terms of the Department of War's planned investment. This is a $1 billion preferred security invested directly in the missile solutions business. The security converts at a 20% discount to the IPO price plus 3% detachable warrants priced at a premium. We are planning for an IPO in 2026 and the DOW is expected to hold a single-digit equity ownership stake. As a reminder, Missile Solutions will remain a consolidated segment in our financials following the planned public offering. This business will continue to be a part of LHX and will take advantage of our enterprise services and support structure. Turning to guidance for 2026. We expect revenue of $23 to $23.5 billion, representing organic growth of 7% at the midpoint. Segment operating margin is anticipated to be low 16%, supported by strong program execution and investments to drive continued transformation and cost structure efficiency. Free cash flow is expected to be $3 billion, driven by growth, higher profitability, and disciplined working capital management even as we increase our CapEx to approximately $600 million. We are transitioning our diluted EPS guidance from a non-GAAP to a GAAP basis now that we have completed the implementation portion of the LHX NEXT program. Our GAAP diluted EPS is expected to be in the range of $11.30 to $11.50. Solid growth even from our non-GAAP diluted EPS in 2025. Our guidance reflects appropriate risk early in the year and the dynamics associated with administration priorities. It includes a full year of space propulsion and power systems business, as we continue to work towards closing the transaction expected in the second half of the year. Consistent with prior practice, we will update as necessary upon the transaction closing. At the segment level, space and mission systems or SMS formed primarily from IMS and SAS, delivers critical multi-domain defense solutions in a traditional prime business model. SMS revenue is expected to be $11.5 billion driven by strength in ISR aircraft missionization and space solutions. Operating margin is expected to be in the mid-10% range. Communications and spectrum dominance or CSD brings our former CS segment together with our Westcam sensor business and other EW programs from across the company, to deliver primarily commercial products at commercial margins. CSD revenue is projected at approximately $8 billion driven by growth in EW programs and communication and airborne EOIR sensor products, with operating margin of about 25%. Missile solutions or MSL combines Aerojet with critical missile systems, including air launch effects, IR seekers, and other advanced technologies, creating a focused high-growth business underpinned by scaled capital investment. MSL revenue is anticipated to be approximately $4.4 billion with margins in the mid-12% range, supported by continued growth in solid rocket motor production. And for modeling purposes, this would convert to EBITDA of approximately $620 million. Our capital deployment strategy reflects our commitment to investing in the business while delivering value to our shareholders. Our approach to dividends is unchanged, and the number of shares outstanding is expected to be relatively consistent with year-end 2025. With that, I'll turn it back to Chris. Christopher E. Kubasik: Thanks, Ken. Our results and actions position us for the next phase of growth. We are more agile, and we're able to allocate capital dynamically, partner strategically, and adapt our portfolio as markets evolve. And we are strengthening our foundation for long-term performance. By transforming our company, evolving our operating system, and adopting AI. Most important, our actions ensure that we remain a trusted partner for our customers and continue to disrupt with a focus on long-term value creation for all stakeholders. Tiffany, let's go to Q&A. Operator: And please limit to one question per person. If you'd like to ask a question, please press 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press 1 if you'd like to remove your question from the queue. If you have an additional question, please press 1 again to get back in the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Thank you. Our first question today comes from the line of Kristine Liwag with Morgan Stanley. Please proceed with your question. Kristine Liwag: Hey. Good morning, everyone. Chris and Ken, thank you for the additional color you provided on the missile solutions business this morning. Considering the strong demand for this product, should we continue to see long-term agreements similar to what was announced on PAC-3 and THAAD, or is this satisfied by the IPO plans with the US government? And also a follow-up to that is you've called out double-digit growth for this business, but demand is very strong. In the next three to five years, and maybe too premature to think about it like that, but is this something that could grow three to five times larger? Christopher E. Kubasik: Thanks. Alright. Kristine, thank you for the question. Yeah. Look. Everything is tracking as we've been talking about. We were excited to hear this morning that Lockheed Martin reached an agreement on THAAD. As you know, we're the only provider of the propulsion and DAC systems for THAAD, and, obviously, we're going to be glad to support Lockheed Martin's and the end customer. So, absolutely, this is what all of the industry has been discussing with the DOW over the last half year or so, and we're starting to see these transactions take form. Once we get the several billion dollars and start with the facilitation building, in excess of 60 factories over a million square feet ordering the equipment, and our supply chain doing the same. I think there's a lot of upside and potential. As you would expect, we'll file form S-1 as part of the IPO process later this year. And it will provide a lot more information and details and highlight the potential upside. Yeah. I'll just add, Kristine. As Chris mentioned, we're absolutely excited about the framework agreements that have been signed between the Department of War and Lockheed on both PAC-3 and THAAD. We are working closely with our customer as well as the end user to make sure that we're very closely aligned. In particular, those customers that are working closely with the Department of War on the acceleration and the scaling and get the agreement signed. We've been investing and, again, closely to modernize production lines for THAAD and PAC-3. We'll continue to do that, and we'll take some of the lessons learned from that to scale across all of the munitions acceleration programs. And, as we look at this, I don't want to put a number out there on tripling, but we do think that this business as we combine missile solutions is one that can grow at a double-digit CAGR for some period to come. We've studied the market. We've studied the demand. We've had some outside parties come in and do an independent look just to make sure we're looking at it correctly, and we do see this business as able to grow double digits for the foreseeable future. Operator: Our next question comes from the line of Myles Walton with Wolfe Research. Please proceed with your question. Myles Walton: Great. Thanks. First one was on CapEx. It's obviously higher, 2.5% of the '26 sales or thereabouts. Is there a much bigger step up happening in the future to give a smaller step up than what I expected for the multibillion-dollar investment required in missile solutions? Kenneth L. Bedingfield: Yeah. Myles, I can take that one. Yeah. We're stepping up CapEx in 2026 to about two and a half percent of sales or $600 million. I think that's something like a 35 or 40% increase from 2025. As we do that, we're still holding to our 2026 free cash flow guidance of $3 billion. And, looking forward, I'm not going to put a number on 2027 CapEx at this point. But we're certainly thinking about it in terms of, as we capacitize to deliver, how will we be able to pull cash on some of these new production programs to be able to offset some of that CapEx that we're needing to invest upfront. We'll certainly be working with the entire supply base to make sure that we're going at this together. And, suffice it to say, I think that this is kind of a one-time capital investment to really and truly modernize how solid rocket motors are produced at speed, and at scale and at a rate that quite frankly, the customers haven't gotten to date out of the SRM supply base. And, there is a lot of demand and we're to help to fill that as quickly as possible to get that product into the hands of the warfighter. So we think there's a durable long-term benefit to this capital investment. But, again, we'll certainly be working to maximize cash inflows as we look at those CapEx requirements in 2027 and 2028. And I'll just add, Myles, as you know, we purchased Aerojet Rocketdyne two and a half years ago, and on day one, we started investing. So it's been well over a half billion dollars of CapEx spent at Aerojet over the past two and a half years. So when we made this acquisition, we knew it was a race. We started on day one. And we sure plan to win the race. Operator: Our next question comes from the line of Noah Poponak with Goldman Sachs. Please proceed with your question. Noah Poponak: Hey. Good morning, everybody. Kenneth L. Bedingfield: Good morning. Hey, Noah. Noah Poponak: Thanks. Ken, just a quick point of clarification. The comment you made about the expectation of the government or Pentagon stake in missile solutions is that it would be a single-digit percentage of the enterprise value of missile solutions. Just want to make sure that's what you meant. And then just as a second question, to your point on still doing the $3 billion with the higher CapEx, that implies your cash from ops is growing year over year quite a bit faster than your segment EBIT. If you could just break down the pieces of why that's happening. Kenneth L. Bedingfield: Sure. Yep. On the first question, yes. I did, in fact, mean a single-digit stake, single-digit ownership stake in the business. And on the second question, look, in terms of our cash from ops and our free cash flow, we're certainly laser-focused on ensuring that we deliver the cash out of the earnings that we generate. And, as we look at 2026, we're very comfortable that we can accommodate the additional CapEx requirements as we look, again, at investing in the business to support our customers and to drive the needed capacity increases in our products. And I should say that's really across the L3Harris portfolio. We focus often on solid rocket motors, but there are demands for a number of our products, as Chris mentioned in his comments. And, look, disciplined working capital management, certainly working in all aspects of the contractual deals with our customers as well as our suppliers to make sure that we can deliver the cash at $3 billion for 2026. Operator: Our next question comes from the line of John Godin with Citigroup. Please proceed with your question. John Godin: Hey, guys. Thanks for taking my question. There's obviously a lot of excitement around missile solutions. But we do get questions on RemainCo. And what the revenue outlook for RemainCo LHX RemainCo might look like over the next couple of years and points of leverage to what could be a very large defense budget on the horizon. I'm sure we're going to get more detail at the Investor Day, but I'd love to just kind of give you a chance to speak to what the revenue growth rate might look like, whether you envision it accelerating from here and what points of leverage remain in the business even when you IPO the sort of most exciting, fastest-growing part? Thanks. Christopher E. Kubasik: Hey, John. Thanks for the question, and I appreciate the focus on RemainCo because that's a big part of L3Harris, and as Ken said, and we've said over the last several weeks, we will continue to consolidate, own, and control MSL even after the IPO. So we're looking at solid mid-single-digit growth, a little faster, I think, than the rest of the industry and hopefully faster than the market in total. As I said in my prepared comments, I really like our portfolio. We spent a lot of time realigning this over the last five or six years. And I would look at our capabilities. I look at our capacity. We've talked about building new factories for space. You know, the SDA win is a big win for us. Four in a row. HPTS has come in. It's a lot of classified work. So when I look at what we have in space, what we have in the airborne domains, even maritime, maybe not as a prime, but supporting a lot of the new construction, I think we're well-positioned. You know, the accelerant will be, we need to see the 2027 defense budget, the PVR president's budget request has yet to be submitted to Congress. I think sometime in March is what people are saying. And if that's in fact $1.5 trillion, I'll be as excited as everybody else in the industry and it could even be further upside. 7% is the midpoint of a range. So I really like our portfolio. I love our backlog. And I think we're well-positioned. Kenneth L. Bedingfield: Yeah. I would just add, John, to that. If we do see a significantly increased defense budget in FY27, our expectation certainly is that, as we look at upside to growth, we would expect L3Harris to be able to deliver on that quicker given our agile nature and our ability to crank up production given some of the investments that we've made in the business. Whether that's in space satellites related to missile defense for America, whether that's in communications or even as we scale the solid rocket motors. Operator: Our next question comes from the line of Peter Arment with Baird. Please proceed with your question. Peter Arment: Yeah. Hey. Good morning, Chris and Ken. Nice results. Chris, regarding Golden Dome and the FDA, you've been very successful with all the FDA programs that you highlighted, and another great win in December. How do we think about the total opportunity? Or can you quantify what Golden Dome looks like for L3Harris when we think about that? Christopher E. Kubasik: Absolutely. Golden Dome was set up as part of an executive order probably about a year ago today. We've been tracking, as you have, all the progress under General Gute Line and setting them up as a DERPAM and the budget. A $155 billion of reconciliation money which contains $25 billion just for Golden Dome. When you look at the three pieces, there's a space-based interceptors, which I think will be the slowest to develop over time and probably began with development programs. We are taking a merchant supplier approach with space-based interceptor. We have some great technologies that everybody wants. I think part of our strategy in a portfolio allows us to prime sub or be a merchant supplier. So that's how we're going to play in that. You know, we talked about the actual satellite architecture. I think we're in a really good position as evidenced by what we've won to date, as you said, Peter. And we just need to wait for more awards and more RFPs. I think the government shutdown, as we said, probably set back Space Force forty-five days or so, but they did come out with an architecture. We have our capabilities and we'll be ready to respond quickly. Again, we've invested. We built the facilities, and we have state-of-the-art modern factories to crank out these satellites at the right time. And then everything else under Golden Dome, a lot of deals with the missile defense and the interceptors, which I think we've covered under the THAAD PAC-3 umbrella. We also have hypersonic capabilities and large solid rocket motors as well. So I believe we're in really good shape relative to each and every piece. And we have the capabilities. We can go fast, as Ken said, and we're just ready to get some awards and respond to some proposals. Operator: Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question. Sheila Kahyaoglu: Good morning, Chris and Ken. I wanted to ask another business question. You mentioned international tactical comms in your prepared remarks. How robust has that growth been in '25 and expectations over the next few years? How are you balancing the domestic side of tactical just thinking about the multiyear outlook there? Christopher E. Kubasik: Yeah. No. Thank you, Sheila. I'm glad you asked the question. We still think we have the best and only resilient comm capability as going to be critical to the future of warfare. On the international, you read a lot about it. We continued to win a lot of business in 2025. We think we're going to continue to win some business in '26. We're in discussions with a lot of countries around the world. And, you know, you have to balance all the political rhetoric with the needs. At the end of the day, these countries need resilient comms and they need interoperability. Our strategy has been and is actually increasing with more and more localization. We utilize partnerships. We're making investments in-country. We're transferring technology as appropriate. And we will have more international software-defined radios in 2026 than we will in 2025. So that's growing on that front. Domestically, you know, there's a lot being reviewed mainly by the army. I do like the fact that they're running experimentation. They're doing demos. And they're going to make the decision based on the capability. We continue to believe we have the best capabilities by far. Again, our radios are software-defined. So we've been investing and upgrading them with new capabilities. And, look, at the end of the day, the soldiers want to carry one radio, don't want to go backwards where people are carrying two or three or four radios. So the fact that we have the software-defined radios is a huge advantage for us. We've invested in the past. It's leveraged the commercial business model. We can scale, and we have a state-of-the-art factory in Upstate New York. So I'm optimistic about the future. Operator: Our next question comes from the line of Gautam Khanna with TD Cowen. Please proceed with your question. Gautam Khanna: Yep. Thank you, guys. Just following up on the last question. As we think about some of the things that did not get funded as well in the '26 request, things like armed Overwatch and some of the US military radios. I'm just curious, do you anticipate that we'll start to see some of that stuff get funded in the '27 request? Do you have any indication either way? And then just as a follow-up, obviously, the compare on margins, there were some asset gains in 2025. I'm just curious if you could talk about sort of what's driving the margin improvement in 2026. Thank you. Christopher E. Kubasik: Yes. Thanks. Thanks, Gautam. We don't actually have insight into the '27 budget as you would expect, but if it is in fact going to be a $1.5 trillion, you know, I got to believe that the needs for, like I've said, the space sensing, the resilient comms, kinetic effects, and such are in our sweet spot, and these will, in fact, be funded. Finding the budget as it relates to these HMS software radios. It's on a variety of different line items. Again, you know, we feel that our hardware is needed, that our capability in the network is needed. And we're willing and able to compete with any and all newcomers and incumbents to prove our capabilities. So I'm feeling pretty good about the potential there, but we need to see how this plays out over the next several months. Kenneth L. Bedingfield: And to the second part of the question, Gautam, I would say, as a part of our strategy and including LHX Next and how we do things differently and most efficiently, we've certainly been focused on investing in the business where we see future opportunities and growth. And as a part of that, where we see some product lines that are, I'll say, legacy or that we're not investing in that are less core to our strategy and our growth, we've focused on trying to monetize some of those for other folks who may see those as more attractive in terms of the longer-term sustainment tails or what aligns better with their business model. In terms of 2026 margin improvement, I largely see it falling onto our team to deliver on our programs and our product deliveries. Not projecting a lot of product line sales or gains relative to that in 2026. This is going to be about execution, product delivery, program delivery, and that's how we plan to get to that increased margin in '26. I think we've got confidence. You know, we're projecting to be, I think, positive EACs for 2025. And that puts us on a good trajectory for '26. I think we've gotten some program challenges understood and behind us, and we've stabilized a few programs that we had been, quite frankly, challenged with in parts of '24 and into '25. So feel good. I think we got the right team. And we can deliver on those commitments, largely by performing on the business, performing on our programs, getting the product delivered, and getting to our low 16% margin rate in 2026. Christopher E. Kubasik: Now I'll just clarify. In my comments, I talked about LHX NEXT finishing a year early. That was a top-down approach, as you know, for two years to take out significant over, you know, billions of dollars of cost to streamline the business. That is now part of our DNA. It's going to be embedded into our operations as part of our ongoing continuous improvement program. So the concepts and the philosophy of continuous improvement efficiency, cost savings will continue. It just won't be called out as a separate top-down initiative. It will be into the day-to-day operations of the business. So another potential tailwind to higher margins. Operator: Our next question comes from the line of Scott Mikus with Melius Research. Please proceed with your question. Scott Mikus: Morning, Chris and Ken. Bookings were very strong in the quarter and the year. But given the shutdown, a lot of the funding from last year was delayed, and the one big beautiful bill funding is yet to be put on contract. I'm just curious where do you expect book-to-bill to come in for the year, and could you maybe parse that out by the new segments? Christopher E. Kubasik: Yeah. I think you're right on the, you know, I think right now, we're waiting for, I think the Department of War has to provide a spend plan for the $155 billion reconciliation back to Congress, and then once that occurs, the money will be allocated and start to flow. You know, we did end the year at 1.3 book-to-bill. Generally, don't guide book-to-bill, but I would think it would be at least 1.1 or larger. But, again, we need to get the '26 appropriations passed. We got to see the '27 PBR, but we feel good about it, and we always plan to book more orders and revenue. We're going to grow 7% midpoint. We're going to grow orders double digits. Operator: Our next question comes from the line of Seth Seifman with JPMorgan. Please proceed with your question. Seth Seifman: Hey, thanks very much, and good morning, everyone. Maybe just a quick question and a clarification. I guess, from the question, the CSD business and kind of, you know, healthy margin there, 25%. How do you think about the sustainability of that margin going forward? Is that a segment where given the model, there's potential for margin expansion? Or is it at a place where, you know, that's about as healthy as things can get? Or are there various, you know, pressures out there from mix or anything else? And the clarification? Christopher E. Kubasik: The clarification. We talked earlier about the, you know, lower funding in the request for tactical radios. Do you, in fact, have a good sense of how everything shook out in appropriations for Tactical? Seth Seifman: Okay. Yeah. Let me take those. Yeah. On CSD, the nice thing now is we have a majority of our commercial businesses in the same segment, and I think that's what's unique about L3Harris. And I think Ken said it well. We have the traditional prime business models. We have the commercial business models, and then, of course, we have the high-growth top-line MSL. So yeah, we are constantly looking to improve our margins. I think with the commercial business model, with the volume and the efficiency, even the upcoming adoption and utilization of AI, there's always potential to increase on those particular opportunities. So I'm really optimistic about it. And there will be best practices shared within the commercial business model segment that has only been formed about four weeks ago. So there's absolutely upside in that regard. And, yeah, checking out on the 2026, like I said, there have been some reductions in some of the tactical radio line items. They are kind of peanut buttered throughout, so you have to piece them together. Some are competitive, which we plan to win, and we're still optimistic that we can grow our tactical radio business in 2026, and that is our plan. Kenneth L. Bedingfield: Yeah. I'll just add maybe just a couple of things, Seth. In terms of CSD and the 25% margin rate that we're forecasting for '26. I think we certainly feel good about that in terms of, look, it's a commercial model. We invest. We bring the product forward. And we will continue to invest in that business to continue to modernize our products and ensure that they meet the ever-changing demands of the warfighter. And, you know, as we make those commercial-type investments, you know, they certainly are or they do offset some of that margin as you think about that model. We certainly accommodate that within the 25%. Is there the opportunity to see some of that go up, as Chris mentioned, as we continue to modernize and continue to think about how we operate the business? Sure. But we'll also think about that as giving us the ability to continue to invest in the growth of that business. And I think that ties into, you know, a bit into your question on the radios. You know, we certainly continue to invest in modern waveforms, certainly into the software-defined radios themselves. And certainly into our relationships with partners around the globe that are able to procure US radios from L3Harris that are, again, resilient and operable. And able to enable us to have steady throughput in the factory even as we think about on the domestic side, reallocating some of our resources to support programs like NGC2, you know, from HMS Manpack and COTS and then filling in the production for our international partners who really want to get their hands on, again, those interoperable L3Harris radios. So it's been a good model for us. Operator: Our next question comes from the line of Douglas Harned with Bernstein. Please proceed with your question. Douglas Harned: Good morning. Thank you. You know, on space, I wanted to understand a little bit more about what your production plans are, the ramps in Palm Bay and Fort Wayne, and then how you think about it in the context of your broader space business. You mentioned, as we know, you've been on every one of the tranches for the tracking layer. But when you look at tranche three, there are three of your peers also on there. So I'm trying to understand how you see the tracking layer evolving over time from a competitive and industrial participation standpoint and how that ties in with your thinking about production ramps in your new facilities. Christopher E. Kubasik: Okay. Good morning, Doug. Thanks for the question. Yeah. There were 72 tracking satellites awarded. I think in our meetings with the customers over the last year or so, the number one focus is speed, followed closely by scale. So we've made the investments over 200,000 square feet, as you said, in Fort Wayne, Indiana, and in Palm Bay. We have the capacity to quickly turn these satellites and meet the schedules and commitments that we've made to. The supply chain is always critical in the satellite manufacturing business. I used to think with all this ramp, that seems to be the challenge. You know, that the entire industry is facing and getting the second and third-tier suppliers the scale and the ability to perform and meet their commitments. So we envision increased revenue in both of those factories as we start to fill them up. Looking forward to getting HPTSS for however many satellites that turns out to be. And there's a lot of work going on, Doug, in the classified arena. So Golden Dome is starting to fill in. And like I said, we've made the investments. We have the capacity. And I think the DOW is going to look for companies that have the capacity. They don't have time to wait for people to build buildings and go from one or two demos to 18 or 36 a year. So I think the strategy has worked. And, again, being a little further ahead several years back, we're perfectly positioned for this growth. Operator: Our next question comes from the line of Robert Stallard with Vertical Research. Please proceed with your question. Robert Stallard: Josh, good morning. Christopher E. Kubasik: Morning. Hey, Rob. Robert Stallard: Chris and Ken, you laid out some pretty interesting growth opportunities ahead. But I suppose all of this is dependent on your supply chain and your personnel. So how do you feel about the capacity of the suppliers and your internal staffing to deal with this trajectory that's ahead of us? Christopher E. Kubasik: Alright. I'll take it for a shot. Good to hear you. Personnel has not been an issue. You know, I think we're one of the hottest companies in the industry for people to work for. We have a very active recruiting both on campus and experienced hires. So no issue filling the workforce. We are spending a lot of time with almost half our employees being engineers. Engineers, you know, how do we enable the engineers AI-enabled to be more efficient, get more productivity, without necessarily having to add a significant amount of people. We're using more and more robotics in our factories, including in the missile segment as well. On the supply chain, I think they have now seen the demand signals where historically, there were sole providers to the entire industry. I think we're seeing two and three different suppliers out there. There's a ton of private equity money looking for things to do. And every time we meet with them, we tell them to start a second, third-tier supplier for the defense industry. The world needs a lot more there. So I think it's healthier than it used to be. It got through COVID. They're investing now that they see the demand signal. And I think, as a country, we're close to being able to hit on all cylinders. But as always, they have to be able to hire. They have to be able to invest and perform, and I think this administration is doing a good job setting us all up for success. Kenneth L. Bedingfield: Yeah. Thanks, Chris. And maybe I'll just comment a little bit further on supply chain at MSL. Just given the rapid growth that we are projecting there. And I'll just say, we've significantly matured our approach to supply chain, our supply chain organization, and the relationships with our suppliers where we really are thinking about our suppliers as partners on this path that we see of growth and getting the additional capacity to our customers. And less about a vendor or a transactional type relationship. So we're working very closely with all of the key suppliers. I would say, in that particular business, we're certainly one of their, if not their largest customers, certainly for these types of products. We certainly intend to keep it that way with the growth that we project. And, as Chris mentioned, in helping our customer get the missiles they need into the hands of the warfighter. And for us, solid rocket motors into the hands of our customers, we are essentially in a race both to get those in the hands of the warfighter as well as stay ahead of the competition. And we do intend to win that race, and working very closely with our supply chain is a key part of that strategy. Christopher E. Kubasik: Tiffany, we'll now take the last question. Operator: Our final question comes from the line of Michael Ciarmoli with Truist Securities. Please proceed with your question. Michael Ciarmoli: Hey, morning, guys. Nice results. Thanks for taking the question. Chris, just Chris or Ken, a little bit more detail on maybe unwinding Aerojet and MSL now. You'll have the majority stake. In the past, you've talked about having all the capabilities or the majority of capabilities under one roof to compete as a prime. Is this still going to be the case? Or is MSL going to be a 100% merchant supplier model? And if so, were there any stipulations or conditions mandated by the DOW to that end? Christopher E. Kubasik: Thanks, Mike. There were no stipulations from DOW with regards to that question. They want competition. They want scale. They want speed, and that's what we plan to focus on. Yeah. It's interesting. I think this when you look at this $4 billion-plus entity, a lot of the focus is on solid rocket motors. But we did talk about seekers. We've been investing hundreds of millions of dollars in developing seekers. Have weapon release. So it's kind of a one-stop shop relative to missiles. But really as a supplier, you know, there generally are a lot fewer new start missile programs as a prime. But if that's something we choose to do, we have the ability to do it. My honest assessment is we have so much work, so much growth, you know, we try to focus on what we do well and how we can grow the top line, the bottom line, and generate cash. And we're not going to spend a lot of time getting distracted or chasing shiny objects. So we have more than enough work. I'm excited about the sixty-plus buildings, the equipment, the robotics, the increase in the workforce. But we'll see what they need, and if we can support the customer, we always look to see in what role is best. Sometimes it's merchant suppliers. Sometimes a prime, sometimes it's a sub. But nothing out there in the near term to focus on in that regard. So I appreciate the last question. In closing, 2025 was our best year ever. We reinforced the durability and alignment of our portfolio, the strength of our and the discipline of our strategy. We took deliberate actions at the beginning of this year to evolve and position ourselves for the future as we build on the momentum from 2025. We enter the next phase as the industry's most focused, agile, and resilient company, confident in our ability to drive sustainable growth, deliver strong results, and to continue to create long-term value for our customers, shareholders, and employees. I want to thank you all for joining today's call. We look forward to seeing you on February 25 at our 2026 Investor Day in New York City. Till then, stay safe and warm. Operator: Thank you.
Operator: Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties, Inc. fourth quarter 2025 results. Our future speakers today are Marguerite Nader, our CEO, Patrick Waite, our President and COO, and Paul Seavey, our Executive Vice President and CFO. In advance of today's call, management released earnings. The call will consist of opening remarks and a question and answer session with management relating to the company's earnings release. For those who would like to participate in the question and answer session, management asks you that you limit yourself to two questions so everyone who would like to participate has ample opportunity. As a reminder, this call is being recorded. Certain matters discussed during this conference call may contain forward-looking statements in the meaning of the Federal securities laws. Forward-looking statements are subject to certain economic risks and uncertainty. The company assumes no obligation to update or supplement any statement that becomes untrue because of subsequent events. In addition, during today's call, we will discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release, our supplemental information, and our historical SEC filings. At this time, I would like to turn the call over to Marguerite Nader, our CEO. Marguerite Nader: Good morning, and thank you for joining us today. I am pleased to report the final results for 2025. We continued our record of strong core operations and FFO growth, with full year growth in NOI of 4.8% and a 5% increase in normalized FFO per share. Our year-end report is a good time to reflect on our business and our industry. Our business model is consistent and durable during all economic cycles. I'd like to focus on our annual rental streams, which comprise over 90% of our revenue. We offer prospective customers the opportunity to join a community where they can build their social connections in an active environment. The strength of our activity offerings continues to be a leading factor in resident retention at our communities. The average age of a new resident is 60 years old, and many are motivated by a desire to escape colder climates and avoid the isolation and inactivity found during northern winters. Resident engagement is a strength of our PLIP. Across our portfolio, hundreds of resident clubs promote social interaction, contributing to high occupancy levels and extended average lengths of stay. Affordability in our sector remains a competitive advantage. Our communities provide a well-maintained living environment at a lower cost than surrounding housing alternatives. The value proposition is further enhanced by the structural advantages of manufactured housing. The homes have changed meaningfully over the last twenty years, with today's homes generally featuring three-bedroom, two-bath layouts, modern open floor plans, energy-efficient systems, and contemporary kitchens and bathrooms. These home enhancements have wide demographic appeal and have strengthened the quality of our communities. Our MH portfolio has produced impressive growth rates over the last thirty years. These growth rates reflect an operating model in which residents choose to make our communities their long-term home, and ELS has reinforced that decision by consistent investment in the community to support growth. Our RV portfolio finished the year strong with an increase in annual of over 500 sites over the last six months. Our annual RV customers generally stay with us for approximately ten years and appreciate the ability to use our properties as a second home or weekend getaway. Last night, we issued initial guidance for 2026. Our guidance is built based on the operating environment at one of our 450 communities, including a robust market survey process. Our teams communicate with our residents to understand their views around capital projects and property operations. The results show strength in both top-line revenue and NOI. For the full year 2026, we anticipate normalized FFO growth of 3.7%. Next, I would like to update you on our 2026 dividend policy. The Board has approved setting the annual dividend rate at $2.17 per share, a 5.3% increase. Our decision to increase the dividend is driven by stable cash flow, a solid balance sheet, and strong underlying business trends. In 2026, we expect to have approximately $100 million of discretionary capital after meeting our obligations for dividend payments, recurring capital expenditures, and principal payments. Over the past ten years, we have increased our dividend by an average of 10% per year, and this year's dividend marks the twenty-second consecutive year of annual dividend growth. I want to thank our team members for all their efforts in 2025, and I'm looking forward to continued operating success in 2026. I will now turn it over to Patrick to provide more details about property operations. Patrick Waite: Thanks, Marguerite. I'll start with some color on our MH business and then address our long-term RV business. In 2025, these revenue streams totaled more than $1 billion. Over the last five years, their combined revenue CAGR was 5.9%, continuing to support our history of consistent property NOI growth since our IPO in 1993. Approximately half of our MH revenue is in Florida. Another 20% is in California and Arizona, and the rest is mostly in the North Central and Northeast US. Over the last five years, we've sold 3,800 new homes, which improved our quality of occupancy. Florida has been a driver of growth with migration patterns supporting economic growth and demand. The rest of the Sunbelt, coastal, and northern markets have contributed to consistent growth as well, given the desirable locations of our properties and the great value that our MH communities offer in their submarkets. Focusing on Florida first, our largest submarkets, Tampa, Saint Pete, and Fort Lauderdale, West Palm Beach, are supported by tourism, finance, and technology, favorable tax structures, business relocations, and in-migration. Demand for MH communities has been consistently strong. And over the last five years, we sold nearly 2,000 homes and reduced our Florida rental load to 2.5% of our occupied sites. Looking next to Arizona, our largest market is Phoenix Mesa, which experienced strong population growth and GDP growth and has supported demand for our MH properties. We sold more than 400 homes over the last five years. The last of the big three is California. Our MH communities offer great value in high-cost markets. Given the high demand, our California properties have an average occupancy of 96%. Before I move on to our RV business, I would note that our portfolio and locations are well-positioned to benefit from the demographic trends in the US. Our recent investor presentation highlights these demand drivers. There are 70 million baby boomers in the US, and every day, 10,000 baby boomers turn 65. Right behind the baby boomers are 65 million Gen X, all aging towards our core demographic. After Gen X is the millennial cohort of 75 million, they will start retiring in about twenty years. As these generations age, they behave similarly, although the timing may differ. As an example, Gen X and millennials entered household formation stages in buying homes later than baby boomers. But the direction is consistent through midlife years and into retirement. They seek what we offer: great value, active lifestyles, and social engagement. On the RV annual business, long-term stays and low turnover provide a stable revenue stream similar to our MH business. Most of our annuals own a park model or RV with fixed site improvements. And when they choose to leave, they resell their unit in place to the next long-term guest, resulting in an uninterrupted revenue stream, very similar to our MH business. Over the last five years, the average RV annual rate growth of more than 6% contributes to our durable long-term revenue. Over the last two quarters, we added more than 500 annuals, and we continue to see consistent demand throughout the Sunbelt and Northern markets. Attrition that we experienced early in 2025 appears to have subsided, and both current and new RV annual customers are enthusiastic about staying with us. Our RV properties are in desirable locations, and a customer can buy one of our resort homes for a fraction of what a lake house or similar accommodation will cost in those markets. The value we offer across our long-term revenue business lines supports consistent demand. As we head into 2026, we see demand for our MH and RV annual offerings, which supports consistent growth in these long-term revenue streams. I'll now turn the call over to Paul. Paul Seavey: Thanks, Patrick, and good morning, everyone. I will discuss our fourth quarter and full year results, review our guidance assumptions for 2026, including some key considerations for the first quarter, and close with a discussion of our balance sheet. Fourth quarter normalized FFO was $0.79 per share, and full year normalized FFO was $3.06 per share, representing 4.25% growth in fourth quarter and year-to-date periods, respectively, compared to the prior year. Strong core portfolio performance generated 4.1% growth in the quarter and 4.8% year-to-date. Our results are in line with our guidance provided at the 2025 and reflect our consistent track record of earnings growth in line with guidance. Core community-based rental income increased 5.5% for the full year 2025 compared to 2024, primarily because of noticed increases to renewing residents and market rent paid by new residents after resident turnover. Full year core RV and marina annual base rental income, which represents approximately 73% of total RV and marina base rental income, increased 4.1% compared to the prior year. Full year core seasonal and transient rent combined decreased 9.1%. The net contribution from our total membership business consists of annual dues and upgrade subscription revenues, offset by sales and marketing expenses. For the full year, the membership business contributed $65.6 million net. During the year, we enrolled approximately 5,900 upgraded membership subscriptions. Core utility and other income increased 3.4% for the full year compared to the prior year. In 2025, our utility recovery rate was 48.7%, a 220 basis point increase from 2024. Full year 2025 core property operating expenses increased 1% compared to the same period in 2024. Our ability to deliver expense growth below CPI resulted from our management of payroll expense at our RV properties, our 2025 insurance renewal, and a reduction in membership sales and marketing expenses. Income from property operations generated by our noncore portfolio was $1.9 million in the quarter and $10.2 million for the full year 2025. Property management and corporate expenses increased 1% for the full year 2025 compared to the prior year. The press release and supplemental package provide an overview of 2026 first quarter and full year earnings guidance. The following remarks are intended to provide context for our current estimate of future results. All growth rate ranges and revenue and expense projections are qualified by the risk factors included in our press release and supplemental package. Our guidance for 2026 full year normalized FFO is $3.17 per share, the midpoint of our guidance range, of $3.12 to $3.22. We project core property operating income growth of 5.6% at the midpoint of our range, and we project the noncore properties will generate between $4.6 million and $8.6 million of NOI during 2026. Our property management and G&A expense guidance range is $120.3 million to $127.3 million. In the core portfolio, we project the following full year growth rate ranges: 4.1% to 5.1% for core revenues, 2.7% to 3.7% for core expenses, and 5.1% to 6.1% for core NOI. Full year guidance assumes core MH rent growth in the range of 5.1% to 6.1%. Full year guidance for combined RV and marina rent growth is 2.4% to 3.4%. We expect 5.2% growth in rental income from RV and marine annuals at the midpoint of our guidance range. For the full year, our guidance assumes interest expense in the range of $133.3 million to $139.3 million. Our first quarter guidance assumes normalized FFO per share in the range of $0.81 to $0.87. That represents approximately 26% of full year normalized FFO per share. Core property operating income growth is projected to be in the range of 4.5% to 5.1% for the first quarter. First quarter growth in MH rent is 5.8% at the midpoint of our guidance range. We project first quarter annual RV and Marina rent growth to be approximately 4.5% at the midpoint of our guidance range. Our guidance assumes first quarter seasonal and transient RV revenues perform in line with our current reservation pacing. I'll now provide some comments on our balance sheet and the financing market. Our balance sheet is well-positioned to execute on capital allocation opportunities. We have no secured debt maturing before 2028, and the weighted average maturity for all debt is seven and a half years. Our debt to EBITDAre is four and a half times, and interest coverage is 5.7 times. We have access to $1.2 billion of capital from our combined line of credit and ATM programs. We continue to place high importance on balance sheet flexibility, and we believe we have multiple sources of capital available to us. Current secured debt terms vary depending on many factors, including lender, borrower, sponsor, and asset type and quality. Current ten-year loans are quoted between five percent and five and a half percent, 50 to 75% loan to value, and 1.4 to 1.6 times debt service coverage. We continue to see solid interest from the GSEs and life companies to lend for ten-year terms. High-quality MH assets continue to command the best financing terms. Now we would like to open it up for questions. Thank you. Operator: And to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Michael Goldsmith from UBS. Your line is open. Michael Goldsmith: Good morning. Thanks a lot for taking my question. First question on the seasonal and transient business. It sounds like the first quarter expectations are consistent with the reservation pacing that you're seeing. But then what's implied for the balance of the year is that it improves pretty materially to, like, a positive, you know, two percentage, 1.8% if you're giving specifics. So just trying to get a sense of what are you seeing or what gives you confidence that seasonal and transient can accelerate through the balance of the year as you sit here today? Marguerite Nader: Sure. Good morning, Michael. Maybe Paul could take us through the pieces of the guidance and Patrick can give a little bit of color about the operating performances. Paul Seavey: Sure. I'll start with I'll frame first. The composition of the revenue and some of the timing considerations. So the first quarter, we earned approximately 50% of our anticipated full year seasonal rent and almost 20% of our full year transient rent. And by the end of the second quarter, we've earned almost two-thirds of that full year seasonal, and nearly 45% of our full year transient rent. The last thing I'll mention is during the third quarter, 40% of the transient rent is earned. So when we think about that activity, particularly transient, the short booking window means our revenue is heavily influenced by weather forecasts. We did put together the 2026 budget for these two revenue streams based on current reservation pacing for rent we anticipate earning in the first quarter. That implied rate is down about 13%. Then for the remainder of the year, as you said, Michael, we anticipate approximately 2% growth in those revenue streams combined. Patrick Waite: Yeah. So, you know, I guess a little color on the seasonal and transient, but first, I'd start with our annual RV that represents 70% of our total RV revenue. And as we mentioned in our opening remarks, we added 500 annuals in the back half of the year. So we see consistent demand, and that demand, through the year, substantially offset the attrition that we saw earlier in the year. On a seasonal and transient, you know, what Paul just walked through, you know, we've basically given you the first our first quarter expectations. And as you looked at Q2 to Q4 for seasonal and transient, that growth represents about $1.3 million. On the transient front, really the points that we focused on were the four major holidays, June 10 is on a Friday, and the July 4 is on a Saturday. So the two variable, key holidays are on weekends. Also, we're coming into America's 200th birthday, so the July 4 is expected to be, you know, particularly good for the hospitality business. And then last, although it's early, our booking pace for the Q2 to Q4 period on transient is favorable to what we experienced last year. On seasonal for Q2 to Q4, the majority of the pickup is in Q4 as we'd be entering the 2026-2027 Sunbelt season. And, again, early booking pace is ahead of last year. So really, at this point in the year, we're surveying and having events with our seasonal customers that are on-site. The ones who are on-site, the two things that they rank most highly are the warm weather and the time they spend with their friends. And anybody in the Northern United States over the last few weeks has experienced subzero temperatures. So it's particularly relevant today. We also survey the guests who did not book with us this season but have stayed with us in the past. They highlight really the same two things. They miss their friends, and they want to spend time in the warmer weather. So both of those groups are contributing to our positive early booking pace. Those are really the factors we considered as we're working our way through our long budget process, particularly with the seasonal and transient. But also for the RV, the total RV revenue. Demand and occupancy trend that we're seeing for the 70% of our RV annual has been positive in the last few quarters. Michael Goldsmith: Very helpful. And maybe just as a follow-up, and maybe this also relates to the expense line, is you just did you just had expense growth of 2.2%. You're guiding to 3.2% expense growth at the midpoint. So how much of that reflects, like, just a step up in the transient revenue and so that there's a corresponding, like, payroll increases related to on the expense side? And then also, you know, what are you expecting for your is, like, what are you expecting on the insurance renewal, and is that playing a role in the step up in expense expectations for 2026? Thanks. Paul Seavey: Sure, Michael. I guess the way that I would kind of address those rolling it all together, in some respects, we have guided to expense growth that generally tracks to it's about a 50 basis point premium to current CPI. We do have assumptions for payroll at higher staffing levels than we had in 2025 to match the revenue. The same is true for the utility expense, as a result of the expectations. With regard to insurance, we're quite pleased that we didn't have any adverse claims experience in 2025. In addition, there are indications that the market is softening. Our guidance does have an assumption with respect to our insurance renewal. However, consistent with our past practice, we're not disclosing that. We've started the renewal process, so we won't make our guidance expectation public. We do look forward to updating you in April after we've completed our renewal. Michael Goldsmith: Thank you very much. Good luck in 2026. Marguerite Nader: Thanks, Michael. Operator: Thank you. One moment for our next question. Our next question will come from the line of Jeffrey Spector from Bank of America Securities. Your line is open. Yana Galan: Hi. This is Yana on for Jeff. Thank you for taking the question. Just, you know, curious on a smaller portion of the RV and Marina. On the Marina side, there were some marinas that were taken offline. Was wondering if you can kind of help us on the progress of those repairs and when those may come back into the portfolio. Patrick Waite: Yeah. Yana, it's Patrick. You're right. It's a small part of the business, and it was a headwind for the quarter. You know, as we're working through that, three marinas. As we're working through repairs of prior storm damage, I think I mentioned this when we met in previous calls that we had some delays with respect to permitting and construction. We're working our way through that. I think we have a pretty good eye on timing at this point, and it looks like it's the latter half of 2026 when we're going to start coming online. That should be completed into 2027. Yana Galan: Great. Thank you. And then maybe a little bigger picture. Kind of curious, some of the new, you know, whether it's the Roads Act or some of these other MH affordable housing programs that the administration is looking at. I was curious if there were potentially any HUD pilot programs that, you know, ELS was looking to be a part of. Marguerite Nader: Yeah. We haven't seen anything new from HUD. I think, you know, when you consider how HUD? Manufactured housing fits into the discussions in DC, it's important to consider manufactured housing in a kind of a broader degree. There's about 7 million manufactured homes in the country that house about 18 million people. And on a square foot basis, MH costs about half as much as single-family construction. So it's definitely a product that could help to address the housing issues across the US, but we really don't see widespread acceptance, especially in areas where we would see being interested in developing new communities, and so we haven't seen a lot of change in DC. Yana Galan: Thanks, Marguerite. Thanks, Jenna. Operator: One moment for our next question. Next question will come from the line of Jamie Feldman from Wells Fargo. Your line is open. James Colin Feldman: Great. Thanks for taking the question, and good morning. Marguerite Nader: Good morning. James Colin Feldman: Can you talk more about Canadian customers, and it sounds like you're seeing a you feel more optimistic about things getting better. But can you talk specifically about Canadian customers and what you're seeing and what's in the guidance? What's your assumption for the decline in '26? In that group specifically? Paul Seavey: Yeah. I can. With respect to the first quarter for seasonal transient, as I mentioned before, it implies a 13% decline compared to the same quarter last year. The reservation pace for the seasonal customers is consistent with the pace we discussed during our call in October. So there hasn't been any meaningful change in that across the customer base. And then just thinking about the Canadians, we've previously talked about the fact that 10% of the total RV revenue is what the Canadians represent. 50% of that is from our annual customers. We have not seen any meaningful increase in home sales from those Canadian annual customers. So that demand profile remains strong. And then the remaining 50% is what we've talked about being split between the seasonal and transient. Marguerite Nader: And, Jamie, Patrick walked through some of the just the Canadian sentiment based on some of the survey work that we had done, and that points to a positive view on our properties and traveling back to Florida. James Colin Feldman: Okay. Thank you for that. And then I guess just shifting gears to the investment market. Anything that we should pay attention to that might feel different in '26? I know it's been very challenging to find opportunities. And maybe that's the honest question. Anything on the legislative side or policy side that might be helpful for you with affordability or just in general, maybe a state of affairs if you could provide it on the investment market? Marguerite Nader: Sure. So transaction activity continues to be constrained, I would say. As you know, ownership is highly fragmented, and we engage with homeowners as they move forward towards, you know, potential sale decisions. The strong performance of these properties over time has really reduced the desire to sell for the owners. And so knowing that, I think that attractive acquisition activities may be limited. We focused on internal growth and operations and expansions. And continuing to keep our balance sheet in a position such that if there is an opportunity, we're able to take advantage of it. With respect to anything happening at the federal level, that would impact us. I think what we've seen more is it's really what happens at a city or local level. You know, convincing city council members to have an MH or RV community in their backyard, it really it's oftentimes difficult even for highly amenitized communities, but we continue to work through that at the local level. James Colin Feldman: Okay. If I could just sneak in, what's your appetite for, like, one-off MH property rather than parks? Or do you think going forward, I mean, assuming legislation gets passed, would you be interested in that at all or no? You kind of sticking with the parts business? Marguerite Nader: I'm sorry. Interested in buying one-off manufactured housing communities? James Colin Feldman: Well, no. But, like, managing them off of, like, you know, random properties around different municipalities. If that becomes something that can get done. Buying single site homes, is that what you're asking? Marguerite Nader: Oh, I think that, you know, what we found is that that community aspect of certainly we operate 450 communities across the country. I think where our acquisition strategy is really focused on buying communities versus buying individual single-off assets. James Colin Feldman: Okay. Alright. Thank you. Marguerite Nader: Thanks, Jamie. Operator: One moment for our next question. Our next question comes from the line of Brad Heffern from RBC. Your line is open. Bradley Barrett Heffern: Hello, Brad? Paul Seavey: Brad, you may be on mute. Marguerite Nader: Victor, maybe if you could move to the next caller, and then we could get back to Brad. Thank you. Operator: Yes. Our next question will come from the line of Eric Wolfe from Citi. Your line is open. Eric Jon Wolfe: Hey. Thanks. Maybe to follow-up on Michael's question at the beginning. Just trying to understand why the annual RV rental income goes from 4.5% in the first quarter, I think, around 5.4% for the rest of the year. Just trying to understand sort of why it steps up in the first quarter and stays at that higher level. Paul Seavey: Sure, Eric. The main driver of the moderate growth in the first quarter, RV and Marina annual rent growth, is the comparison to our first quarter 2025, which had a higher level of occupancy. You may remember we experienced attrition in the Northern Resorts as they came back in season in the '25. And that has some carryover impact to the '26. Eric Jon Wolfe: Gotcha. And so this year, tell me if I'm wrong, you're expecting, you know, normal attrition, normal turnover. Can you maybe just sort of tell us how much visibility you have into that? You know, if at this point in the year, have very good visibility because, I don't know, 80% of your annual customers have already signed a lease or something like that. I'm just trying to understand, you know, how much visibility you have into that normal attrition at this point and what we should be watching, say, over the next, you know, couple months to determine what that's actually gonna happen or not. Patrick Waite: Yeah. It's Patrick. It's reasonable to view the attrition as, you know, normal. That's the we had that we had that period of elevated attrition, you know, early last year. Just as a reminder, we send out rent increase notices in the latter part of the year that is there's a timing component, but that covers the Sunbelt and our northern properties. And we go we're going through a renewal process as we make our way through the back half of the year. So we have pretty good visibility at this point. I will note that in the in the North, there are some, the effective dates of those rate increases are typically April as we're entering the summer season. So there's, you know, there's renewals that occur at that point, but the visibility we have right now feel pretty confident that the elevated attrition that we experienced in the prior year is behind us. Operator: Thank you. One moment for our next question. Our next question will come from the line of Manu Szbek from Evercore ISI. Your line is open. Manu Szbek: Good morning. Operator: And we'll go on to the next question. One moment. Marguerite Nader: Thank you, Victor. Operator: You're welcome. Our next question will come from the line of Wesley Golladay from Baird. Your line is open. Wesley Keith Golladay: Hey. Good morning, everyone. I have a question on the hey. Good morning. Question on the domestic RV transient and seasonal customer. You think we're finally back to normalized numbers on that? Are we back to the trend line post-COVID? Patrick Waite: You know, we've had that question over the last several quarters as we work our way through, you know, the normalization of that business. You know, I think given what we're seeing with respect to early pace, I feel that we if we're not at it, we have some we certainly see some green shoots with respect to positive trends on booking base going into 2026. Wesley Keith Golladay: Okay. And then, on your expansions, are you targeting the higher growth Sunbelt markets for those expansions? Patrick Waite: Well, yeah, for the most part of it. That's where the largest concentration of our portfolio is. So the significant majority of our expansions have occurred throughout the Sunbelt properties. Marguerite Nader: And we do have we do have a small expansion in the North, in Minnesota, but other than that, they're basically in the Sunbelt. Wesley Keith Golladay: Okay. And then just one quick follow-up on that. On the lease-up, I know you delivered some on the MH side in the fourth quarter. What's the typical time to lease that up and get the occupancy up? Patrick Waite: I mean, it depends on the number of sites. So just at any particular community, you're filling in the range of, call it, you know, 20 to 30 a year, you're having a you know, that's a that's a good pace for, you know, selling manufactured homes to new homeowners in an expansion. Wesley Keith Golladay: Okay. Thank you very much. Patrick Waite: Sure. Thank you. Operator: Moment for our next question. Next question will come from the line of John Kim from BMO Capital Markets. Your line is open. John P. Kim: Thank you. This quarter, you provided new disclosure on MH occupied sites. At the beginning at the end of the quarter. So new disclosure is always good. The actual number went down, though, during the quarter. So I was wondering what contributed to the occupies going down just given occupancy growth has been a focus for your company. And just generally, I think occupancy in MH has been at its lowest levels in about ten years. And I'm wondering what has been driving that just given the demographic tailwinds that you talked about earlier. Patrick Waite: Yeah. John, it's Patrick. First, I'll take the quarter. The outcome for the quarter was really driven by our number of sites where we have depleted our home inventory. We're in the process of replenishing, which would be just ordinary course of business for us. And just the mix of, you know, move-ins and move-outs for the quarter. It was down about seventies, 10 basis points. I think to your point on the demand profile, we consistently see good demand, and we feel very positive going into 2026. So, I think that has more to do with just the timing of the quarter as opposed to any takeaway on the fundamentals. And just, you know, long term with respect to the view of occupancy, I mean, we continue to increase the number of occupied sites over the years. The percentage I appreciate, as we've talked about in the past, can fluctuate as we're bringing on expansion sites into the denominator. Marguerite Nader: And, John, that was the kind of the reason for that new disclosure just to be clear about those expansion sites. John P. Kim: Yep. That makes sense. Okay. So I'm asking on RV, today, minus seven degrees Celsius in Toronto. It's 22 degrees Fahrenheit in New York. And I know in the past, you talked about the colder weather potentially being a driver for transient and seasonal RV demand. It doesn't sound like you feel that bullish on that today. But just wanted to get your updated thoughts on the cold weather impact on RVs. Marguerite Nader: Sure. So we're obviously looking at it on a daily basis. Sometimes throughout the day. But what we've seen in the month of January, I think we've had only three or four days where we were not exceeding last year's pace. So really positive pacing and it really is corresponding to what we're seeing as the temperature is dropping. Our marketing team does a really good job of monitoring the weather in the North and leveraging predictions of difficult weather, which is not difficult to do now because all the weather has been difficult across the country. And encouraging the customers to escape the cold and, you know, visit our Sunbelt locations. So we look at those marketing tools or, you know, weather-related digital ads and organic posts, and that's generating some positive return for us as people try to escape this difficult weather. John P. Kim: Great. Thank you. Marguerite Nader: Thanks, Jen. Operator: One moment for our next question. Our next question will come from the line of Jason Wayne from Barclays. Your line is open. Jason Adam Wayne: Hi, good morning. Marguerite Nader: Good morning. Jason Adam Wayne: Yeah. Just looking at the rental home business. Had a nice year in '25, some growth there. So I'm just wondering what's the strategy there and that business one that you'd like to continue growing moving forward? Patrick Waite: Yeah. I mean, that's really gonna be based on what we see from a demand perspective. As we're replenishing new home inventory across the portfolio and filling expansions, you know, our first priority is to sell the home. And as demand is coming at us, we may very well accept rentals. Rentals is a positive business in that it exposes more and more prospects to be future homebuyers. And spend some time since we spoke about this step, but roughly 15 to 20% of our sales on property are to current residents. Those are either renters looking to own a home and become a home buyer, or current home buyers that are looking to either downsize or get into an upgrade on their home. Jason Adam Wayne: And then you also began disclosing the rental home operating expenses. So just so the 4Q increase was tied to those expansions then, it sounds like. But I'm just wondering how that's expected to trend this year why it was kind of down the rest of the year based on the disclosure. Paul Seavey: Yeah. The rental home expenses, it's essentially embedded in our operating expense growth assumption. And what we see in that business, yes, to the extent that we have incremental rental homes, we will see a higher level of expense relative to prior periods. There is also impact just on the mix of homes that are in the program, whether they're new homes that happen to be rented or homes that have previously been occupied, and the expense associated with the latter can be higher. So as that mix changes, we see a slightly lighter load on expenses. Jason Adam Wayne: Got it. Thank you. Marguerite Nader: Thank you. Operator: One moment for our next question. Our next question will come from the line of David Siegel from Green Street Advisors. Your line is open. David Segall: Thank you. Guidance for the MH portfolio seems to imply that the vast majority of growth is coming from rent growth and that only a small bump from probably occupancy or other income. And considering the higher level of expansion sites likely to be added this year versus last year, would it be fair to say that this implies occupancy will actually dip further this year? Paul Seavey: I guess I wouldn't think about it that way. We have a practice that we've used for quite some time not to make a specific assumption about occupancy gains in our guidance, and we've used that in building our model for 2026. David Segall: Thank you. And then just on RV performance in 4Q, it ultimately landed below the low end of the range for the quarter, although as of November, it looks like it was tracking at the higher end of the range. Considering that you mentioned that the Canadian booking pace was, you know, in line with what was discussed in October. I just want to try and understand what happened in December to cause performance to lag so much. Marguerite Nader: Yeah. I mean, what we saw in December was really weather effect going the other way. It was moderate temperatures kind of throughout the North, and we didn't see those bookings pick up like we had in previous years. So it's kind of the opposite of what we're seeing in January. Is what we saw in December. David Segall: Great. Thank you. Marguerite Nader: Thank you. Operator: One moment for our next question. Next question will come from the line of Omotayo Okusanya from Deutsche Bank. Good morning. Omotayo Okusanya: Morning. I wonder if you could talk a little bit about the campground membership results. Again, we kind of had another quarter where the membership count declined. I know in the past, it kind of talked about making it up with kind of better pricing and upgrades and things of that sort. I think even upgrade activity this quarter was a little bit light. So just curious, you know, what's kind of happening there? What does that tell us about overall demand, whether it's on the transient side or seasonal side? Just kind of trying to get some read-through from those results and how you're thinking about it going forward. Marguerite Nader: Sure. Thanks, Theo. So I think, you know, the Thousand Trails system has got about 80 properties with about 24,000 sites. And I think 108,000 members right now. And it's I think it's helpful. You've mentioned the upgrade, but I think it's helpful to just highlight all the pieces of the Thousand Trails business. We have our annual membership subscriptions where we sell those online and in the field. And that activity, I think, about half of that activity comes from online activity. You know, initial subscriptions are sold online. That's that $700 product that we've talked about, the entry-level product that has a set of benefits to stay at the location. That line item now also includes our new upgrade dues product, and in the year, we saw a healthy growth of over 5% in that line item. And then when you think about the Thousand Trails portfolio, you need to consider the annual piece of it, and that's where we see our members wanting to stay and have a more permanent stay at our communities. And that annual income has increased significantly over time, I think 7% or 8% over the last five years. And then as it relates to the promotional membership originations, which we highlight in the supplemental, we're seeing tractions on that. And those are trial memberships that's included in the sale of an RV. These are really just really great prospects for the annual camping passes at our properties. And we've seen an increase in conversion of those. And the conversion is the important piece because that's the piece where the customer starts to pay dues in the year following their initial membership. Omotayo Okusanya: Gotcha. So what's the piece that kind of still if I may use the word weak amongst all those moving pieces, it's kind of dragging down the counts and things like that. Marguerite Nader: Sure. So what we've seen is there's some attrition of the legacy members that were paying a lower dues amount, and we're bringing in new members that are paying a higher dues amount. And so that's what you're seeing in the in the Omotayo Okusanya: Gotcha. Thank you. Thank you, Dale. Operator: One moment for our next question. Our next question comes from the line of Eric Wolfe from Citi. Line is open. Eric Jon Wolfe: For taking the follow-ups. For the noncore income looks like it's dropping $3.6 million year over year. I think it's the same pool properties in 2026 to 2025. I was just curious what's causing that. Paul Seavey: Sure. We have $6.6 million in our guidance for six. That does compare to the $10.2 million that we recognized in 2025. The difference is really attributed to timing of insurance proceeds and the recovery of the storm-affected properties. There's just a timing difference there. Eric Jon Wolfe: Okay. So you expect to get it. It's just I mean, normally, when I think about business interruption proceeds, it's the pay for the business interruption that you're seeing. So you're saying that you expect to get at some point, it's just the timing difference. You already received it more in 2025 than you thought you would. Paul Seavey: Exactly. The recognition occurs when it's received. And that doesn't necessarily line up with when we would otherwise earn it. Eric Jon Wolfe: Okay. And then I think your historical practice has been to not include any use of free cash flow in your core FFO estimate, just confirming that that's true this year. And then, I guess, sort of practically speaking, is that $100 million of cash after dividends and recurring CapEx earmarked for anything this year? I assume perhaps you're just going to more sort of inventory growth, but maybe help us understand where that could go. Paul Seavey: Yeah. I mean, I've I've I've I guess I'll focus on the interest expense. And our assumption for 2026. I mean, certainly, we look at our debt in place at the '25, scheduled principal amortization during '26, and then how our line of credit will increase or decrease throughout the year. We don't make any change any assumption for a change in the short-term borrowing rate. But the funding of working capital investments such as you described, that comes from borrowings on the line of credit that exceed the free cash flow. So that includes purchasing homes for sale and rental in our communities, the discretionary CapEx that we have that includes expansion as well. Eric Jon Wolfe: Okay. Thank you. Marguerite Nader: Thank you. Operator: Thank you. And since we have no more questions on the line at this time, I would like to turn it back over to Marguerite Nader for closing comments. Marguerite Nader: Thank you all for joining today. Appreciate you taking the time and look forward to updating you on our next quarter call. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss fourth quarter and fiscal year 2025 results. [Operator Instructions] Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. Your host for today's call is Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Now first up is a year-end video. [Presentation] Operator: I would now like to pass the call to our host, Mary Winn Pilkington. Mary Winn, please go ahead. Mary Pilkington: Thank you, Elissa. Good morning, everyone. We appreciate your time and participation in today's call. On the call today, participating in prepared remarks are Hal Lawton, our Chief Executive Officer; and Kurt Barton, our CFO. We will also have Seth Estep, Rob Miles, John Ordus and Colin Yankee, joined the call for the question-and-answer portion. . Following our prepared remarks, we'll open the floor for questions. Please note that a supplemental slide presentation has been made available on our website to accompany today's earnings release. Now let me reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct, and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. As we move into the Q&A session, please limit yourself to 1 question to ensure everyone has the opportunity to participate. If you have additional questions, please feel free to rejoin the queue. We appreciate your understanding and cooperation. We will also be available after the call for further discussions. Thank you for your time and attention this morning. Now it's my pleasure to turn the call over to Hal. Harry Lawton: Thank you, Mary Winn, and good morning, everyone. Before we begin, I want to recognize our team members, first responders and local communities impacted by winter storm Fern. Our teams moved quickly to support our neighbors during challenging times and continue to do so, and it reinforces our role as a dependable supplier when our customers need us most. Turning to the business. The opening video highlights the progress our team made in 2025 and does a nice job of setting the context for the discussion that will follow in this earnings call. As with any year, 2025 was not without its challenges, and I want to thank our more than 52,000 Tractor Supply team members for staying focused on our purpose, operating with discipline and making the adjustments necessary in a dynamic environment while continuing to evolve the business. That work positions us to build on our strategic advantages and remain a consistent share gainer in an attractive market. Before getting into the details, I want to acknowledge that our fourth quarter results came in below our expectations. Results reflected a shift in consumer spending with essential categories remaining resilient while discretionary demand moderated and emergency response was absent versus last year. There were 3 primary drivers of our performance that I'd like to drill down on. First, as we cycled the benefit from last year's Hurricane Helane and Milton storm recovery, it became clear that it contributed more meaningfully to our results in 2024 than we had originally estimated. In contrast, 2025 was a historically quiet storm season with no hurricanes making landfall in the Continental U.S. for the first time in a decade. We now estimate this dynamic represented roughly 100 basis points headwind to comps, most pronounced in the South Atlantic. The second main driver was big ticket categories, excluding emergency response, and they experienced a step down versus our trend in Q3. Our inventory levels and pricing were competitive, and we do not believe we lost share in these categories. Instead, we believe customers were more selective and that some discretionary spending shifted towards categories outside of our addressable market in the fourth quarter. And lastly, performance across select holiday periods and seasonal categories such as holiday decor, toys, things like dogs, toys and snacks, power tools, they were below our expectations. And this reflected a highly promotional holiday environment, combined with softer demand. Again, we believe these dynamics were category-specific, quarter-specific and broadly consistent with what we saw across retail. At the same time, customer engagement remained healthy throughout the quarter and our consumable, usable and edible categories continue to perform very well, reinforcing the resilience of our needs-based model. We estimate we had 1 of our strongest quarters of share gain in Farm & Ranch, stayed disciplined on cost and continue to execute the fundamentals of the business while investing strategically in our growth priorities. Now let's transition to the fourth quarter and full year 2025 results. For the fourth quarter, net sales increased 3.3% to $3.9 billion, with comparable store sales increasing 0.3% driven by modest growth in average ticket. Fourth quarter diluted EPS was $0.43, reflecting the combined impact of modest sales growth, elevated promotional activity and continued investment to support our strategic initiatives. Our digital business delivered high single-digit growth. We posted positive comps in 11 of our 15 regions. However, this strength was offset by the 2 regions in the South Atlantic, which declined mid-single digits as I mentioned previously, we're lapping storm activity. Customer fundamentals remained solid during the quarter. Identified customer counts increased approximately 2%, while spend per customer moderated just slightly. From a category standpoint, consumable, usable and edible were strong, as I mentioned previously, and they delivered low mid-single-digit comparable growth, led by livestock, equine and poultry and wildlife supplies and our winter seasonal categories posted modest comp growth with cold weather conditions largely neutral for the quarter. Again, as I mentioned previously, this strength was offset by continued pressure in big ticket emerging response categories, which together declined high single digits. Turning to the full year. 2025 was a year of steady progress as we navigated a challenging and uneven retail environment. Throughout the year, we stayed focused on executing the fundamentals of the business, serving our customers well and advancing our Life Out Here 2030 strategy. Net sales increased 4.3% to $15.5 billion, driven by new store growth, the addition of Allivet and comparable store sales gains of 1.2%. Diluted earnings per share were $2.06, reflecting disciplined execution while continuing to fund strategic investments across the business. Total active customers and high-value customer retention continued to be strong and customer service scores once again reached all-time highs. Neighbor's Club continued to grow, with membership representing more than 80% of sales. Team member engagement remained high and turnover stayed near historic lows, particularly at the store manager level. On the technology front, our digital business continued to scale in 2025, delivering high single-digit growth for the year, and this performance reflects continued improvement in personalization and conversion as well as our delivery capabilities. More broadly on the technology front, we expanded our use of AI across the enterprise, including expanding our relationship with OpenAI. The capabilities are improving forecasting, inventory flow and team member productivity, helping us operate more efficiently and better serve our customers. A hallmark of Tractor Supply continues to be opening productive new stores. We opened 99 Tractor Supply stores and once again saw robust early new store productivity performance. Our distribution centers delivered mid-single-digit productivity improvements for the year while maintaining excellent safety and engagement results. We also opened our first bulk distribution center in 2025, and we broke ground in Idaho on our 11th DC. As part of our Life Out Here 2030 strategy, 2025 was a year of meaningful progress in building capabilities to support long-term growth. We focused on strengthening what we do best, while continuing to scale new initiatives that expand how we serve our customers and grow our share of wallet. On the stores front, we continue to embed localization into new stores and remodels with 160 stores localized as of year-end. With nearly 60% of our stores in the Project Fusion format, we continue to see attractive economics and improved customer relevance from our remodel program. We also advanced our final mile delivery initiative, which lowers the cost to serve online orders and expands our ability to fulfill larger, more complex orders. During the year, we increased capacity and execution, expanding to more than 210 delivery centers covering nearly 25% of our store base. In direct sales, we ended the year with approximately 50 sales specialists covering 375 stores. While both initiatives are still early, we're encouraged by the traction we're seeing in customer engagement, basket size and repeat behavior. In pet and animal prescriptions, 2025 was focused on building the foundation and integrating capabilities into the Tractor Supply ecosystem. While customer adoption progressed more gradually at the beginning that we have liked, Allivet accelerated throughout the year and delivered approximately $100 million in sales in the total year, reinforcing the customer demand in this category and the opportunity ahead. Taken together, these initiatives strengthen our foundation, improved execution and positioned Tractor Supply for durable long-term growth. As we plan for 2026, we are preparing for a wide range of demand outcomes. We're planning for continued net sales growth supported by new store openings and improved comp sales and better leverage as our investments mature. In our view, the broader environment remains uncertain with a wide range of potential consumer spending outcomes. We continue to see mixed signals, including an all-time high stock market and a strong projected tax refund season. However, that's alongside declining consumer sentiment and a robust national debate around affordability. These dynamics are not unique to Tractor Supply. We believe our needs-based model, strong customer relevance, scale and disciplined execution positions us favorably. And with that, I'll now turn the call over to Kirk for further insights on our results and our outlook for 2026. Kurt Barton: Thank you, Hal, and hello to everyone on the call. I'd like to start by walking us through the cadence of the quarter. Looking at comp sales, October started soft as we lapped the hurricane response, followed by a rebound in November as they got colder and the Hurricane lap dissipated. We entered the final 5 weeks of the year with relatively flat quarter-to-date comps. December, inclusive of Black Friday produced modest gains. All accounts, broader retail sales growth, especially general merchandise stepped down in December. Average ticket increased 0.3%, driven by approximately 2 points of retail inflation, offset by softness in big ticket categories and a decline in units per transaction. The retail inflation was primarily the result of a higher commodity cost environment and selective price adjustments as higher product costs flowed through our supply chain. The decline in [ UPT ] reflects the softness in certain discretionary seasonal and holiday categories. Turning to margins. Fourth quarter gross margin declined approximately 10 basis points year-over-year as ongoing cost management was offset by incremental tariffs, elevated promotional activity and higher delivery related transportation costs. The largest variance versus our expectation was the promotional environment, particularly around Black Friday and Cyber Week as customers were more deliberate in how they allocated their spending. Our view is that these promotions were transitory and specific to the operating environment in Q4. Stepping back for the full year, gross margin expanded 16 basis points, underscoring the underlying strength of our margin structure despite the more challenging dynamics. SG&A, including depreciation and amortization, increased approximately 70 basis points to 27.5% of sales, driven primarily by planned investments and fixed cost deleverage at the lower level of comp sales growth. These pressures were partially offset by continued productivity and cost control. Our expense management was a strong point for the quarter. SG&A inclusive of D&A expense increased 6% over the prior year, with nearly 2/3 of the growth rate attributed to new stores and the acquisition of Allivet, providing evidence of a more normalized cost structure. Operating income declined 6.5% year-over-year, reflecting the combined impact of the modest sales growth, gross margin performance and the investments to support our key strategic initiatives. Our effective tax rate for the fourth quarter improved approximately 250 basis points to 19%, primarily reflecting the timing of certain tax planning initiatives, including a federal tax benefit discrete to the quarter representing half of the rate reduction. Average inventory per store was up approximately 5%. About 1/3 of the growth reflects the impact of tariffs, the remaining portion of the growth reflects our deliberate actions to support customer demand and in-stock levels going into 2026. We remain comfortable with our inventory position. Taken together, while 2025 was not the year we had planned, some of the challenges we faced were largely transitory rather than structural. And we made meaningful progress strengthening the business as we head into 2026. Let me now turn to our outlook. We view the upcoming year as a period of normalization for the business. For 2026, we expect total sales growth in the range of 4% to 6%, driven by continued new store openings and improving comparable store sales. We expect comp sales growth of 1% to 3% supported by continued improvement in average ticket as AUR growth trends are expected to continue, along with modest transaction growth. From a gross margin perspective, we expect continued expansion driven by ongoing cost management initiatives, growth in our exclusive brands, retail media and continued supply chain efficiencies. These benefits are partially offset by delivery costs and tariffs. Overall, these positive gross margin drivers remain firmly in place. On the expense side, we expect measured SG&A deleverage. SG&A will experience some pressure from the opening of a new DC in the second half of the year and a more normalized incentive compensation burden in most quarters. After several years of elevated investment, we expect [ G&A ] growth to moderate and move more in line with sales growth this year. Taken together, we expect operating margin in the range of 9.3% to 9.6%, which implies we can maintain operating margin at the midpoint of the range. For planning purposes, we are assuming an effective tax rate of approximately 22% and interest expense that is generally consistent with 2025, reflecting our ongoing approach to disciplined capital structure and leverage. We are forecasting diluted EPS in the range of $2.13 to $2.23. As we manage the business, we are anchored to the midpoint of our guidance, while maintaining flexibility to respond to changes in the operating environment. Net capital spending is expected to be in the range of $675 million to $725 million, with the majority focused on growth initiatives. We plan to open 100 new stores that are low-risk, high-return organic growth opportunities. Our new store pipeline is robust, and we expect to see greater consistency of openings across the year. In 2026, approximately 50% of our new stores will be fee development, which continues to provide cost efficiencies, improved site quality and more favorable long-term economics. We also expect share repurchases between $375 million and $450 million, representing approximately 1% to 1.5% of shares outstanding. While we remain focused on supporting our strategic priorities, we also expect those investments to increasingly self-fund. Our capital allocation priorities remain unchanged. We will continue to invest in our flywheel, new stores, remodels, supply chain capacity, digital and newer growth initiatives like direct sales and final mile delivery while maintaining a competitive and growing dividend, consistent share repurchases and a strong balance sheet. Overall, we believe this positions Tractor Supply to continue executing effectively and deliver long-term value for shareholders. As always, we view our results in halves rather than the quarters given the seasonality of the business. Turning to the calendarization of key line items. We currently expect comp sales performance to be relatively balanced across the year, with each half contributing relatively equal to the comp sales growth. We expect every quarter to be within the range of 1% to 3% growth. We are planning for a more normalized spring season, which would result in a rebalancing of sales between Q2 and Q3. While the first quarter began against tougher comparisons, recent winter weather has supported demand across our core categories. That said, importantly, a majority of the quarter remains ahead of us, with March representing more than 40% of first quarter sales, and each successive week becoming more impactful as spring conditions emerge across the country. From a margin standpoint, we expect gross margin performance to be stronger in the second half of the year as comparisons ease and benefits from our new distribution center begin to flow through. SG&A deleverage is expected to be modestly higher in the first half, driven by an earlier cadence of new store openings, a more normalized incentive compensation and the lapping of strategic investments, which ramped up near midyear 2025. We expect the cost of the new Idaho DC to add approximately $10 million of incremental expense on the year, most of this in the second half. We anticipate Q1 EPS to be comparable to the prior year as it bears a heavier burden of these 3 key SG&A factors I just mentioned. Given the prior year's compares, we expect stronger EPS growth in Q2 and Q4. So stepping back for a moment before I wrap up, I want to address the underlying earnings power of Tractor Supply. While our recent earnings performance has been influenced by our comp sales trends, we have been transparent that the backdrop has not been conducive to achieving our long-term outlook. We continue to believe the company is capable of delivering 3% to 5% comparable store sales growth over time. As that growth materializes, operating leverage naturally follows. Our model shows an inflection point in the low 2% comp range. As comps move above that inflection point, we would expect operating margin to improve by roughly 5 to 20 basis points per year. This will allow us to progress back towards our target operating margin over time, consistent with our long-term framework. To close, we remain focused on execution, productivity and advancing our Life Out Here 2030 Strategy, and we believe the actions we are taking position the business for durable long-term value. Now I'll turn it back over to Hal. Harry Lawton: Thank you, Kurt. As we begin 2026, we're staying focused on what is resonating most with customers across retail, value and essentials. Needs-based products are a core strength for Tractor Supply. We are effectively the grocery store for our customers' animals and pets with the scale, frequency and relevance that come with that role. That allows us to lead on value, invest with confidence and remain the dependable supplier our customers rely on every day. While much of the country is still in winter mode, spring will be here before long, particularly for Southern markets. As that transition unfolds, we're committed to being a dependable supplier for our customers' spring needs while also bringing meaningful innovation and newness across the store to keep Tractor Supply relevant and differentiated. This year, Chick Days will be bigger than ever with more stores participating and more selling weeks. Chick Days is retail theater like no other. It continues to be a powerful traffic driver with existing customers and a gateway for new customers, particularly [ backyard home centers ] and hobby farmers. This year, we're leaning into chick health and wellness, expanding breed assortments and deepening education support for both new and experienced poultry customers. We're also extending Chick Days online to 365 days a year, and expanding our exclusive ImPECKables brand with more functional treats and toys. Taken together, these efforts reinforce Tractor Supply as the destination for poultry while driving differentiation, value and engagement across channels. As we prepare for the spring selling season, we're leaning into targeted newness in the categories where customers are actively investing. That includes refreshed assortments in lawn and garden on our exclusive Groundwork brand, including expanded outdoor living and grilling accessories and also a stronger, more curated [ riders presentation ] in our flagship stores featuring Bad Boy, Cub Cadet and Toro. We're also creating a dedicated in-store destination for outdoor power equipment and battery power tools, bringing together leading brands like Husqvarna and Dewalt, Toro and Dreamworks to make it easier for customers to shop and complete their projects. By midyear, we'll also be rolling out expanded outdoor and wildlife recreation aisles in approximately 500 stores. This includes a broader field and stream presence, extending beyond hardgoods into apparel and footwear, along with a more complete assortment of food and supplements to support wildlife feeding and recreation. These updates strengthen our relevance with customers who live and work outdoors and reinforce Tractor Supply as a destination for both everyday needs and seasonal pursuits. Beyond Outdoor and Wildlife, we're also expanding our fresh pet food offering following a successful initial pilot with plans to add Fresh Pet to additional stores by midyear and continue building from there. At the same time, we're investing in our 4health private brand, including refreshed packaging, new fresh food products and updates to lines such as Shreds and Untamed. And Pet & Animal prescriptions with Allivet. We're focused on deeper integration, embedding prescription in our Vet clinics and pet wash experience and strengthening our subscription offering on tractorsupply.com. As we move from spring into summer, we'll then layer in seasonal moments like our Ameraucana program, combining patriotic assortments and in-store experiences with continued focus on value and care for animals. Taken together, these efforts reflect our ongoing investment in private brands and curated assortments that strengthen value, support margins and reinforce our role as a dependable supplier. Combined with continued investments in our core flywheel, we're advancing our Life Out Here 2030 Strategy and strategic initiatives. Two of our highest priority initiatives are direct sales in Final Mile, which are gaining traction and becoming increasingly important in how we serve customers with larger, more complex and needs-based purchases. In direct sales, we're continuing the rollout of this initiative, including building the capabilities, tools and operating discipline needed to scale along with plans to approximately double our sales force over the course of the year. Turning to Final Mile. Our focus in 2026 is on lowering the cost and improving the efficiency of our digital order delivery while enabling large and bulky store purchases and supporting direct sales. To do that, we're planning to add more than 150 new hubs this year, take us to approximately 375 hubs, covering more than 50% of our stores by year-end. One way to think about that level of coverage is that it gives us last-mile delivery capabilities across more than 1,200 stores and reaching over 15 million customers. We are also increasing utilization of our own delivery network while further integrating with gig providers, allowing us to optimize final mile execution and lower our cost per delivery across all channels. While both direct sales and Final Mile are still early, we're encouraged by the progress we're seeing and the role these capabilities can play in expanding how we serve our customers. Importantly, they sit behind continued investment in our core growth engine, including opening approximately 100 new stores, advancing our store remodel program with roughly 160 to 175 Fusion projects with localization, expanding distribution capacity with our new Idaho DC and continued investment in digital capabilities. Taken together, these investments support a disciplined, balanced approach to growth and represent meaningful long-term opportunities as we work to address a larger share of our approximately $225 billion total addressable market. To close, we remain confident in the long-term opportunity for Tractor Supply. We operate a differentiated needs-based model that has proven resilient across cycles, and we continue to gain share in a highly fragmented market. The actions we're taking, investing with discipline, strengthening our core and scaling our capabilities thoughtfully support a year of greater normalization in 2026 and position the business to deliver more consistent performance and create long-term value for our shareholders. With that, thank you for joining us this morning. We'll now open the call for questions. Mary Pilkington: Thank you, Hal. Before we move to Q&A, one note for planning purposes. Due to a scheduling conflict, we will release our first quarter 2026 earnings on Tuesday, April 21. For the balance of the year, we anticipate returning to our normal reporting cadence. We just wanted everybody to be able to get that on their calendars now. With that, I'll turn it over to Elissa to begin our Q&A session. Operator: Thank you, Mary Winn. [Operator Instructions] Our first question comes from the line of Steven Zaccone with Citigroup. Steven Zaccone: I wanted to start on gross margin. So it sounds like for '26, you're still expecting expansion, is going to be second half weighted. Should we anticipate gross margin decline in the first half? And then specifically on promotions, what gives you confidence that the promotions will be confined to the fourth quarter and that persist to the 26? Kurt Barton: Steve, it's Kurt. Yes, thank you for the question. To your point on gross margin, gave guidance on, our expectation is that we can continue to expand gross margin. The fundamentals of our gross margin initiatives are still very solid. There is a stronger opportunity for expansion in the back half of the year, but we are not anticipating gross margin retraction in the first half of the year. The puts and takes that we described on fourth quarter, as I mentioned, very transitory. Our gross margin initiatives, our cost management is still producing a strong opportunity for gross margin expansion, albeit modest particularly in the first half of the year. Operator: The next question comes from the line of Jonathan Matuszewski with Jefferies. Jonathan Matuszewski: It sounds like 1Q started against tough comparisons, but you saw some outsized demand due to winter storm Fern recognizing that March is a large chunk of the quarter, with each quarter anticipated to be between 1% and 3%, is that to suggest the quarter-to-date trend is in that range? Or could you just clarify maybe how the first couple of weeks in the quarter in aggregate are trending? Harry Lawton: I think you've encapsulated it pretty well. As you mentioned, the first few weeks, we were lapping winter weather from last year in storms and it was warm in the first 3 weeks of this year. And so we had offsetting comps there. And then, of course, with Winter Storm Fern, we had the flip where we were having strength due to storm preparations and storm recovery on top of some warmer weather last year. Case in point on the volatility that often happens in the beginning of the year, this week, as an example, last year was the warmest in 35 years, and then week this year is the coldest in 35 years. So you get these extremes in the first part of the year. But net-net, to your point, we are tracking at above our plan for the quarter-to-date. But as you said, there's still a lot of sales left to go. The month of January is like 30-ish percent of our sales. The month of March is 40-ish [indiscernible]. We certainly need the weather to turn in the south in late February to deliver on our plan for March. But in addition to spring coming on, which we know happens every year, just in a little bit different time, we're optimistic about the potential for tax refunds this year and I think that could be very similar to say 2018, and that would be the majority of that benefit would also be in the first quarter. So there are a number of things as we look out at the balance of the 7 weeks to go in the quarter that give us optimism but feeling good about the quarter so far, yes. Operator: The next question is from the line of Bobby Griffin with Raymond James. Robert Griffin: I just want to maybe talk about the discretionary weakness you referenced. I'm just curious, like, can you unpack that a little more? Do you think there's been a step function change where your customer, the more rule-based customers started to feel maybe some of the pressure other areas in this country felt across retailer? Or Is It really just weather-driven? Is anything there to help us understand that and what the maybe drivers will be for that to get better in '26 and beyond. Harry Lawton: Bobby, when we reflect back on the discretionary for Q4 and a bit of the step down that we saw there, we do think that was specific to Q4 using the word transitory, I guess. And kind of hit on a few things there. First, a lot of it was emergency response as we called out which is being specific to that quarter. The second one was really around kind of these like seasonal holiday categories that we really only participate in Q4 in. And so things like toys, holiday decor. Some of the -- even like in like dog snacks and dog treats, you see like a lift in those last 2 weeks kind of that are discretionary in their orientation. We just didn't see that. But as we head into 2026, we feel very good about our business. Just based on Jonathan's question, just gave a little bit of a summary of how things are playing to date in the quarter. We feel very good about our big ticket plan for the spring. We've had 2 successful seasons in riders, even with kind of broader big ticket pressure in the market. So I feel very good about our setup as we head into the first half of this year and do think most of the step down we saw in Q4 was kind of onetime kind of transitory type things that happened in the month of December. And I think you'll hear that a bit more across retail as it comes out. I mean, by all accounts, December stepped down versus the year-to-date and quarter-to-date if you look at almost any external data, as it relates to retail sales. And in particular, you see that in general merchant and big ticket as well. You see -- you saw kind of low price point gifting, things like beauty, and others have a good December. But I think most -- across most categories that were big ticket, you saw a pullback in December . Operator: The next question is from the line of Kate McShane with Goldman Sachs. Katharine McShane: Kurt, we wondered if you could walk us through the cadence of how you see tariff costs rolling in here maybe in the first half and how you're managing pricing as a result. Kurt Barton: Yes, Kate, I'll share a little bit of what our assumptions are in 2026. And in summary, I'd say there's not that much variation to what we saw in the second half of 2025 as we've said before, we feel like we're basically halfway through the process of cycling through tariffs, tariffs have had at its base rate anywhere from 20 or 30 basis points of pressure. We've been able to offset that through great cost management initiatives. In some cases, there are some -- there's price increases selectively like I mentioned in there. And we would anticipate that the impact in the second and the first half to be very similar. It's one of the key drivers of the average ticket increase. As we mentioned, there's some level of inflation in AUR. The biggest portion of that would be related to cycling the tariffs in the first half of the year. So not that much different. We step back, we look at -- at the tariff piece of the business, the team managed it really well, been able to maintain our margins related to that, and we anticipate similar in the first half. Operator: The next question is from the line of Michael Lasser with UBS. Michael Lasser: You have expressed a lot of optimism that the model can eventually return to the algorithm. So under what conditions, economic or otherwise are necessary in order to restore the comp growth back to 3% to 5%, what's a reasonable time frame for that? And is the challenge today versus 10 years ago, that tractor has just achieved so much productivity gains during the last decade through all the initiatives deployed such that it's just going to be more difficult to generate the type of growth that the market had been accustomed to in the past because of the base being so much bigger in the market share being so much larger today? Harry Lawton: Michael, thanks for your question. Good to speak with you this morning. We remain very committed to our long-term algorithm on our comp sales. We feel like we're on track and a path to return to those comp sales. And we think we've got the full suite of activities necessary to deliver that, including big investments we made in our core flywheel everything ranging from our DC capacity to all the investments we made in our stores and our remodel programs. Our new stores continue to provide excellent maturity curves, and we've got a number of our strategic initiatives as well. So we feel like the toolkit that Tractor Supply has had for the last 20, 30 years is a tried and true tool kit. We continue to add to it like we always have and feel very confident in our long-term algorithm. We think we're on the path back to that. Operator: The next question is from the line of Robert Ohmes with Bank of America. Robert Ohmes: I was hoping you guys could actually talk a little more about the direct sales model and the profitability now, and it looks like you're going to keep ramping it up. Is there a how do we think about how many stores, how many sales specialists, what the -- how big it needs to be to really become profitable? John Ordus: Yes. Thanks for the question. First, I'll just tell you, I'm very pleased with our performance so far. We saw volume average sales per rep, transaction value, average transaction volume, all increased in the month and in the quarter. In December, we finished with sales of over $2 million. We're seeing a month-to-month-to-month ramp as similar to new store maturation curve. Our growth is structural. Our direct [ sales app ] is core growth engine for us. Our people and our process investments are delivering returns, and we're seeing strong momentum exiting Q4 into 2026. 75% of our specialists are external and they're bringing this book of business with them and they are strong at selling. They all live the lifestyle, and they all have an average of 11 years of experience in the farm and ranch industry. And in the month of December, we had our first $1 million specialist. So I was able to go travel with that person. I could tell you just like phone calls throughout the day, the relationship he had with his clients, [ everybody call them ] all the stuff they need. You can just see that relationship building and building and building there. As we look into 2026, we'll continue to invest in technology and training. We'll double our specialist count, as Hal mentioned. We have found that smaller training classes have been better than the bigger classes, and we're able to do more one-on-one training. And we're targeting around $50 million in sales in 2026. I also mentioned that we ended the year with just under 50 sales specialists. We've hired 9 at the end of December going into January, and we'll continue to build as this year goes on throughout the year. Operator: The next question is from the line of Peter Benedict with Baird. Peter Benedict: I wanted to follow up on an earlier question. Just on the inflation with, I guess, 200 basis points, a lot of that [ you're seeing ] with tariffs. I'm just curious if you could talk about the commodity side of that and what you're seeing and what your outlook for 2026 includes from a commodity standpoint. And then my other question is just around the garden centers, you're about 32% penetrated. What's the outlook there? Any plans to go faster or slower? Just kind of an update on that initiative? Harry Lawton: Peter, Seth will take the first question on inflation and then I'll take the question on garden centers. Seth Estep: Yes. Peter, it's Seth. Thanks, Hal. As we look ahead to this year -- as we're looking at comp sales, some of what we put in the guide is we do anticipate a little bit of inflation, that kind of potentially at 1% to 2% range from an AUR perspective to really help drive that from a comp perspective with some modest obviously, transaction gains with that. . And that's kind of a blend, right, with commodities trading kind of within a range in which we manage kind of every day. It's corns within that low to mid-4s, which we feel very comfortable with, with that outlook right now. And as we look ahead, as we strategically manage our kind of pricing, we'll continue to monitor how much is being driven by traffic, how much is being driven by AUR, and we'll continue to flex up and down accordingly. But yes, some modest continued inflation as we look ahead and the guide to deliver on that [ comp sales ] goal this year. . Harry Lawton: And then circling back on Garden Centers. I'll start off by just saying we remain very pleased and committed to our being in the business of live goods and kind of the outdoor garden business. As expected over the last 5 years, the way we go after that has -- continues to evolve. So we have -- and we talked about this a little bit before, but we have kind of our now really large live goods, garden centers. We've got kind of a medium in size, we have a smaller size. And then we also have another solution set where we do pop-up tents out in our stores. And so gotten really good in our real estate model over the last few years of deciding which one of those solution sets is best for each store and then we deploy it as such. And as I mentioned, in my opening remarks, we'll have well over 1,000 stores this year that we -- between garden Center Stores and pop-up garden centers, and we feel really good about it. And Live Goods is one of our best-performing categories last year as a business. Operator: Our next question is from the line of Oliver Wintermantel with Evercore ISI. Oliver Wintermantel: How should we think about the lap of sales leaseback benefits? And as we move through 2026, should we expect any incremental contributions next year? Or does the comparison become neutral? Harry Lawton: Ali, and Kurt can jump in here if we need to get anything to the. Some of the core details of it. I would just say, in general, the sale leaseback is going to be flat year-over-year from an operating income benefit. What I'd love to do is just step and just talk about how successful our real estate model that we introduced 2 summers ago is going. We are now doing own development on 50% of our new stores that is providing 2 sets of benefits. One, the dollars that we would normally pay a developer, we're now able to reinvest that back in the store. That's saving us somewhere in the high single digit, call it, 10-ish percent in total cost to build. And then we're also essentially procuring a lot of the materials that go into building our stores, and we're getting high single digit, call it, 10-ish percent savings there as well. So we are getting significant savings from the cost of building a new store that continues to allow us to deliver high IRRs. And now when we're in the market starting to sell some of those owned stores, we're seeing really strong cap rates on those as well. So the strategy has paid off in spades and more. We're very pleased with the results and the returns it's getting and the capital impact, the operating income impact, et cetera. I just can't say enough about the work that team is doing and the impact it's having on the company. Operator: The next question is from the line of Michael Baker with D.A. Davidson & Company. Michael Baker: Can you talk about the timing of when you start to leverage some of the investments that you've made over the last few years. For instance, you're saying that delivery will still be a drag this year. At some point, I think the final mile investments you're making start to leverage themselves. Similarly with the [ Big Barn ] initiative, just wondering when we see a, I guess, would be a lower comp breakeven point from leveraging the past investments? Harry Lawton: Michael, and thanks for the question this morning. I'll just start off by saying at a low 2% comp, I think that's a really good inflection point for retail. So that's why we're emphasizing it and putting it out there so folks kind of have that in their model. So I feel really good about that. And I think that stands tall in retail in terms of the right comp percent to be inflecting on your operating margin. . Specific to the initiatives, on Final Mile, there are -- there is no kind of incremental operating expense being attributed into that this year. That -- while we're expanding it to twice the number of stores this year and getting to 50% store coverage, it's basically last year's benefits are paying for the rollout for this year. Incremental to that, there is significant cost savings that, that initiative will capture this year related to freight. Specific on freight that we use for Roadie and also -- which is our gig provider as well as freight that we use to ship goods from our DCs that will now ship through our stores and then out to the customer for the Final Mile. And those are $10-ish million a year in savings that help improve our gross margin, but then also fund that initiative. So that initiative in many ways is kind of self-funding itself as it goes. On the same front, direct sales is doing the same thing. As we talked about last year, we invested around 10 basis points of margin rate between those 2 initiatives. They are not further dilutive this year. on final -- direct sales, it's the same way. As Jon mentioned, we're going to double the class from this year, last year 50 to next year 100. The class of last year of 50 is basically paying for the investment of the next 50 this coming year. And so there's not incremental dilution on either one of those from a rate perspective, and that's what allows us to achieve that breakeven just above the 2% comp run rate. Operator: The next question is from the line of Chris Horvers with JPMorgan. Christopher Horvers: So I wanted to take the other half of that question. So as you've scaled out the [ self-help ] benefits from prescriptions and Final mile And direct sales, how do those build? Like when do you think that will become sort of a greater portion of the comp such that the overall trends become a lot less macro sensitive. Is there an inflection as this year progresses? And how does that look then in '27? And any quantification around that would be really helpful. Harry Lawton: Yes. Thanks for the question, Chris. And what I'd say is if you take -- well, first off, I'd start by saying we expect those initiatives to provide material benefit this year in our comp. And they did have some nominal benefit in our comp last year. Last year at the beginning of the year, we kind of said, "Hey, look, don't -- we're going to get these things ramped up. We're making some investments in them. You'll be able to -- we'll be able to see some of the sales, but we're not going to be sharing those a lot, just because we wanted to get ramped up and get in a good spot. This year, we feel like those are off and running. As Jon said, we have 50 sales reps last year. We had the first 1 to hit $1 million. We did $2 million in the month of December. We eclipsed that rate in the month of January. So we're seeing the right pace and cadence there. You guys can do the math on that. If you think about the number of reps and the pace we're running at, you can see the dollars that we would roughly be targeting this year, and that starts to have a material 40-ish basis point impact on comp. And the same thing starts to happen in Pet and Rx as we start to scale that up as well, and we start to see the strong growth rates we see in there, and then that starts to add to it as well. And so feeling really good about these initiatives. And Final Mile, as we talked about, is really it has 3 purposes. It's driving cost down on our delivery. It's enabling the direct sales as well. But really, it's also providing a means for us to be able to fulfill future demand as delivery becomes more and more a way of life for everyone. So feeling great about all 3 initiatives. They're all on track and doing really well. Operator: The next question is from the line of Peter Keith with Piper Sandler. Peter Keith: Hal, I was hoping you could talk about the pet food category that was not called out as an area of outperformance within Q. I think there's been some concern out there with investors of maybe market share loss or maybe the category seeing deflation. What specifically did you guys see in Q4? And what are you expecting for pet food in '26. Seth Estep: Peter, this is Seth. Thanks for the question. relative to Pet, I would approach Pet and how we're thinking about it in kind of 3 different kind of frameworks, particularly as we look ahead for kind of 2026 and beyond. The first thing I would just say is Pet does not have to over deliver an outsized growth for us to achieve our overall comp targets. We're needs-based, multi-category retailer. We have a history of balancing our full portfolio to deliver our comp growth rates. And there's not -- we're really not relying on any single category kind of going forward. The second way I'd look at Pet is also from a share perspective. We're not seeing any indication that we're losing share in pet. We're holding our own, we might not be at the outsized pace that we were over the course of the last couple of years, but the data that we get is a very data-rich industry that we're holding our own. We're holding trips. Our customer remains very engaged in the category. For an example, last year, we saw over 2 million pets come through our pet washes. Our PetVet clinics grew in sales over 20% in those stores. So we're seeing really good engagement from our shoppers in the category itself. And then third, I would just say, hey, we're excited about what's ahead. I mean from the assortments, from the layouts, we're focusing on more localized assortments, making sure that we're allocating brand and space in our stores to the brands that fit kind of regional preferences in a given market. As Hal mentioned as well earlier, we're continuing to expand kind of fresh and frozen into that category. That is the fastest-growing category in the space, and we'll have a few hundred stores this year in that particular area as well. And we're constantly looking to revitalize our brands as well, like for Health, continuing to see that kind of customer engagement and interaction. And as the category returns to kind of historical growth, we feel like we're really well positioned to continue to maintain our share and being in a position to grow share long term here as well. So thanks for the question. Operator: The next question is from the line of David Bellinger with Mizuho. David Bellinger: Maybe a bit bigger picture, but you mentioned some of these initiatives layering in for 2026, even maybe 40 basis points of comps from direct sales is very incremental. But if we back some of these things out, why is the core business of Tractor sort of underperforming now? We're talking about a wider range of outcomes. These outcomes basically widening out. And plus, can you square that away with some of this increased promo activity we heard about in Q4. Is that something contained to the period or something that we could see bleed into 2026 as well. Harry Lawton: David, thanks so much for the question. We are very excited as we enter the year 2026. I think as always, as we commented, there's a wide range of outcomes, we think that are allowable for the year. And I think we're starting in the right prudent mentality. As it relates to promos, we really haven't seen that carry over into 2026. I admit there's been a lot of volatility in retail for these first 5 or 6 weeks. And so I think time will tell on that. But to date, we've not seen that carryover. We all -- I would say all already have most part, our spring plans already laid out, and we're planning for a more normalized environment on that as well. But certainly, we'll be prepared to respond if necessary. But I'd just start out by -- just close by just saying we're feeling very optimistic about 2026. We like the setup we have coming into 2026. The first 5 or 6 weeks have been a nice start to the year. We're optimistic about the potential for tax refunds. We're optimistic about the potential for a strong spring after 2 tough springs. We think we've got a lot of strategic initiatives underway. Our team is engaged. Supply chain has never been better. Stores have never been operating better. We think we've got a great setup as we head into 2026 here, and we're looking forward to getting into the year and coming back and reporting on some strong actuals for you. Mary Pilkington: Listen, we've hit the top of the hour, maybe even going a minute past. So we'll go ahead and call it now and wrap the call up. I do want to thank everybody for joining us. And as a reminder, we look forward to speaking with you again during our Q1 earnings on Tuesday, April 21. As always, please don't hesitate to reach out with any questions. Thank you for your time and attention today. Operator: This will conclude today's conference call. Thank you all for your participation. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to Exco Technologies Limited First Quarter Results 2026. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, President and CEO, Mr. Darren Kirk. Darren Kirk: Thank you, Josh, and good morning to everyone joining us. Welcome to Exco Technologies Fiscal 2026 First Quarter Conference Call. I'll begin today with an overview of our operations and strategic progress. I will then hand it over to Matthew Posno, our CFO, to review the financial details for the quarter. Afterwards, I'll return to discuss our outlook before opening the call for questions. Before we proceed, I'd like to remind everyone that our discussion today contains forward-looking information. I ask that you refer to the cautionary notes included in yesterday's news release and in our continuous disclosure filings, which apply to today's discussion. We are pleased to report a solid start to fiscal 2026, and a global environment still characterized by economic fluidity and shifting trade policies, Exco delivered consolidated sales of almost $150 million for the first quarter, an increase of 4% over the prior year. More importantly, we translated this top line stability into bottom line growth with net income rising to $4.8 million in earnings per share reaching $0.13, up from $0.11 a year ago. This performance underscores the resilience we have built into our business model, capitalizing on relatively stable vehicle production volumes, while navigating tariff-related uncertainties, our diversification strategy and our relentless focus on operational efficiency are bearing fruit. We are seeing incremental benefits of our intense capital investment cycle over the past few years as our newer facilities ramp up and our cost structures optimize. Let's look at our segments, starting with automotive solutions, where we saw a very encouraging turnaround this quarter. The segment posted a robust sales growth increasing 10% over the same quarter last year. To add some color to this performance, we are seeing a return to normal in the inventory channels. If you recall, in the prior year quarter, we faced a significant headwind from customers destocking their accessory inventories. That pressure has abated, and we are now seeing a cleaner run rate that better reflects actual end market demand. This growth was further bolstered by relatively stable automotive production volumes in both North America and Europe, alongside a favorable vehicle mix. We have substantial content on larger SUVs and crossover platforms. And as these continue to sell well, we benefit. But the real story here is on the profitability side. Pretax profit surged 37% to $6.5 million. This wasn't just about higher sales giving us better overhead absorption, though that certainly helped. It was about execution in the face of persistent inflation. As many of you know, labor costs in Mexico have been a structural challenge for the entire industry due to sharp government-mandated minimum wage increases. I am incredibly proud of how our management team have handled this. They didn't just absorb the cost they offset it. Through aggressive productivity improvements and the development of new automation, we managed to keep our overall labor cost effectively flat compared to the prior year despite those wage hikes. This is a significant operational win. We are also being much more disciplined on pricing. We do not chase volume for volume's sake. On new program launches, we are ensuring that our pricing reflects the reality of today's higher economic and input costs. This pricing discipline, combined with our stabilized cost structure gives us confidence that we can sustain and improve these margins even if the broader global economy softens. Turning to the Casting and Extrusion segment. Sales for the quarter were $70.2 million, down slightly by 2% compared to last year. It is important to flesh out the drivers here as the top line numbers math some significant shifts in the market. Sales were negatively impacted by a sharp slowdown in die cast molds, which was largely a reaction to the political landscape in the United States. When President Trump returned to office many OEMs paused or even canceled than current programs to assess the new regulatory and emissions landscape. Consequently, they pivoted aggressively away from pure EV platforms, which hurt our immediate pipeline of EV programs and have since refocused their efforts on hybrids and internal combustion engine vehicles. The good news is that the dust is settling. Tooling demand for these hybrid and ICE platforms has picked up substantially in the past quarter and our quoting activity is currently very strong. Given that lead times in this business are approximately 6 months, we expect die cast tooling revenues will begin to pick up late in Q2 and then continue to improve for the remainder of the year. And while the EV time line has shifted, electrification is continuing to move ahead, albeit at a slower pace. We remain confident that demand for Giga and mega casting applications associated with EV will rise in the future from a number of customers. And beyond automotive powertrain and structural applications, we are seeing a pickup in die cast demand in other sectors. We are seeing activity in marine, heavy trucks, energy and even telecom, which provides additional growth drivers and helps diversify our revenue base. Finally, the onshore of tooling remains a significant tailwind for us. As supply chains regionalize, we are extremely well positioned to capture that volume as well. On the extrusion side, the business continued to perform well. I'd like to add some color to the dynamics of this market as it has proven to be incredibly resilient. There are many shock absorbers built into this industry, because the ultimate applications for aluminum extrusions are so diverse, ranging from building and construction to automotive to consumer goods, weakness in one area is often offset by strength in another. But beyond that, there is a countercyclical dynamic that plays to our benefit. When general extrusion activity slows, extruders tend to accept shorter production runs and more complex jobs to keep their presses utilized. These complex short-run jobs are actually more tooling intensive, which drives incremental demand for our guides. Furthermore, in slower market conditions, we often see demand for our capital equipment items increase. Extruders used these quieter periods to focus on maintenance of their operations and upgrade to efficiency, which benefits our Castool business. Finally, we are seeing a powerful new demand vector emerging, the rise of artificial intelligence and data centers. These facilities generate an immense heat and require massive amounts of aluminum extrusion for cooling solutions such as complex, heat sinks and structural racking. As the build-out of this digital infrastructure accelerates, it is driving demand for high-precision aluminum extrusions and by extension, our advanced tooling. Before I discuss capital allocation, I want to highlight something that underpins all of these results, the incredible culture of innovation we have fostered at Exco. Innovation is not just the department here. It is woven into our DNA from product development to process automation. I'm incredibly proud of my teammates across the company for driving these advancements. We are seeing this clearly in our leadership with additively produced tooling, but also in less visible yet equally critical areas. For example, we are now utilizing machine learning and AI to automate complex programming tests, reducing human error and speeding up our workflows. There are numerous examples like this across the company, where our teams are challenging the status quo, whether it is deploying increased automation in our Automotive Solutions group are utilizing 3D printing to solve complex cooling challenges for our die cast customers, this culture of innovation is what allows us to stay ahead of the curve and deliver value even in challenging markets. With our major growth capital initiatives now largely complete, we are pivoting our capital allocation strategy. You will see capital spending trend below historical averages as we prioritize harvesting the returns from these investments. I will now turn the call over to Matthew to discuss the financial highlights in more detail. Matthew Posno: Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales for the first quarter ended December 31, 2025, were $149.5 million compared to $143.6 million in the same quarter last year, an increase of $6 million or 4%. Foreign exchange movements increased sales by approximately $1 million, primarily due to the strengthening of the euro versus the Canadian dollar. Consolidated net income for the quarter was $4.8 million or $0.13 per share compared with $4.2 million or $0.11 per share in the prior year quarter. The effective income tax rate for the quarter was 31.8% compared to 35.8% last year, reflecting geographic mix, foreign tax rate differentials and losses that cannot be tax affected for accounting purposes. Quarterly consolidated EBITDA was $17.4 million, representing 12% of sales compared to $16.7 million or 12% in the prior year period. First quarter sales in the Automotive Solutions segment were $79.3 million, up $7.2 million or 10% from the prior year quarter. The increase reflected relatively stable automotive production volumes in North America and Europe, new product launches, a favorable vehicle mix and the impact of inventory destocking in the accessory channel during the prior year quarter. Sales should continue to benefit from recent and upcoming program launches, which will further increase content per vehicle and quoting activity remains encouraging. Pretax profit for the Automotive Solutions segment was $6.5 million, an increase of $1.8 million or 37% from the prior year quarter. The improvement was driven by higher volumes and favorable mix supporting improved overhead absorption. Labor costs in Mexico remained an industry-wide challenge due to mandated wage increases. However, management continues to emphasize productivity initiatives and pricing discipline, particularly on new programs to mitigate cost inflation. First quarter sales in the Casting and Extrusion segment were $70.2 million, down $1.3 million or 2% versus the prior year quarter. Favorable foreign exchange movements contributed approximately $700,000 to sales. Extrusion tooling sales performed well year-over-year, supported by a diversified range of end markets, including building and construction, transportation, sustainable energy and electrical components. Die-cast tooling sales declined as OEMs deferred new tooling -- new program launches amidst softer EV demand, regulatory, uncertainty and tariff-related considerations with a shift toward hybrid and smaller internal combustion engine platforms. Quoting activity and orders for die-cast tooling improved during the quarter and demand for Exco's additive or 3D printed tooling remains strong, particularly for larger, more complex applications such as giga-press molds. The segment reported pretax profit of $3.5 million, down $200,000 or 6% from last year. The decline reflected lower volumes and favorable mix, higher direct labor and overhead costs and increased depreciation. Performance at newer operations, including Castool greenfield facilities in Extrusion Germany, weighed on results as these remained a focus area for improvements as operations scale. Management continues to emphasize pricing initiatives, operational efficiency, process standardization and automation to support improved profitability over time. Corporate expenses for the quarter were $1.9 million compared to $400,000 in the prior year quarter. The increase was driven primarily by foreign exchange losses related to the strengthening Canadian dollar on balance sheet accounts. Cash provided by operating activities was $10.2 million compared to $10.4 million in the prior year quarter. Free cash flow for the quarter was $4.8 million, up from $3.8 million last year. Cash used in investing activities totaled $4.5 million compared to $7.7 million in the prior year quarter. Growth capital expenditures were $200,000, while maintenance CapEx totaled $4.3 million. Following several years of elevated growth-related investments, management intends to monitor capital spending and focus on optimizing the performance of existing assets. Fiscal 2026 capital spending is forecasted $28 million compared to $36 million in fiscal 2025. Exco ended the quarter with net debt of $67.1 million, unchanged from September 30, 2025. The company had cash of $24.6 million and $59.8 million of available liquidity under its $151 million committed credit facility maturing March 2027. Exco remained in compliance with all financial covenants at quarter end. Our financial position remains strong and continues to provide flexibility to support strategic investments, dividends and other opportunities as they arise. That concludes my comments. We can now transition back to Darren for his closing remarks. Darren Kirk: Looking ahead, the macro environment remains complex with uncertainty surrounding the global trade policy, particularly regarding tariffs. However, I want to be very clear. Our long-term confidence is unshaken. First, nearly all of Exco's products sold within North America comply with the USMCA rules of origin. We expect these compliance products to remain exempt from tariffs in the long term. Second, the broader push towards reshoring industrial manufacturing in North America is a powerful tailwind for us. As tariffs make offshore tooling less competitive we expect to see increased demand for domestic and near-shore sourcing. We maintain a substantial manufacturing footprint in the U.S. and in USMCA partners, countries like Mexico and Canada. The combination of policy-driven reshoring, the aging vehicle fleet and our strong product positioning reinforces our positive outlook. We have the capacity, technology and the footprint to capture market share as these conditions stabilize. I would like to thank our shareholders for their continued support and our global team for their dedication and hard work in navigating this dynamic environment. Operator, we are now ready to take questions. Operator: [Operator Instructions] Our first question comes from Nick Corcoran with Acumen Capital Partners. Nick Corcoran: Just a couple of questions from me. First, you mentioned that extrusion used in AI data centers. Can you comment on what percentage of your businesses is and what potential growth rate might be going forward? Darren Kirk: Nick. So it's -- AI data centers is obviously an emerging end market for aluminum extrusions. It's in the low single digits currently. But it's growing well into the double digits. So it remains a major tailwind for the foreseeable future, but albeit the current demand usage is a relatively low now. Nick Corcoran: That's fair. And then maybe just switching gears, right now in the past, you talked about organic growth and potential for acquisitions. I'm wondering what your M&A pipeline looks like right now? Darren Kirk: So the M&A pipeline is -- it's not very robust, to be honest. We continue to look for tuck-in opportunities. But as we've kind of indicated, the real focus is harvesting the investments that we have made through the prior CapEx cycle. So -- but we do certainly remain interested in looking out for acquisition activities. Our balance sheet remains very strong and we have liquidity capacity to pursue that. Operator: I would now like to turn the call back over to Mr. Darren Kirk for any closing remarks. Darren Kirk: Okay. Well, thanks, everyone, for joining us today. We look forward to speaking again when we release our Q2 results. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to Brunswick Corporation's Fourth Quarter and Full Year 2025 Earnings Conference Call. All participants will be in a listen-only mode until the question and answer period. Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Stephen Weiland, Senior Vice President and Deputy Chief Financial Officer of Brunswick Corporation. Please go ahead. Stephen Weiland: Good morning and thank you for joining us. With me on the call this morning are David Foulkes, Brunswick's Chairman and CEO, and Ryan Gwillim, Brunswick's CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at brunswick.com. During our presentation, we will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation section of the unaudited consolidated financial statements accompanying today's results. I will now turn the call over to Dave. David Foulkes: Thank you, Steve. We finished 2025 ahead of recent expectations, with all our businesses reporting sales and earnings growth in the quarter, leading to full-year net sales growth for the first time in three years and significantly higher free cash flow generation. All supported by a strengthening boat market in the second half of the year. In addition to improved retail conditions, our performance was underpinned by solid boating participation driving stability in our recurring revenue businesses and outstanding operational execution across the enterprise. Retail demand stabilized in the second half of the year, following a challenging second quarter primarily caused by tariff-induced economic uncertainty. While the U.S. retail boat market finished the year down approximately 9% in units, Brunswick's leading boat brands outperformed the U.S. industry, and Brunswick global retail unit sales were down only 5%, driven by weakness in value product. Dealer inventories remain at very low levels, and with a high percentage of recent model year product. Despite the volatile first half of the year, we delivered $5.4 billion in net sales, up 2% over the prior year. Our adjusted earnings per share of $3.27 were impacted by the anticipated tariff headwinds, which had a substantial impact on the fourth quarter. Comprehensive cost containment actions throughout the year, along with robust capital strategy execution and diligent working capital management, resulted in exceptional free cash flow generation for the year of $442 million, which provided us with the financial flexibility to continue to invest in the business, repurchase $80 million of shares, increase our dividend, and retire approximately $240 million of debt to further improve our strong balance sheet. Strong early season retail and falling interest rates combined with a stabilized retail environment currently supports our initial expectations for improved market conditions in 2026. In 2025, both an engine retail sales significantly outpaced wholesale, which positions Brunswick for revenue growth in 2026 in a range of flat to improving retail scenarios. Turning to some segment highlights, I'm pleased to report that for the second quarter in a row, all segments grew revenue over the prior year quarter. Operating margin also expanded across our businesses, except for engine P&A, where it was down slightly due to strong performance in the lower margin distribution side of the business. Our propulsion segment had an outstanding fourth quarter, increasing revenues and earnings versus prior year in each of its three business lines: outboard, sterndrive, and controlled rigging and propellers. Mercury continues to be the outboard market share leader in the U.S., Canada, and Europe and is increasing its investment in groundbreaking new products. Recently, at the Consumer Electronics Show in Las Vegas, Mercury unveiled its 808 outboard engine concept, signaling the future direction of ultra-high horsepower outboard propulsion. Mercury's commercial traction continues to accelerate, as highlighted by the recently announced exclusive agreements with Axopar, Saksdore, and D'Antonio Yachts, adding to the more than 100 new or renewed OEM agreements in the last twelve months. Our recurring revenue, high-margin engine parts and accessories business delivered higher sales and earnings in the fourth quarter versus prior year, in both its products and distribution business lines, fueled by higher boating participation and our growing share in marine distribution. Our market-leading U.S. distribution business gained 210 basis points of share in 2025. Stephen Weiland: Navico Group increased both revenue and operating margin in the fourth quarter versus prior year. David Foulkes: Reflecting the steadily increasing benefits of our continued focus on a refreshed product portfolio, and operational, commercial, and financial improvement actions. Navico Group launched Connected Solutions, including integration with mobile apps and SIMRAD multifunction displays, enabling onboard and offboard real-time monitoring and control of vessels. And the introduction of our SIMRAD AutoCaptain autonomous floating system was another example of Brunswick's unique ability to deliver seamlessly integrated system solutions co-developed by Navico Group, Mercury Marine, and Brunswick Boat Group. Finally, this quarter, our boat business capitalized on the continued improvement in the retail market, which drove sales growth and significantly expanded margins versus the prior year quarter. Discounting levels in 2025 also improved approximately 100 basis points year over year. Our premium and core brands experienced continued strength, highlighted by 15% overall revenue growth across our premium brands at the Fort Lauderdale Boat Show. And our value brands also recovered some momentum. Lastly, Freedom Boat Club had another strong quarter, growing to 442 global locations, and with member trips finishing the year at over 640,000, up 5% over 2024. Moving on to external factors, the U.S. Fed cut rates by 75 basis points over the latter part of 2025, with additional rate cuts anticipated in 2026. While the cuts have reduced financing costs for both dealers and consumers, they came too late in the season to have a material impact on 2025 but will be a tailwind for the 2026 season. Additionally, while the geopolitical and trade environment remains very dynamic, continued equity market strength and the moderating inflation trends are also expected to create a more constructive environment. Our tariff mitigation actions in 2025 were extremely successful, offsetting over half of our gross dollar exposure, and resulted in approximately $75 million of net incremental tariff impact. While the Supreme Court decision regarding the AIP tariffs remains pending, U.S. import tariffs on Mercury's Japanese competitor are projected to remain in effect in any scenario, representing a potential long-term structural advantage for Brunswick as the only domestic manufacturer of outboard engines. Notwithstanding the outstanding AIPA decision, with the U.S. import tariffs anticipated to be in effect for the full year of 2026, versus a partial year in 2025, we expect to incur further incremental tariff costs of approximately $35 million to $45 million in 2026 net of continuing mitigation actions. Ryan Gwillim: OEM dealer and customer sentiment is improving. David Foulkes: With healthy pipelines and increasing both the participation benefiting all our businesses. We were particularly pleased to see Navico Group marine OEM sales pick up in the fourth quarter supported by well-received new products. Looking now at industry retail performance, the latest FSI reporting for December showed U.S. industry retail units down about 9% for the year, with Brunswick internal U.S. retail outperforming the market. As I noted earlier, Brunswick retail boat sales stabilized in the second half of the year resulting in overall flat second half performance compared to prior year, and with acceleration through year-end. In addition to solid performance in our historically strong premium and core brands, we also experienced some recovery in value products. Mercury Marine's leading U.S. retail output share remains stable, although during the year share was temporarily impacted by tariff-related dynamics. Ryan Gwillim: Mercury finished the year with approximately 47% share. David Foulkes: Gaining 70 basis points overall in the second half of the year, and with large gains in higher horsepower engines. Mercury also remains the clear leader in Canada, Europe, and many countries around the world. Consistent with its strong outboard share performance at recent boat shows, Mercury's wholesale market share also accelerated through the fourth quarter and was up over 400 basis points in the quarter and 900 basis points in December versus prior year. Ryan Gwillim: As previously. David Foulkes: Noted, our boat and engine pipelines are extremely low levels. The results of deliberate action over the last two years. Global boat pipelines are down approximately 2,200 units from a year ago, and U.S. outboard pipelines down by approximately 10%, with retail sales significantly outpacing wholesale. In addition, as of year-end, our global boat order backlog was 79% of our first quarter wholesale forecast, up 13 percentage points from the same time last year. Brunswick delivered outstanding free cash flow of $442 million in 2025, with continued benefits from our recurring revenue businesses that represented approximately 60% of our earnings this year, and continued operational and working capital discipline. Our cash performance has enabled us to support planned investments in industry-leading products and technology, return capital to shareholders, and efficiently retire more debt than previously planned. Our investment-grade balance sheet was further strengthened by the retirement of approximately $240 million of debt this year, exceeding our guidance and commitments, and putting us firmly on track towards our two times net leverage target. We're progressing towards this goal while maintaining significant financial flexibility. And at year-end, we had $1.3 billion in liquidity, including full access to our undrawn revolving credit facility. In December, we converted $300 million of long-term debt into rate advantage commercial paper, reducing interest expense and setting up additional debt retirement in 2026 supported by continued strong free cash flow generation. A series of thoughtful capital strategy actions initiated at the 2024 will reduce our expected 2026 interest expense by approximately $40 million, including the benefits of an additional $160 million or more of anticipated debt retirement this year. While still allowing us to make our planned new product AI and other investments, as well as return capital to shareholders. I'll now turn the call over to Ryan to provide additional comments on our 2025 financial performance and our initial outlook for 2026. Ryan Gwillim: Thank you, Dave, and good morning, everyone. Brunswick's fourth quarter performance came in ahead of expectations, with sales and earnings in each of our segments exceeding fourth quarter 2024. On a consolidated basis, sales were up 16%, reflecting improved market conditions, increased wholesale shipments to our channel partners, pricing actions taken earlier in the year, lower discounting environment, and continued solid boating participation to growth in our P&A and aftermarket businesses. It's also worth noting that this growth was not only broad-based across all segments in the quarter, but also across all global regions. Q4 earnings improved 41% versus prior year, as the impact of higher sales along with increased absorption from comparatively high production levels and operational improvements, more than offset the enterprise headwinds of incremental tariffs and the restatement of variable compensation which affected each business. Lastly, we generated $88 million of free cash flow in the fourth quarter wrapping up a tremendous year of cash generation. As expected, free cash flow was down from the unseasonably high 2024 reflecting a more normalized working capital environment and higher production levels across our businesses. On a full-year basis, sales increased 2% driven by improved second-half market conditions and resulting stronger wholesale orders together with strong P&A and aftermarket performance helping to overcome the impacts of the challenging first-half retail environment. Full-year adjusted operating earnings and diluted EPS ended slightly above expectations, but below the prior year, mainly reflecting the impact of incremental tariffs and the reinstated variable compensation. Outside of these two impacts, we would have shown strong adjusted earnings growth for the year. The earnings impacts of the sales growth, inclusive of pricing and improved discounting levels, together with tariff mitigation efforts helped partially offset these earnings headwinds. We generated $442 million of free cash flow in the year, up 56% year over year and exceeded our increased guidance from the last quarter. One of the most challenging years for the industry since the GFC, we generated the third highest full-year free cash flow in Brunswick's history. Now we'll look at each reporting segment's performance for the quarter starting with our propulsion business, which grew sales for the third consecutive quarter. Sales were up 23% with double-digit increases in all product categories resulting primarily from strong OEM orders heading into the early 2026 retail season. Segment adjusted operating earnings and margin also increased significantly compared to prior year due to the impacts of increased sales and higher absorption from increased production levels offsetting the incremental tariff impact and the reinstatement of variable compensation. Our aftermarket recurring revenue engine parts and accessories business also grew sales for the third consecutive quarter with fourth quarter sales up 15% versus prior year. Ryan Gwillim: Sales growth accelerated from the third quarter for both products and distribution. Stephen Weiland: Reflecting strong voter participation, favorable weather in many regions in the back half of the year, and continued share gains in our distribution business. Q4 adjusted operating earnings increased 7% with slightly lower margins due primarily to the mix impact from the stronger growth in distribution sales. Despite the compensation and tariff headwinds, a sluggish first-half retail environment and a slight mix shift towards our distribution business, our full-year adjusted operating earnings for the P&A business were essentially flat to $20.24. Continuing to validate the prioritizing recurring, aftermarket revenue is essential to driving performance through the cycle from our differentiated balanced business model. Navico Group grew sales for the second quarter in a row increasing 4% over the prior year, driven by solid OEM orders and steady aftermarket performance during the important holiday selling season. Improving Navico Group's financial performance remains a critical focus for our entire team and we are seeing the results of strategic actions including continued investment into new product, product portfolio optimization and operational measures. While many new exciting products are still to come, we believe that we are now seeing the early benefits of our recently developed and launched competitively priced new products winning in the market, especially in our electronics portfolio. The Navico Group's outstanding operational performance in the quarter helped translate the sales growth into strong adjusted operating earnings and margins, are up 180 basis points from the prior year as benefits from higher sales, new product investments, portfolio optimization and cost control measures more than offset the enterprise headwinds. Finally, our Boat segment had a strong quarter reporting 11% sales increase over the prior year with growth from both boat sales and the business acceleration portfolio. Our Boat Group sales were led by increases in our recreational fiberglass and aluminum boat brands, while Freedom Boat Club continued its growth journey with network-wide increases in trips, numbers and locations during the quarter. Note that the Boat Group increased sales in each of the premium core and value categories continuing the success from the third quarter. Segment adjusted operating earnings and margin were both up significantly. Adjusted operating margin expanded 290 basis points benefiting from the impact of higher sales, including annual model year pricing actions and improved discounting levels, along with increased production driving improved absorption, which handily offset headwinds from the enterprise factors. As Dave mentioned earlier, we finished the year with very healthy dealer pipeline with retail sales outpacing wholesale setting us up favorably for 2026 in a variety of market scenarios. Moving to our outlook, as we enter 2026, Brunswick is extremely well positioned to benefit from the building market tailwinds that were evident in the retail market stabilization experienced in the 2025. Given the very dynamic geopolitical and trade backdrop, we plan to continue to relentlessly drive operating efficiencies and are encouraged by the strong reception for our many new and exciting products, our low and fresh boat and engine field pipelines the improving sentiment across our network and the market's anticipation of further interest rate cuts during the year. Our guidance assumes a flat to slightly up U.S. retail boat market. With anticipated wholesale sales to more closely match retail throughout our businesses, along with continued stable boating participation. It also assumes the recent relative macro environment stability continues through the year. These assumptions translate into guidance you see on this page, with anticipated revenue of between $5.6 billion and $5.8 billion adjusted operating margins between 7.58% and adjusted EPS in the range of $3.8 to $4.4 We continue to expect strong free cash flow in excess of $350 million representing at least 125% free cash flow conversion as benefits from earnings growth and continued net working capital management help offset the over $100 million cash impact of the reinstatement of variable compensation earned in 2025 and paid in the 2026. We anticipate improvement in wholesale ordering patterns in Q1 given early season retail strength, including steady boat show performance, and low dealer pipelines. Directional guidance for Q1 reflects growth in net sales versus the 2025. With adjusted EPS between $0.35 and $0.45 being burdened by a majority of the full-year incremental tariff cost as 2025 tariffs did not materially begin until April together with increased investments in the first quarter on critical product programs. Next, we'll take a closer look at the components of our guided $4.1 adjusted EPS guidance midpoint, which reflects approximately 25% growth over 2025, consistent with the initial 2026 thoughts that we shared last quarter. The main driver of the earnings improvement is the impact of the anticipated sales increases which should carry incremental earnings north of 20%. Included in the sales increase are benefits from annual pricing actions and a lower discounting environment, continued mix benefits towards more premium products and higher content, and volume increases as we better match retail and wholesale throughout the year. We also anticipate favorable earnings impacts from currency, capital strategy and continued cost reduction programs across the enterprise mainly improving gross margins. In part to drive the sales improvements, we do anticipate an increase in full-year operating expenses, but believe OpEx spending will remain consistent with 2025 on a percentage of sales basis. The large majority of the OpEx increase relates to growth investments in critical product and technology programs sales and marketing efforts to drive demand, and necessary systems and infrastructure upgrades. The only other anticipated EPS headwind would be the continued impact of incremental tariffs, which under the current legislation we estimate to be between $35 million and $45 million or approximately $0.60 of EPS. This is a net tariff headwind resulting from the full-year impact of the tariff instituted in 2025 and assumes that we'll continue to be successful in our aggressive tariff mitigation strategies as we continue to use self-developed AI tools sourcing optimization, value engineering, trade provisions and other methods to reduce tariff impacts. As you can see, we remain quite bullish about our opportunities for success in 2026. Ryan Gwillim: I'll end my I'll over. Stephen Weiland: This morning with a quick review on other P&L and cash flow assumptions underlying our annual guidance. Ryan Gwillim: We believe that our capital expenditure spending and annual depreciation expense will be similar to 2025 levels, as we remain in harvest phase for most of our recent capital initiatives and believe that we have sufficient capacity available for a multiyear growth vector. We plan to generate approximately $50 million of net working capital as we drive continued inventory and balance sheet improvement even with anticipated stronger production. Finally, as Dave mentioned earlier, we anticipate retiring no less than $160 million of debt throughout the year resulting in a total of $400 million of debt retirement between 2025 and 2026, will leave us with net debt leverage of 2.5 times or lower by the end of the year. Returning capital to shareholders through dividends and share repurchase is always a priority. Our plan anticipates a slight dividend increase later this quarter while continuing our systematic share repurchase program with approximately $50 million of repurchases planned for the year while remaining opportunistic should cash flow and valuations continue to be supportive. Lastly, please see the appendix for segment level guidance and other assumptions. I will now pass the call back over to Dave for concluding remarks. David Foulkes: Thanks, Ryan. As we wrap up the call, I'd like to highlight some exciting events, new product launches, and awards from a very busy January. At the beginning of the month, Brunswick again exhibited at the Consumer Electronics Show in Las Vegas, where we leverage this unique global technology stage to showcase our full portfolio of industry-leading products and technology, including our ASUS and bolting intelligence solutions. We launched the all-new Sea Ray SLX360, our first-ever boat launch at CES, which is packed with Mercury Marine and Navico Group technology and was fitted with SIMRAD's AutoCaptain autonomous floating system. We also debuted the FLYHT RACE e foil, a collaboration between FLYHT Board and Mercury Racing. Capable of speeds over 30 miles per hour, this product sets a new industry performance benchmark for electric watercraft. In addition, we debuted the Mercury 808 concept, based on the current, very capable and expandable 600 horsepower V12 outboard platform which provides a vision for the future of ultra-high horsepower outboard propulsion. Brunswick was recognized with several awards at CES. SIMRAD AutoCaptain was honored with a CES pick award. Our overall exhibit was recognized as a top 10 best booth experience. And Brunswick is a finalist for the best of Shaw awards, which recognizes the best experiential exhibits. Moving on to recent boat shows, encouraged by the high levels of engagement and positive customer sentiment observed at recent major shows. This is reflected in our performance at the Fort Lauderdale show, where our premium boat brands delivered 15% overall revenue growth versus the prior year show and Mercury had a record-breaking 61% overall outboard share. At the world's largest boat show in Dusseldorf, Germany, we debuted the Novan T30 model, and our premium fiberglass brands recorded year-over-year sales growth. Mercury had more than 50% share of all outboards at the show, almost triple the nearest competitor, and added to its recent run of signing multiyear exclusive supply agreements with some of Europe's largest and fastest-growing boat OEMs. We were also proud to receive award recognition at these various boat shows. Our Navan S30 model won Motor Boat of the Year and our Sea Ray SCX270 SURF model was awarded European Power Boat of the Year in their respective classes. At the Minneapolis Boat Show, Prince Craft earned its second consecutive NMMA Innovation Award, for the all-new Platinum 190 model which is recognized for its premium engineering and class-leading phishing features. Finally, as you all know, we pride ourselves on being an employer of choice and innovator in our space a responsible and trustworthy company. For the fourth consecutive year, we surpassed the 100 awards for our people, our culture, our products, and our innovation. Notably, many of these awards are national awards from media outlets such as Newsweek, USA TODAY, TIME, and Forbes. That we've received for multiple years. However, for the first time in 2026, Brunswick was named to Forbes America's Best Companies list. Thank you again to all our talented Brunswick employees who make this recognition possible. Before I finish, I'd like to remind you of our investor and analyst event during the upcoming Miami Boat Show, which will include a tour of Brunswick's many exhibits and products at the show followed by cocktail hour at the Ritz Carlton on South Beach. We look forward to offering you the opportunity to see our exciting products and technologies as well as meet with members of our management team. Thank you for your attention. We'll now open the line for questions. Operator: Thank you. We'll now be conducting a question and answer session. David Foulkes: Session. Operator: Thank you. Our first question is from James Hardiman with Citi. James Hardiman: Hey, good morning. Thanks for taking my question. So I think given your track record, I think most investors have a high of confidence that you can deliver given sort of whatever the retail assumptions are. I think the retail assumptions are ultimately what so many investors struggle to underwrite at this point. And so maybe, I guess, to start, what specifically was the retail performance in the fourth quarter? Obviously, we get some of this SSI data which showed, you know, certainly November and December down. You talked about flat for the second half, but I'm curious specifically sort of how you finished the year. And as you carry that forward to 2026, what gives you confidence that flat to up is the right way to think about the full year? Thanks. David Foulkes: Yeah. Hi, James. Yeah. As you mentioned, on a unit basis, we were flat. Basically within 10 units or something. Was it was you know, particularly particularly flat, if you like. And as we noted, I think we saw continued strength in premium and core. Obviously, that's about 75% of our portfolio and about 90% of our gross margin. So that is a tailwind for us. We did though see some recovery in the value part of the business, which was nice to see, as you know, that have been the major source of weakness in the first half of the year. That is a more economically sensitive customer, I would say, probably a bit more unsettled by some of the events in the first half of the year. But in terms of tailwinds into the into 2026, In the latter part of 2025, as you know, we got about seventy-five basis points of rate cuts, but they all really occurred too late in the season to be very material for 2025. But they will affect 2026. I think there's some uncertainty over the timing of further rate cuts, but I think they are likely to come. So probably through the season, we'll end up with at least 100 basis points of year-over-year rate improvement, which is helpful for our end consumers. We have clearly seen retail financing rates respond to this. And rates retail rates are down around 7.5% now versus 9% to 10% at peak. And that is very helpful for our dealers as well. Equity markets remain strong, which is helpful for our premium buyers. And then we did see somewhat of an acceleration, I guess, as you went through the quarter. And that is retailers continue I mean, it's as you know, we're always very cautious about quoting numbers for when it's such a when the volumes are so low at this time of the year, but retail is up double digits, so far this year. Despite the inclement weather and a few other things going on around the country, So I think, overall, material tailwinds and evidence on a small scale, at least, so far in the year that, that is translating to solid to positive retail. James Hardiman: Got it. That's really helpful. And just to clarify, I think I think you just said, just to underscore, retail up double digits so far in January. I just want to make sure that that's sort of on the record here. And then that is right. Okay. And then as we think about inventories, obviously, good work. Bringing down global pipelines. Think 2,200 units in 2025. How should we think about that number for 2026? Is that a zero in 2026, I. E, wholesale equals retail or do we expect a little bit more of a reduction Obviously, one of your big, if not biggest, customers is speaking to stubbornly high inventories at least around the industry. With maybe one more quarter remaining, maybe square that with how you're thinking about things? Ryan Gwillim: Yes, James, I'll take that. Good morning. So we have taken pipeline units out each of the last several years. I would say in 2026, expect that to be probably flat to maybe taking out a couple of 100 units at most. I mean, goal really is to match wholesale and retail this year which would mean wholesale growth, obviously, year over year versus last year. And as it relates to maybe your last comment, I would say I think our biggest distributor would say that our inventory in their hands is quite fresh and in very good levels. So the pockets that are maybe were mentioned or or we don't believe are Brunswick inventory. And in fact, Sea Ray and and Whalen specifically in in their hands are in really good shape and lean to start the season. James Hardiman: Got it. And just if I could just squeeze in one more Obviously, your specific brands aren't all that matters for you, right, just given you know, your propulsion business, your P&A business, do you think sort of competitive or I guess a better way to put it industry inventory levels needing to come down is that all a headwind as we think about some of those other. David Foulkes: I don't you know, I I think so. I mean, in terms of flow through to us, you know, we've seen very solid ordering. You know, we mentioned in on the call that our wholesale orders so far close to 80% of our Q1 production, which is up 13 points versus last year, So thus far, in terms of dealer pull, we are not seeing any evidence that that they are holding back on borders kind of on a year-over-year basis. Operator: Perfect. Our next question is from Craig Kennison with Baird. Craig Kennison: Hey, good morning. Thanks for taking my question. I'm trying to understand the dynamics that might push retail back to or at least closer to historical trends. Can you tell us about I guess, repeat buyer behavior and any deferred trade-up cycle that could eventually be released based on any consumer data you have? David Foulkes: Yeah. Hi, Craig. Thanks for the question. Yes, as you know, I mean, still have a huge gap between industry new boat sales and replacement. Rates? And we think the natural replacement rate in the fleet is probably in the 225,000 plus range. And this year, 2025 will be in the 130 something range So that is a kind of natural pull. I think I also think that there is some deferred purchases from the depressed kind of overall industry sales in the past few years where people have waited for the right buying conditions. To reenter the market Generally, we continue to see new boaters come in around the historical pace, I would say, of 25% of of new boat sales. But if you think about the shocks that we've experienced over the last several years, Some but certainly on the interest rate side, conditions have not been positive and constructive. We are beginning to see that normalize. I think you look at inflation obviously, the Fed would like it to be 2%, but compared to where it was two or three years ago, we're a much more normalized situation. So I think that, you know, we based on depressed sales over the last few years, we likely have some buyers waiting for the right point to come back into the market. We will see the full effect of those 75 to 100 basis points of rate cuts this year. So and we have a kind of replacement we're well below replacement rate. So I think all of those suggest full force is for retail. But of course, we are if that happens, that will be great. But at the moment, we're forecasting at least some uplift in the market. Ryan Gwillim: I would also add, Craig, that we've been very thoughtful. Us and really the industry, about pricing over the last handful of years. And now you're seeing a more balanced dynamic between trade-in values for people that bought around 2020 or 2021. And what they can purchase today. So I think are getting a little bit more value for their trade-in. They've held it for a little bit longer, so their ability to trade up and trade back in is greatly improved now over maybe where it was two or three years ago. Craig Kennison: That's very helpful. Thank you both. Our next question is from Gerrick Johnson with Seaport Research. Gerrick Johnson: Hey, good morning. I wanted to ask you about propulsion. Outboard was up 26%. Your boat business was up 11%. So I'm just going to infer here that your sales to OEM customers really expanded nicely. Can you talk about that, your business to OEM customers and how much of your growth there is coming from existing customers? And how much from new wins? David Foulkes: Yes. Hey, Gerrick. Good question. So yeah, Brunswick's Well, Brands Are Performing Very Well In The Marketplace. In Fact, We're Gaining Share. But We Focus A Lot On The U.S. Market and we chose to add a few more details on Europe in particular this time where where Mercury is gaining share in a lot of markets, a lot of parts of The EU So I think we have we signed multiyear agreements with some of the biggest and fastest growing OEMs in Europe recently. We in fact some of these are five-year agreements, which is quite unusual. So if you think about Mercury's strategy, obviously, it's to get best products and technology in the marketplace, advance share, but then fortify that share by putting in place multiyear agreements And so I think the the implications of both five-year agreements are these large and fast-growing OEMs, not just in The US, but in Europe, are putting their trust that Mercury is going to be the leader for a long time. And they have seen some of our new product plans, so I think that trust is extremely well placed. So, yeah, I think that we are growing share with new customers. We've gone exclusive with a number of customers now that we weren't exclusive with before, and we're signing longer agreements. That fortify our position. Connecting what you just discussed a bit with some of the kind of strategic spending that we referred to, clearly, a significant portion of that is in Mercury. Ryan Gwillim: We hired 60 new Mercury engineers in 2025. David Foulkes: So despite the fact that we were continuing to watch our spending, we are you know, we are loading up for another product blitz in Grand Prairie We have five new outboard programs going. Obviously, we shared some details of those with with some of those customers. So I think that yeah, we we're getting more customers Our existing customers are shy for the of signing long-term agreements with us, and a number of customers who are not exclusive to us are going exclusive All of those effects will be positive, I think. Ryan Gwillim: And then, Gerrick, as it relates to just the kind of the near-term Q4 and as we move into 2026, engine pipelines, which we talk a lot about boat pipelines and the ability to put more wholesale into the field when when pipelines are lean, our engine pipeline. So engines that are sitting both with our dealer network and with our OEMs are kind of at historical lean levels. We took twenty twenty mid-twenty thousand engines out in The U.S. Alone in 24 of the pipeline is about 17%. And last year, we took another 10% out just in The U.S. Alone. And so you're seeing build rates with our OEMs remain pretty static, if not improving a little bit. And there are need to buy engines, follow that trend. So you have the share gains and you have the benefit of low pipeline inventory sitting at the OEM leads to a pretty nice outlook that you've seen. Gerrick Johnson: Okay. Very, very thorough. Thank you. I have more but I'll get back in queue. Thank you. Operator: Our next question is from Anna Glaessgen with B. Riley Securities. Anna Glaessgen: Good morning. Thanks for taking my question. I'd like to continue along the track of talking about pipeline and expectations for retail versus wholesale. You know, we're expecting flattish, flat to slightly up retail getting a little bit of a break on interest rates. Guess, would you think it would take to see some pipeline replenishment for to exceed retail Or do you think we're at kind of like a new normal of lower inventory versus pre-COVID? Thanks. David Foulkes: Hannah, thank you for the question. Yes, I don't think that we're a kind of new normal as such. I mean, clearly, there are a lot of things in the last few years that have caused our channel partners to be cautious about ordering But I would say you see sentiment across OEMs, dealers, and customers continuing to improve and confidence to build one of the things that's helpful for our channel partners about just holding inventory is the double effect, if you like, of interest rate reductions The carrying cost is lower because floor plan is lower. And the margins tend to be higher because discounting is lower. So think that you know, as as as either our OEMs or channel partners, calculate the carrying cost or marginal benefit, if you like, of inventory those positive effects on both ends, carrying cost and the demand are both constructive at the moment. So yes, I think it's nice to see that we are we are getting strong pull through from our channel partners in this early point of the year as evidenced, as I mentioned earlier, by a a stronger fill rate, if you like, than than at this point last year. So it's a case of gradually building confidence, and I think that confidence certainly is building the. Anna Glaessgen: Great. Thanks, Dave. And Ryan, one on the tariff math. I guess, for the full year in '25, which was partial because we didn't have 1Q impact, it was $75 million net impact And then for 2026, it's an incremental 35,000,000 to 45 with the majority of one queue. Guess that implies kind of a step up in that quarterly rate, if I'm thinking about that correctly. I guess that a function of mix with propulsion expected to grow more in 2026, which carries more tariff impact any help there. Thanks. Ryan Gwillim: Yes. And I wish it was really straightforward, Anna, but the upshot is Q1 takes the brunt because there was basically no tariffs in Q1 of last year. And then if you remember, the AIPA rates kind of bounced around a little bit, and then we got two thirty-two incremental impact in August, which impacted the back half of the year only. Remember, is balance sheet and capitalized variance. There's some some kind of accounting math that plays into this as well, and there's some of that impact in Q1. But really, if you think about it, the first half is going to take all of the incremental all the incremental tariff costs call it half to two-thirds of that in first quarter, which is really that combined with accelerated product spending, which we want to do really in the quarter. That's a that can be a $30 ish million number in total. So if you normalize Q1 just for those two items, you're at an EPS growth of 25 plus percent which looks similar to the rest of the year. So yes, that's the tariff math. It's really the continuation of what happened in 2025. With a little bit of accounting treatment roll off given the inventory valuations. Anna Glaessgen: Okay, great. Super helpful. Thanks, guys. Operator: Our next question is from Scott Stember with Roth Capital. Scott Stember: Good morning and thanks for taking my questions. Ryan Gwillim: Good morning, Scott. Scott Stember: Can we talk about the IE book? Tariffs? Obviously, we're going to get some kind of ruling in coming days from the Supreme Court. Just trying to get a sense of how much of a benefit you could get if they get eliminated. Can you just size up how much of your tariffs are IEPA driven? Ryan Gwillim: Yes, Scott, I'll take this one as well. Yes, mean if you look at a full year of IEPA, call it, 20,000,000 to $25,000,000 is the impact. And so again, that's a full year impact. You don't know when it would be effective or when it would if there'd be looked back and all of the above. So it would be a a a material good guy for us, but it's only a portion of the tariffs given all the reciprocal two thirty-two and other impacts that we're facing. Scott Stember: Got it. And then Dave, just following up on your comments about interest rates financing rates for the consumer. So it's about seven and a half percent currently. Can you just maybe frame out how much rates have actually gone down as of late given the 75 basis points of cuts from the Fed trying to get a sense of how much relief we're talking about in the actual financing rates of the consumer versus six months ago? David Foulkes: Yeah. So maybe I'll start a bit further back. Scott. So if you looked in 2019 at what the financing rate would be, it would be in the kind of 5.5% to 6% range. It peaked in '24 at about 10%. And now it's down to about seven and a half percent. So, very material improvement versus peak rates. Still 150 ish basis points above kind of pre-pandemic levels. But that is overall still a tailwind versus the last couple of years certainly. And on top of that, as Ryan mentioned, there are a couple of other tailwinds include the fact that our price increases the last couple of years and this year will be pretty modest. And and the trading values are beginning to normalize versus some of the kind of peak prices that people paid in COVID. So they have more equity in their existing product, which is encouraging in terms of the ability to to trade up But, yeah, I think we've got a couple of couple of tailwinds there. Scott Stember: Gotcha. That's all I have. Thank you. Anna Glaessgen: Thank you. Operator: Our next question is from Xian Siew with BNP Paribas. Xian Siew: Hi guys. Thanks for the question. Maybe given the competitive advantage of Mercury on the tariff front versus maybe the Japanese OEMs and the recent momentum, I think how are you thinking about market share opportunities into '26? What's kind of baked into the expectations for that for propulsion? Thanks. David Foulkes: Yes. Thank you, Seen. I think it's difficult to know at the moment The reality is we think we have a long-term structural advantage here. But in terms of what happens in the market, it depends on what the pricing policy to some extent of the competitors. You know, turns out to be, how much pain they're willing to take on on margins. We have a I think, pretty dynamic situation with the yen as well. We did see that, obviously, they took some pain on margins in back half of twenty twenty-five. So I think we will see a steady march on share. I do think that will be supercharged in certain segments as we begin to introduce new products. We have a very exciting product plan at the moment. Think And so I think we see selective gain. Some of that is targeted at what we've come to refer to as ultra-high horsepower. Some of it is more refresh. And upgrades to more mid-horsepower engines as well, which although not quite as glamorous, do represent high volume for us. So, yeah, we we have a very solid product plan A lot of products coming to market over the next couple of years. And then I think we'll see this steady March as OEMs continue to move towards us and, in some cases, become exclusive. Ryan Gwillim: The other the other just oh, yeah. Just real quick. The other factor, we've had really strong wholesale share in the last several months. And so that's good prediction really of where we think the 26% share will continue to grow. Xian Siew: Makes sense. And then maybe just as a follow-up 26 guidance, I think implies something like 20% incremental margins with which is inclusive of, I guess, the incremental tariffs. So underlying if we kind of set that aside, strong incremental margins. I guess, how do you think about the potential for incremental margins and flow through as you kind of kind continue to recover from here? Ryan Gwillim: Yes, you're exactly right. Your math is correct. So nothing's really changed. Even in a tariff impact environment, we think we can deliver north of 20% incrementals. That's obviously going to be a little bit higher in propulsion and P&A and and pretty strong in Navico as well. I mean, we haven't talked a lot about Navico, but what a great fourth quarter and really year that Navico had here in '25 and to start '26. Just because their product and variable margins are the highest in in the company. So and the Vogue Group's taken all the right steps to take cost out and deliver on their margin targets as well. So north of 20% is always the goal. But as you've seen, in past years, with value, comes some supercharged incrementals. And we think that '26 and beyond is gonna be a period where we have more volume and you're going to see things improve and increase. Xian Siew: Great. Thank you, guys and good luck. Operator: Thank you. Our next question is from Jaime Katz with Morningstar. Jaime Katz: Hey, good morning guys. I just want to stay on that margin topic. And I think in our model, at least, absorption isn't really benefiting the P&L as much as we thought it would be, right? You're looking at 7% to 8% operating margins in the year ahead. So you guys talk about, I guess, of tariffs, what's the biggest sort of cost headwind holding that adjusted operating margin back? And then maybe where the top opportunity for upside resides in the cost structure? Thanks. Ryan Gwillim: Is really the accelerated spending on investments and that's necessary to grow the top line. We believe that we're in a spot where the industry is probably trying to grow and increase, and we want to be there with the right consumers. So you've seen on the bridge that we showed kind of a big chunk of OpEx increase I mean, most of that is strategic investment in product, in capital growth initiatives, will support us moving forward inclusive of things like sales and marketing, IT, and necessary systems that will enable us to service our customers even better. So you know, the good news is there's no year-over-year lumpiness with comp, right? Because that'll be kind of a zero factor year over year So think of it really as just growth initiative spending, which were happy to do to continue to drive our market share and our leading products. David Foulkes: Yeah. Jimmy, I'll I'll just add to that. I think mean, obviously, as you know, as a a management team in a business, we're thinking about '26, but we're also thinking about '27, '28. And how do we grow the business long term? We think that we're at an inflection point at the moment. And so we took the decision to accelerate in in certain areas that we think are gonna grow us not just in '26, but well beyond And that is new products, at some extent, AI, And I I don't throw that out there lightly. I know it's a very kind of topic topic of the year, but but AIs can be a big influence on efficiencies in our business. And also strongly influence and improve our kind of products and overall go to market. So there's just some spending. But as you know, we offset a lot of that by really laser focused on operating efficiency. You know about the footprint reduction actions that were taking So we're valid very balanced. But I think the strong cash flow and through cycle performance that we have allows us to to make investments maybe ahead of where other people might be able to make them And, this is not just about growth in '26. It's about long-term growth medium-term growth as well. And we think we are well positioned to achieve that. Jaime Katz: Very helpful. Thanks. Operator: Thank you. This concludes our question and answer session. I would like to hand the floor back over to Dave for any closing remarks. David Foulkes: Yes. Thank you all for the great questions as usual. This is another very encouraging quarter. For us with improving retail, revenue up across all our businesses and global regions, very solid earnings and continued exceptional free cash flow generation. Full-year revenue being up over prior year for the first time in three years was very nice A real, I think, a tangible signal or an inflection point Early twenty twenty-six retail is strong and wholesale orders are also strong from our dealers. So that's really encouraging. We continue, though, to be laser-focused, as I mentioned, on structural cost reduction actions, but we are and have accelerated some investments in new products and technology, notably in propulsion. We tend to focus on big big picture things, but don't overlook the fact that we won the two big awards in in the European boat shows early this year. European Power Boat of the Year, Motor Boat of the Year. We We don't just win because of scale and technology. We win because we have the best products. And we will continue to do that. And on that note, we'll be introducing quite a few new products at the Miami Boat Show. So I'm excited about that. Please join us if you can. We will be launching and debuting, more new products across the businesses than I can remember for quite some time. And I look forward to seeing many of you at that investor and analyst event on February 12. Please make the time. We'd love to see you. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, everyone, and welcome to Eagle Materials' Third Quarter of Fiscal 2026 Earnings Conference Call. The call is being recorded. At this time, I would like to turn the call over to Eagle's President and Chief Executive Officer, Mr. Michael Haack. Mr. Haack, please go ahead, sir. Michael Haack: Thank you, Drew. Good morning. Welcome to Eagle Materials conference call for our third quarter of fiscal year 2026. This is Michael Haack. Joining me today are Craig Kesler, our Chief Financial Officer; and Alex Haddock, Senior Vice President of Investor Relations, Strategy and Corporate Development. A slide presentation accompanies this call. To access it, please go to eaglematerials.com and click on the link to the webcast. While you're accessing the slides, note that the first slide covers our cautionary disclosure regarding forward-looking statements made during this call. These statements are subject to risks and uncertainties that could cause results to differ from those discussed during the call. For further information, please refer to this disclosure, which is also included at the end of our press release. In our third quarter fiscal 2026, despite the mixed construction environment, our businesses continue to perform well. We generated $556 million in revenue. Our earnings per share were $3.22, and we delivered a gross profit margin of 28.9%. In these choppy times, Eagle will continue to operate as it always has. We will control what is in our control and adjust to current market conditions to maximize profitability in both the short and long term. Our strategy is consistent. We will invest in the health and safety of our largest differentiating asset, our people, our plans to control costs and support our customers through increased reliability, efficiency and capacity, our short- and long-term strategy with return-focused projects or acquisitions. All of this while ensuring our balance sheet remains in pristine condition. Foundational to everything we do is maintaining the highest standards of health and safety. Our annual safety conference was held in December. It is always a great opportunity to interact with the leaders of the organization to review our safety and environmental performance, pass along some important messages and set our path for continued improvement. Our journey to 0 incidents is ongoing, but every employee at Eagle understands that the safety of our people always comes first. If we cannot perform a job safely, we will not perform the job. These meetings with the best practice sharing and commitment from the team have allowed Eagle to maintain an industry-leading safety record. To say the least, I'm proud of all Eagle's employees and the safety culture we have built. Regarding our plants, we work to maintain the reliability of our assets, increase efficiency and capacity, which gives us operational flexibility to execute efficiently through economic cycles. This past quarter, we advanced several initiatives that convert our waste streams into revenue streams to help further improve our low-cost producer position. Let me give a few examples. In Cement, we have been able to reclaim decades old waste streams that can be used as a source of raw materials in our production process. In our Aggregates operations, we have begun using fines and overburden to support our raw materials or extend our reserves at our Cement plants and Aggregates facilities. In the light side of our business, we are expanding the capabilities of our Republic paper mill to repurpose non-wallboard grade paper and trim rolls into higher value-add products. At American Gypsum, we are recycling 100% of our waste wallboard back into the production process, except at our Duke facility, which will also be at 100% following the completion of our modernization there. Importantly, many of these projects require minimal or no capital investment while having an outsized positive benefit on our operations. These initiatives complement some larger strategic projects we have underway that benefit our overall system reliability, capacity and profitability, namely the modernization of our Mountain Cement plant and the Duke Wallboard facility. We made good progress on both projects during the quarter, which means that our Laramie, Wyoming Cement plant should be going through its commissioning late this calendar year, followed by our Duke, Oklahoma commissioning in the second half of calendar 2027. Each investment will lower the cost structure of the respective plant, strengthen our already low-cost competitive position and deliver a strong return on investment. I'm incredibly excited for what's ahead as we are experiencing some downtime at the Mountain Cement kilns recently, increasing the justification for the modernization project. In the meantime, we can use our network of Cement plants to meet our customer needs, albeit at an increased cost. We'll continue to report on progress as we approach the end of each plant's construction time line. With both plants coming online over the next 18 months, let me pivot now to where we think we are in the economic cycle. At Eagle, we don't operate in a way that is overly focused on short-term demand cycles. Our primary products are essential commodities, meaning demand will fluctuate. That being said, heavy materials and Wallboard appear to be at different inflection points today. Our Cement and Aggregates sales volumes grew last quarter, and we believe the support from federal, state and local infrastructure spending plus solid growth on key nonresidential end markets will continue support for our heavy materials business. As discussed last quarter, we have announced price increases for the first quarter of calendar 2026 in most of our markets, further reflecting our volume expectations for our heavy materials business. At the same time, residential construction, which drives wallboard volumes was challenged last quarter. Current housing data reflects the affordability issues that have been plaguing the homebuilding industry for quite some time. Recent housing policy announcements, combined with more accommodative monetary and fiscal policy, recognize the fundamental need for new home construction in the U.S. so we are monitoring these developments closely. Nonetheless, as I said, our focus is on our operations, not on predicting demand. Over decades, we've demonstrated that we can operate equally well in strong economic environments and in mixed construction environments. Our low-cost producer position gives us opportunities and advantages for managing cost. In Wallboard, our sustaining maintenance costs are already low, and we benefit from the ability to flex production to match sales. Finally, as I mentioned earlier, our focus on financial discipline and balance sheet strength remains. During the quarter, we strengthened our already solid financial position, issuing $750 million in 10-year senior notes, aligning our capital structure with our ongoing investments at the Laramie, Wyoming Cement plant and Duke, Oklahoma Wallboard plant. While making significant progress on our major capital projects, we increased our return of capital to shareholders. During our fiscal third quarter, we returned nearly $150 million to shareholders through our dividend and share repurchases. Our leverage ratio of 1.8x allows us to navigate cycles and stay in growth mode even as our end markets have endured choppiness. Craig, with those comments, I will now turn it over to you. D. Kesler: Thank you, Michael. Third quarter revenue was $556 million, down slightly from the prior year. The decrease reflects lower wallboard and paperboard sales volume, partially offset by higher cement sales volume and the contribution from the recently acquired Aggregates business. Third quarter earnings per share was $3.22, down 10% from the third quarter of fiscal 2025. The decrease reflects lower net earnings, mostly the result of lower wallboard sales volume, offset by a 5% reduction in fully diluted shares due to our share buyback program. Turning now to segment performance. In our Heavy Materials sector, which includes our Cement and Concrete and Aggregates segments, revenue was up 11%, driven primarily by a 9% increase in cement sales volume and a 22% increase in concrete and aggregates revenue. Aggregate sales volume was up 81% to a record 1.6 million tons, reflecting a 34% increase in organic aggregates sales volume and the contribution from the recently acquired Aggregates business. Operating earnings were up 9%, driven primarily by the 9% increase in cement sales volume. As Michael mentioned, cement price increases have been announced in most of our markets to take effect in the first part of calendar 2026. Moving to the Light Materials sector on the next slide. Revenue in the sector decreased 16% to $203 million, reflecting lower wallboard and recycled paperboard sales volume and a 5% decline in wallboard sales prices. Operating earnings in the sector were down 25% to $73 million, primarily because of lower wallboard sales volume and prices. Looking now at our cash flow. We continue to generate strong cash flow and allocate capital in a disciplined way, in line with our strategic priorities. During the first 9 months of the fiscal year, operating cash flow increased 5% to $512 million. Capital spending increased to $295 million. Most of this increase was associated with the modernization and expansion of our Mountain Cement plant in Laramie, Wyoming and the modernization of our Duke, Oklahoma Wallboard plant. Considering these 2 projects as well as our sustaining capital spending, we expect total capital spending in fiscal 2026 to be in the range of $430 million to $450 million. During our fiscal third quarter, while investing in these growth projects, we also significantly increased our shareholder distribution. We returned nearly $150 million to shareholders through our quarterly dividend payment and the repurchase of approximately 648,000 shares of our common stock. Through the first 9 months of fiscal '26, we have repurchased approximately 1.4 million shares or 4% of our outstanding. We have approximately 3.3 million shares remaining under our current repurchase authorization. Finally, a look at our capital structure, which continues to give us significant financial flexibility. As Michael mentioned, during the quarter, we further strengthened our financial position by issuing $750 million of 10-year senior notes with an interest rate of 5%. This issuance enhances our debt maturity schedule, increases committed liquidity and aligns our capital structure with the long-term investments we're making at our Mountain Cement plant and Duke Wallboard facility. We also used a portion of the proceeds to repay our bank credit facility. At December 31, 2025, our net debt-to-cap ratio was 48% and our net debt-to-EBITDA leverage ratio was 1.8x. We ended the quarter with $419 million of cash on hand. Total committed liquidity at the end of the quarter was approximately $1.2 billion, and we have no meaningful near-term debt maturities, giving us substantial financial flexibility. Thank you for attending today's call. We'll now move to the question-and-answer session. Drew, I'll throw it back to you. Operator: [Operator Instructions] The first question comes from Trey Grooms with Stephens Inc. Trey Grooms: So Cement, if we could start there, the Cement volume up nicely again in the quarter, also organic Aggregates volume as well. Can you -- you touched on a few things there in the press release or in the slide deck rather, that were -- where we were seeing some strength, maybe infrastructure, data centers, those types of things. Can you talk about -- is that demand pretty well widespread across your markets? Or is it more isolated to some specific geographies? And then has that strength kind of continued as we've started off here into calendar '26? D. Kesler: Yes, Trey, look, I would tell you, it's pretty broad-based across our markets. I think we came into calendar '25. If you think about a year ago, we were optimistic around infrastructure, some of the nonresidential key markets and that played out as we had expected in many parts of our markets. And we're a broad national footprint. And so as we head into calendar '26, we have some -- continue to have that optimism around infrastructure and some of the nonresidential markets. So always hard to generate a trend in January and February given winter weather. And certainly, we've all lived through that in the last week or so, but optimism coming into '26. Trey Grooms: Good deal. Okay. And kind of sticking with Cement, the margins impacted a bit here or down a little bit here. I understand there was maybe a slight decline in pricing, but volume again here was strong like we discussed. Can you talk about what's driving the margins there? I didn't see anything kind of unusual called out in the press release as far as maintenance or anything, but just if you can maybe touch on the margins in Cement. D. Kesler: Yes. I mean, look, costs were largely in line. We did have some raw material costs, purchased raw materials costs that were up this quarter. But maintenance was largely in check. Fuel costs, as we've talked about, have been largely in line. So nothing stands out significant. Trey Grooms: Okay. Okay. Fair enough. And then last one for me is on Wallboard pricing. You saw a little bit of a decline there sequentially. I think it was about 3% or so and not overly surprising. But have you -- has this kind of pricing trend maybe continued into January? Or how should we be thinking maybe about the kind of directionally at least with Wallboard -- around Wallboard pricing here in the near term as we kind of bump along at these lower demand levels with nothing looking to change drastically on that front, at least in the near term. Any color you could give us on how we should be thinking about that? D. Kesler: Yes, you hit on it, Trey. The annual shipments for calendar '25 for Wallboard came in at about 25.4 billion square feet. That's back to a 2018 pace. So in this type of residential market, not at all surprised to see pricing have some downward trend. But again, very range bound relative to what we've seen and certainly relative to the demand environment that we're in. So not surprised by that at all. Trey Grooms: Yes. Yes. But I assume it's still your take that there's been a lot of changes in the industry and with the cost structure that we've talked about for years that have, I think, maybe changed -- made some changes with pricing over the long term being somewhat structurally higher just given the backdrop of some of those things. So is it still your take that modest declines could be expected, but these changes are still in place such that we shouldn't be expecting any kind of replay of some of the more drastic price swings that we saw maybe go back 10-plus years ago. D. Kesler: Yes. No, exactly. Given all the changes that have happened with raw material costs, this is what you would have expected to see happen, a pretty range-bound pricing environment even in light of a very difficult residential environment. So I don't see anything changing from that perspective. I do think there's upside on pricing as we get housing to recover and back to a reasonable level of construction activity. I think you'd see that fairly quickly. But in the current environment, yes, I still think prices are relatively range bound. Operator: The next question comes from Brent Thielman with D.A. Davidson. Brent Thielman: Just had a follow-up on the Wallboard side, just down 14% in terms of shipments. Just thoughts in terms of whether that's consistent across the footprint or you've got some -- potentially some regions outperforming that. D. Kesler: No, that was pretty consistent across our regions. And if you look at the total GA numbers, they were down 8%. Our regions underperformed that. So our business was pretty much in line with the regional performance. Brent Thielman: Okay. And then on the Lehigh JV, Craig, I guess, has been anticipating some improvement in terms of the profit contribution. Just wanted to get a sense of what we're seeing here in the December quarter sort of indicative of the market trends? Or there's still some operational noise under the hood there? Michael Haack: Yes. So with the JV itself, we're -- the plant itself is performing better. Texas was probably our most challenged market, both from a pricing standpoint and some on demand and its competitive nature with it. So I know Trey asked the previous question about across the U.S., where we see kind of our demand and our pricing and everything with it. And we've been very stable in every location except Texas had the most pressure. So you could really look at this as more of we had to adjust our pricing more in that area, which offset some of the benefits you'd see from our plant operating better on the profit side. Brent Thielman: Okay. All right. I appreciate that. Maybe just last quick one. Just in terms of the proposed price increases in Cement here to start the year, I think typically, you do some in January and some in spring. I mean, just from past experience, obviously, terrible weather across the country. Does that potentially push some of this more into the spring? Any thoughts around that? D. Kesler: Yes, Brent, I would say we have terrible spring every January and February. So yes, look, the volume improvement we saw here in calendar '25 is really good to see in terms of the incremental pricing opportunity as we head into calendar '26. We do have increases out there, as we talked about, they're spread throughout here the first couple of months of calendar '26. Exact realization, we'll certainly update everybody on. But we have the volume momentum, and that's a good sign and expect that to continue here into calendar '26. Operator: The next question comes from Anthony Pettinari with Citigroup. Asher Sohnen: This is Asher Sohnen on for Anthony. I was just wondering how we should think about maybe natural gas costs for Wallboard and Cement in the fiscal fourth quarter. I think natural gas prices have risen pretty meaningfully in recent weeks. So I'm just wondering how you guys are looking at that. D. Kesler: Yes. It's really more of a Wallboard thing. In Cement, you're going to burn typically more solid fuels than natural gas. In Wallboard, we do have a hedging program in place. So we're a little more than 50% hedged here through the winter, which is where we like to be because you will see these spikes when you get these winter storms that pop up. And I think that's what's driven natural gas here in the last week or so with the colder temps. Fully expect that to come back down more in line. There's not something that's structurally changed in the natural gas markets. So just a short period here during the winter, and we've got a good hedge position from that. Asher Sohnen: Okay. Great. And then one more for me. I mean with the pressure in Wallboard, it seems like it's coming a lot from new build. But I was wondering if you could talk about roughly what portion of the business is repair and remodel. I know it's a little bit smaller, maybe harder to estimate. And then what trends you might be seeing in that end market if you're able to get that visibility? D. Kesler: Yes. No, it's a good question. We talk about a lot of the new residential construction activity, but repair and remodel is, call it, 1/3 of the demand profile for Wallboard. And it's certainly meaningful and has been growing over the last many, many years. And it's a much steadier market, harder to get forecast data exactly, but at least the forward look there continues to see low single-digit type of growth and a very meaningful market for us. So it's a good question. Operator: The next question comes from Timna Tanners with Wells Fargo. Timna Tanners: I was hoping to follow up on the comments or questions about the upcoming quarter, if you had any specific observations on any impact to your operations from these storms? Anything you can comment on there? D. Kesler: As it relates specifically to the winter storms, our folks have done a really, really good job of preparing the facilities for very extreme cold temps, weather-proofing lines, raw material lines and things like that. So from the winter storm perspective, our folks and our plants are ready for it. Timna Tanners: Okay. I appreciate that. And then I was wondering if you can get into some more specific about what you're seeing about Cement imports. I think that's what you're alluding to in terms of Texas and California, but any updated observations there? Michael Haack: Yes. Really, how you look at it is any of the markets that could be served by imports, of course, it all depends on the freight rates and everything coming in. Texas is not just impacted by imports, though, with my comments there. There's been a structural change in the market in Texas a little bit with the ownership. And every time there is changes in it, people operate their plants a little bit differently and look at markets a little bit differently. So I think there has been some structural changes on how those plants that changed ownership, which is a significant portion of the production in the Texas market between the 2 facilities have different owners that they look at different. So we've just had different competitive pressures in Texas. As you get closer to the coast, imports definitely do have an impact, but it's kind of a -- it's not just one thing that's affecting Texas. It's more, and that led us to respond to some competitive pressures. Timna Tanners: Got it. Helpful. And then just finally from us on the CapEx comments, it seems like it was lowered from prior numbers. I'm just wondering if there's any basis or explanation for that. D. Kesler: No. Thanks, Timna, for bringing that up. We have been forecasting closer to $500 million. It's just timing. When you get these very, very large projects like Mountain Cement and the Duke plant, it's hard to exactly forecast when spending will occur. Nothing to change there. And then sustaining capital, we look very hard at what spending needs to occur there. And in light of the elevated capital spending, we've done a good job of prioritizing more of the sustaining capital, which ends up with a slightly lower number. Operator: The next question comes from Adam Thalhimer with Thompson, Davis. Adam Thalhimer: I wanted to start on capital allocation. How are you guys thinking about share repurchases and acquisitions after the November bond deal? D. Kesler: Yes. Look, that's where we spend a lot of our time. We've positioned the assets well. We've got a good group of operators. And so how we continue to allocate capital to generate value is where we spend the majority of our time. As we've said, and this really hasn't changed over decades, and that is the priority is to continue to grow the organization. But with a high bar for that growth, both strategically and financially and whether that's M&A or organic. So we have the 2 large organic projects underway, very excited about those and the returns they will generate. But we've also got a balance sheet that we can continue to pursue M&A activity, but remaining very disciplined on valuation there. And then you have our capital return strategy, and we certainly repurchased more shares this quarter than we had in quite some time. And some of that's also relative to the stock price. And so we still see value in the shares. But we're fortunate we can continue to kind of have a balanced offense across all 3 of those. Adam Thalhimer: Great. And then I wanted to ask about Wallboard margins. Can you talk a little bit about the puts and takes there? And I guess what I'm really getting after is if margins could stabilize at that Q3 level? D. Kesler: Yes. Look, I think we talked about we saw some sequential price declines there. I still think they're moderated given the structure and the changes that have occurred. Cost-wise, OCC continues to be at a pretty low level. Natural gas, again, it fluctuates a little bit during the winter, but don't see that as a long-term change. We own our primary raw materials. So nothing significant on the cost side that we're looking at today. But in a volume environment, we'll see where that goes. But we've positioned the business to continue to perform at this high level even in this difficult environment for residential construction. So I think we'll continue to see good performance. Adam Thalhimer: Okay. And last one for me. The Wallboard comps get a lot easier starting in late calendar '26. I'm just curious if there's any reason for optimism on volume stabilization or maybe even a little bit of growth as we get to the back half of the year. D. Kesler: Yes. Look, there's a lot of moving parts when it comes to homebuilding right now. So I would say our optimism is around how well our assets are positioned, the cash flow that we're generating even in this environment and our ability to continue to make good return investments. So we'll deal with the choppiness. When it does recover, I think it recovers meaningfully, and you'll see a significant upward inflection there, but maybe a little early to call that. Operator: The next question comes from Philip Ng with Jefferies. Philip Ng: Michael, great color on the Texas market for Cement. Are you seeing any other regions where you're seeing price competition be a little more elevated perhaps in the West? I know the last earnings call, you guys announced an $8 per ton cement price increase in all the markets ex Texas and the West. Have you announced price increases in those markets? And any early read on how the Jan increase is progressing? Are you seeing any traction? Or are you seeing some pushback here? Michael Haack: It's a great question. When we look across the U.S., we're very happy with the remainder of our markets. I mean some markets -- each market is independent of each other when you look at the supply-demand dynamics with it. But for the most part, we've announced price increases across the majority of our network with it. I highlighted Texas is the one that's the most challenged. Every other market structurally is in very good position, we feel. So there's nothing I would point out there. What's really -- what we're really going to determine over the next months is which ones -- as we talk with our customers, what that number is and if it's a January increase or an April increase, and that will be determined by individual markets. Philip Ng: Okay. That's helpful. And then I guess a question for you, Craig. Wallboard prices bled a little bit, right? No surprise there just given the dynamic on the homebuilding side. Are you expecting prices to kind of stabilize here and some of the weakness? Is that destocking related? Or it's just kind of normal trends in terms of underlying demand? How should we think about the wallboard side of things? D. Kesler: Yes, not really destocking in my view. Just it's a perishable product. So you don't -- you can't store it outside. So you're subject to the indoor storage at your own -- at our manufacturing facilities and the distributors. Look, as we said in the beginning, I'm not surprised by some of the pricing weakness, but it's all relative. It's down, but not down anything like what we would have seen in prior cycles, especially at this demand level. Utilization rates are higher just given some of the raw material issues. So again, I think pricing stays range bound. I wouldn't be surprised to see some further decline here, but I think it's all relative and certainly versus where we are with the demand side. Philip Ng: Got you. And just kind of one final question on the Wallboard side. Two of, I believe, your larger customers on the Pro distribution side now are owned by [ big box ]. I'm just curious, as you kind of look into 2026, have that relationship dynamic changed any way in terms of how you're talking about procurement conversations? Is it the same people or it's kind of merge where you have the retail side versus the Pro side having one conversation and any movement from a placement standpoint we should be mindful of this year? D. Kesler: Yes, Phil, I think it's probably a little early to have that definitive. See how -- again, you mentioned it, and it's an important point, very different business models, the traditional retail versus the mass distribution, how they run those is, I think, to be determined if they run them together or keep them independent because they are so different. So it's something that we'll continue to monitor, but maybe a little early to talk about that. Operator: The next question comes from Keith Hughes with Truist. Keith Hughes: A couple of questions on Wallboard. Given the volume, did you have to take extra downtime in the December quarter you kind of were expecting and same thing on the March quarter, we have some of that just given where housing is and where the trends are. D. Kesler: Keith, like we've always done, you match the production with the sales opportunity. It's more of a variable cost business, very different than Cement. You can run a Wallboard plant 7 days a week, you can run it 4 days a week. So you'll certainly modulate shifts depending upon the opportunity. Keith Hughes: Okay. And the -- switching back over to Cement. On the Cement side, I know you got price increases out. When will you kind of be able to definitively tell what pricing is going to be like for the year? Is that something that becomes evident in March? Or does it take well into the second quarter before the price settles in? Michael Haack: Keith, really, it's going to be dependent on our conversations we have with our customers and what those individual markets are. You'll see -- we'll update you on each quarter and you'll see it in the financial results with where we did the price increases and when. Our -- really, our conversations right now are on timing. We've announced them in those markets, and it's just on what timing we implement that makes sense for us and our customers. Operator: The next question comes from Garrett Greenblatt with JPMorgan. Garrett Samuel Greenblatt: I was wondering if you just touch on Cement pricing once again in terms of what have you announced in your current letters that you've already sent? And then maybe something like a low single-digit volume growth year for Cement, what has been the historical realization rate? D. Kesler: Yes. In terms of the price increases that have been announced, they've been around $8 a ton for most of our markets across the U.S., excluding Texas and the Far West markets. And timing ranges somewhere between January and April, kind of the first part of your calendar '26. And Michael said it earlier, but these markets are very regional. So they'll have a very different -- the pricing will be determined regionally rather than a national average. So that's what we're going through right now. Look, we're coming off of calendar '25 for us is really the first year where we -- in the first 3 years -- the last 3 years where we've seen volume improve. And so that has certainly improved utilization rates. And so that's been good to see. And as we head into calendar '26, again, optimism around volume continuing to grow and should push utilization rates higher. Garrett Samuel Greenblatt: And then just a follow-up on Wallboard. How did those demand trends, I guess, progress through the fourth quarter? Was there any momentum coming into calendar 1Q? D. Kesler: Look, it's been pretty consistent here in the second half of the year, which I think is pretty consistent with what the homebuilders has been reporting and others within kind of this light building materials sector, where the second half of the year was -- had a meaningful drop in demand profile. So I think as we head into calendar '26, again, you've got some winter issues here, but expect to continue to see a similar trend. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Michael Haack for any closing remarks. Michael Haack: Thank you, Drew. As we enter the final quarter of our fiscal year, we continue to prioritize health and safety, operational excellence and financial discipline while seeking growth opportunities that meet our strategic and financial criteria. I look forward to elaborating more on our strategic priorities next quarter as we wrap up our fiscal year 2026. Thanks to everyone for joining our call today. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Charles Nunn: Good morning, everyone, and thank you for joining our 2025 full year results presentation. It's great that the move to prelims has allowed us to update you earlier than prior years. This means that our organization can make a fast start and increase our focus on the year ahead as we enter the final stage of the strategy that we laid out in early 2022. I'm very pleased with our ongoing strategic transformation, and 2025 was another strong year for the group. We're building significant momentum that sets us up well to deliver upgraded 2026 commitments and stronger sustainable returns for the period. I'm very excited about the plans we're developing for our next strategic phase, and you'll hear more about this in July alongside our half year results. As usual, following my opening remarks, I'll hand over to William, who will run through the financials in detail. We'll then have plenty of time to take questions. Let me begin on Slide 3. I'd like to start by highlighting the following key messages. Firstly, our strategic delivery is accelerating and building momentum across the business. We're on track to meet or exceed our 2026 strategic targeted outcomes, delivering clear benefits for all stakeholders. Secondly, our continued strategic execution underpins sustained strength in financial performance and growth in shareholder distributions. We've announced a 15% increase in the ordinary dividend alongside a shareback (sic) share buyback of up to GBP 1.75 billion. And finally, we're confident in our outlook. We are upgrading our guidance for 2026 and are committed to further improvements in financial performance beyond this. Turning now to a performance overview on Slide 4. We delivered strong outcomes for all stakeholders in 2025. Our clear purpose of Helping Britain Prosper continues to drive attractive growth opportunities. This includes supporting our customers during a record ISA season and funding the growth ambitions of businesses that create opportunities across the U.K. These actions drive healthy franchise momentum, delivering growth across both sides of the balance sheet and market share gains in key focus areas such as personal current accounts. Taken together, the group is delivering sustained strength in financial performance. We returned to top line revenue growth during 2025 with increases in both NII and OOI, the latter up 9%. This supports a return on tangible equity of 14.8% and 178 basis points of capital generation, excluding the motor finance provision taken earlier in the year. On Slide 5, I'll provide a brief update on our outlook for the U.K. economy. As you've heard from me previously, we're constructive on our outlook for the U.K. We continue to forecast a resilient but slower growth economy with interest rates falling gradually in 2026. In addition, the financial position of both households and businesses continues to strengthen with emerging signs of growing capacity to spend and invest. Combined with the government's focus on regulatory reform and driving growth in key sectors, we believe the economy has the potential to move to a higher medium-term growth trajectory than is forecast today. We are well positioned against this backdrop with our strategy focused on faster-growing high-potential sectors such as housing, pensions, investments and infrastructure. We're already driving growth in these areas, leveraging our competitive advantages as the U.K.'s only integrated financial services provider. As a result, we expect the group to continue to grow faster than the wider economy over the coming years. I'll now turn to highlight our strategic progress, starting on Slide 6. We continue to successfully deliver a significant transformation. Over the last 4 years, we have meaningfully grown the balance sheet, driven diversified revenue growth, improved our cost and capital efficiency while significantly derisking the business and established a digital and AI leadership position. These actions have both enhanced the franchise and delivered attractive returns to our shareholders, including total capital distributions of around GBP 15 billion. We're now entering the final phase of our 5-year strategic plan with delivery accelerating and momentum growing. This is translating into significant financial benefits. We've generated GBP 1.4 billion of additional revenues from strategic initiatives to date and are today upgrading our 2026 target to circa GBP 2 billion. As part of this, we expect the other income contribution to be circa GBP 0.9 billion, ahead of our original '26 guidance. At the same time, we've now realized circa GBP 1.9 billion of gross cost savings, having met our upgraded 2024 target of GBP 1.2 billion last year. As you'd expect, we remain committed to driving further improvements in operating leverage. To bring this to life, I'll now spend a few minutes discussing our progress in more detail. Let me begin with our growth areas, starting with Retail and IP&I on Slide 7. In Retail, we are the leading provider across key products in our own and third-party channels. We further strengthened our position through growth in high-value areas and continue to develop our product range and capabilities to meet more customer needs. Mobile app users are now up circa 45% since 2021. In '26, we'll roll out in-app AI agents for these customers with these currently in [ colleague beta ] testing. In IP&I, we're deepening relationships as an integrated bancassurance provider, expanding our product offering through exciting partnerships. We're also transforming engagement through our Scottish Widows app with further growth expected in 2026 as we launch to the open market. Complementing our strategic delivery, we announced the acquisition of Schroders Personal Wealth in the second half of last year. It's early days, but we're really pleased with our progress, and we'll rebrand the business to Lloyds Wealth in the coming months. The acquisition is an important enabler to delivering our ambition for a market-leading end-to-end wealth offering, providing us with an opportunity to deepen relationships with our mass affluent customers and workplace clients. Let me continue on Slide 8. Our Commercial Banking division captures both BCB and CIB businesses. In BCB, we're building the best digitally led relationship bank, building upon our strong deposit franchise and rolling out new mobile-first journeys to support growth in targeted sectors. Our BCB gross net lending increased by 15% in 2025, and we are committed to further growth this year. And in CIB, we're driving revenue diversification through growth opportunities aligned to our simple cash, debt and risk management model. For example, FX volumes increased by over 20% in the year, supported by the launch of a market-leading algorithmic trading solution. We were also awarded a landmark U.K. Government banking services contract, a testament to the investment we've made in our award-winning cash management and payments platform. Finally, equity investments is a growing contributor to the group, now representing nearly 10% of group OOI. Lloyds Living has now grown to nearly 8,000 homes since launching in 2021, whilst LDC generated more than GBP 600 million of exit proceeds during the year. On Slide 9, I'll now talk about the ongoing drivers of OOI more broadly. Since 2021, we've delivered strong OOI growth across each of our business units, reflecting a resilient and diversified portfolio. For example, our Retail business has benefited from growth in our Motor franchise, whilst Commercial Banking has been supported by renewed focus in our Markets business. We've also realized the benefits from improved cross-group collaboration such as increasing protection take-up rates across mortgage journeys and leveraging the full breadth of the group to meet the ancillary needs of commercial clients. We delivered 9% growth in 2025, consistent with prior years and are confident in our outlook. Going forward, other income will also benefit from the full impact of the Lloyds Wealth acquisition, and we expect to unlock more value from this business over time. Turning now to cost and capital efficiency on Slide 10. We remain focused on delivering an organization that drives continued improvements in cost efficiency and capital intensity. As I mentioned earlier, we've now delivered circa GBP 1.9 billion of gross cost savings since 2021. This has been supported by the ongoing shift to mobile first and consequent refinement of our physical footprint as well as actions taken to reduce both the size and complexity of our legacy technology estate. These savings reinforce our confidence in delivering a cost/income ratio of below 50% in 2026. On capital efficiency, we've now delivered GBP 24 billion of gross RWA optimization since 2021. We continue to target more than 200 basis points of capital generation in 2026 and we'll now consider excess capital distributions every half year, reflective of our increasing confidence. I'll now move to Slide 11 and focus on our enablers of people, technology and data. As you heard in our digital and AI seminar in November, we're making strong progress against our clear strategic priorities. We have significantly enhanced our infrastructure, actively managing our legacy estate and increasingly building on modern technology. The ongoing investment in our people is critical to our success with circa 9,000 technology and data hires since 2021. These actions have created the platform for increased innovation. Digital-first propositions such as your credit score are driving clear benefits for both customers and the group. Our strong execution to this point means we're well positioned to take advantage of future opportunities. We're innovating and leading across new and emerging technologies, launching industry-first use cases at scale in the U.K. These areas will be critical to driving further enhancements to operating leverage in the future. I was incredibly proud to see that our efforts were recognized across the industry during the year. But importantly, we're not done. I see further significant potential in the coming years. Now turning to Slide 12, where I'll provide more detail on how we're thinking about AI specifically. In 2025, we scaled 50 Gen AI use cases into full production, demonstrating significant potential and generating GBP 50 million of in-year P&L benefit. It should be stressed that this is based on a narrow definition of the latest technology with the full spectrum of digital and AI initiatives contributing around 70% of our upgraded strategic initiatives revenue and over 60% of the total gross cost savings realized since 2021. This represents a strong foundation for us to accelerate our progress in '26, where we intend to increase the number of use cases with a particular focus on high-value agentic opportunities. This will deliver more than GBP 100 million of P&L benefit in 2026, capturing both revenues and costs with significant upside beyond this as use cases are scaled and mature. This is just the start of the journey, and we will, of course, talk more about our plans in this space as part of our strategic update in July. I'll now turn to Slide 13 and bring this together with a view on how we're building operating leverage in 2026. We've increased our net income by GBP 3 billion over the last 4 years. During this period, we have mitigated several headwinds, including those from the mortgage book and deposit churn with these partially offset by the structural hedge earnings growth of more than GBP 3 billion. As a result, the majority of this growth has been linked to management of the BAU business and the GBP 1.4 billion of strategic initiatives revenue, including a significant OOI contribution. We expect to deliver continued improvements in net income in 2026. Whilst headwinds will persist, these will be more than offset by an additional GBP 1.5 billion of structural hedge earnings and continued growth within the core franchise. This accelerating income growth, combined with flattening costs will further improve operating leverage and underpin the delivery of a cost/income ratio below 50% in '26. Let me now close on Slide 14. So as you've heard, we are successfully executing our strategy. This is reinforcing our competitive advantages and underpinning the delivery of strong shareholder outcomes. Indeed, reflective of our momentum, we are today upgrading our return on tangible equity target to be greater than 16% for 2026. Our confidence extends beyond this, and we're excited about sharing our updated strategic plan with you in July. We'll provide more details on the actions we'll be taking to further strengthen and grow the core franchise, address new diversified growth opportunities and deliver continued improvements in productivity, enabled by our leadership position across new and emerging technologies. We will, of course, share more detail on our medium-term financials at that stage, too. Beyond 2026, we are committed to continuing income growth, improving operating leverage and stronger sustainable returns. Thanks for listening. I'll now return briefly at the end. But for now, I'll hand over to William to cover the financials. William Leon Chalmers: Thank you, Charlie. Good morning, everybody, and thank you again for joining. As usual, I'll provide an overview of the group's financial performance, starting on Slide 16. Lloyds Bank Group delivered sustained strength in its financial performance in 2025, in line with guidance. Statutory profit after tax was GBP 4.8 billion, equating to a return on tangible equity of 12.9% or 14.8%, excluding the Q3 motor provision. Within this, we delivered robust net income for the full year of GBP 18.3 billion, up 7% versus 2024. This was driven by sustained growth across NII and other income, up 6% and 9%, respectively. In the fourth quarter, net income was 2% higher versus Q3. This was driven by a 4 basis point increase in the net interest margin, continued balance sheet growth and further momentum in other income. Operating costs for 2025 were GBP 9.76 billion, up 3% year-on-year as continued investment, business growth and inflationary pressures were partly mitigated by further efficiency savings. Remediation charge for the full year was GBP 968 million, GBP 800 million of this relates to the additional motor finance charge in Q3. Credit performance meanwhile remained strong with an impairment charge of GBP 795 million for the full year, equating to an asset quality ratio of 17 basis points. Tangible net asset value per share ended the year at 57p, up 4.6p in 2025. Our performance for the year included capital generation of 147 basis points or 178 basis points, excluding the motor provision. This enabled a 15% increase in the ordinary dividend and a GBP 1.75 billion buyback while maintaining a 13.2% CET1 ratio. Let me now turn to Slide 17 to look at Q4 growth in lending and deposits. We saw a healthy balance sheet momentum in 2025. Lending balances closed the year at GBP 481 billion, up GBP 22 million or 5%. In Q4, lending balances grew by GBP 4 billion. Within this, retail saw growth across all of our business lines. Mortgages were up GBP 2.1 billion, strong but slightly slower than Q3 given higher maturities. Highlights elsewhere in Retail include credit cards, which grew GBP 0.5 billion with continued market share gains and European retail also up GBP 0.5 billion in the fourth quarter. Commercial lending was GBP 0.2 million higher. This represents further growth in targeted areas within CIB and business-as-usual performance within BCB, partly offset by continued government-backed lending repayments. Turning to liability franchise. Total deposits increased by GBP 13.8 billion or 3% in the year. Q4 was down slightly by GBP 0.2 billion. The fourth quarter saw growth in retail deposits across both savings and notably PCAs, with deposit churn continuing to ease as we had expected. Commercial deposits meanwhile, were down GBP 1.5 billion in Q4, driven by actions on low-margin funding as well as by seasonal outflows in BCB. And alongside these developments, insurance, pensions and investments saw open book net new money flows of GBP 7.9 billion for the year, including GBP 4.2 billion in Q4. This, of course, now includes inflows from Lloyds Wealth. Let me turn to net interest income on Slide 18. Net interest income for the year was GBP 13.6 billion, in line with our guidance. This represents an increase of 6% year-on-year, with Q4 up 2% versus the prior quarter. Across both the year and Q4, strong hedge income and business volume growth were partly offset by mortgage repricing and deposit churn headwinds. Average interest-earning assets of GBP 463 billion for the full year were up 3% compared to 2024. Q4 AIEAs were just over GBP 470 billion, up GBP 4.8 billion. Our net interest margin increased 11 basis points to 3.06%. This included a Q4 margin of 3.10%, up 4 basis points on Q3, driven by a significant pickup in hedge income, again, as we had expected. The nonbanking NII charge in 2025 was GBP 515 million, up GBP 46 million or 10% year-on-year, supporting growth in OOI. For 2026, we are guiding to NII of around GBP 14.9 billion. Within this, we expect margin expansion alongside continued healthy balance sheet growth across both retail and commercial. Our guidance incorporates further hedge income uplift of circa GBP 1.5 billion, partly offset by mortgage refinancing and easing deposit churn. Alongside, we also expect some growth in nonbanking NII charge consistent with associated business growth in OOI. Let me turn to mortgages on Slide 19. Mortgages grew by GBP 10.8 billion or 3% in 2025 to GBP 323 billion, supported by a growing market and a flow share of around 19%. We've continued to benefit from our strategic investment in the Homes ecosystem, enabling us to build customer relationships, including in higher-value direct lending and to retain more balances. It remains a competitive market. Q4 completion margins were again around 70 basis points with a further 1 or 2 basis points of tightening during the quarter. We continue to enhance the customer journey by integrating protection and home insurance. In 2025, we saw protection take-up rates in mortgages increase by 5 percentage points to 20%. There is further to go. I'll now turn to Slide 20 to look at developments in consumer and commercial lending. We saw a strong performance across our consumer portfolios in 2025 and a strengthening performance in commercial. Combined, cards, loans and motor grew GBP 4.1 billion or 10% year-on-year. We are taking market share in all 3 segments, driven by leveraging better data to add personalization and by launching innovative new products such as Lloyds Ultra within credit cards. Turning to Commercial Banking. Lending was up GBP 2.7 billion in the year or GBP 4.1 billion, excluding government-backed lending repayments. We saw encouraging progress in CIB, particularly in strategic areas such as infrastructure and project finance. This was partially offset by BCB lending, which held steady when excluding government-backed lending repayments or down GBP 1.4 billion if they are included. Let me turn to developments in the deposit franchise on Slide 21. Our deposit franchise continues to perform well. Total deposits ended the year at GBP 496.5 billion, up GBP 13.8 billion or 3%. Retail deposits were up GBP 5.5 billion or 2% in the year. Within this, current account balances grew by GBP 1.5 billion, representing growth in our market share of balances during the period. Retail savings meanwhile, grew by GBP 4.3 billion or 2%. This was driven by targeted participation throughout the year with a strong ISA season in the first half, followed by slower growth in H2 as we managed our portfolio. In Commercial, deposits grew strongly by GBP 8.5 billion or 5% on the back of growth in our targeted sectors. Notably, noninterest-bearing deposits stabilized and indeed grew a little in the second half. The performance and stability of our deposits are what underpin the structural hedge, which I will now talk to on Slide 22. The structural hedge is a strengthening tailwind to NII. The hedge notional stood at GBP 244 billion at the year-end, up GBP 2 billion over the year, supported by our high-quality deposit franchise. Hedge income in 2025 was around GBP 5.5 billion, a material step-up from last year and a little above our guidance. During Q4, the weighted average life increased to about 3.75 years built off continued strength in our deposit balances. And as previously guided, we expect a roughly GBP 1.5 billion step-up in hedge income to circa GBP 7 billion in 2026. We then expect hedge income to reach around GBP 8 billion in 2027 and to continue growing to the end of the decade as yields converge with market rates and as the notional slowly builds. Let's now turn to other income on Slide 23. Other operating income performance in 2025 was once again strong. OOI was GBP 6.1 billion in the year, up 9% versus 2024 and up 2% in Q4 versus Q3. The latter was supported, of course, by the full acquisition of Lloyds Wealth. Growth over 2025 has been broad-based. Retail is up 12% with strength in motor leasing as well as growth in cards and banking fees. Commercial was up 1% with solid growth in our Markets and Transaction Banking businesses, offset by lower loan markets activity. Insurance, Pensions and Investments meanwhile, grew by 11%, driven by strong performance in general insurance and workplace as we continue to focus on our strategic choices in this area. And our equity investments business was up 15%. This was particularly driven by Lloyds Living more than doubling its OOI during the year. Operating lease depreciation was GBP 1.45 billion in the year, up 10% versus 2024. This was driven by fleet growth, higher-value vehicles and to an extent, electric vehicle price movements, altogether, essentially in line with the OOI growth generated by the vehicle leasing business. Moving to costs on Slide 24. Cost discipline remains critical to the group. Operating costs were GBP 9.76 billion in 2025, in line with guidance, excluding the impact of the Lloyds Wealth acquisition in Q4. Year-on-year cost growth of 3% is on the back of continued strategic investment, volume growth and inflationary pressures, partly offset by further efficiencies. As Charlie highlighted earlier, since 2021, we have now delivered cumulative gross cost savings of circa GBP 1.9 billion, thereby creating capacity for strategic investment across the business. The 2025 cost/income ratio was 58.6% or 53.3%, excluding remediation. And looking ahead, as you know, we remain committed to delivering a 2026 cost/income ratio of less than 50%. Based on our current plan, that implies operating expenses of less than GBP 9.9 billion. This is in line with the flattening cost trajectory that we have previously indicated as our investment in this strategic cycle culminates. On top of that, inflation moderates and cost benefits are fully realized. Remediation for 2025 was GBP 968 million, including the GBP 800 million motor provision taken in Q3. There is no update on motor in Q4. We wait to see the detail of the FCA's final proposals post the consultation in the next couple of months. Let me turn to credit performance on Slide 25. Credit performance remains strong, reflecting our prime customer base, prudent approach to risk and healthy customer behaviors. Across Retail, new to arrears remain low and stable. Early warning indicators likewise are also benign. In Commercial, after some idiosyncratic cases in H1, the H2 picture has been very constructive. The 2025 impairment charge was GBP 795 million, equating to an asset quality ratio of 17 basis points. This incorporates a small MES charge, but also benefits from model calibrations and refinements. Indeed, we consider the underlying charge to be just below 25 basis points. The Q4 impairment charge is GBP 177 million or 14 basis points, including a GBP 47 million MES charge to reflect a slightly higher unemployment peak. Our stock of ECLs on the balance sheet now stands at GBP 3.4 billion. That's around GBP 0.4 billion in excess of our base case and leaving us well covered. Looking forward, we expect the asset quality ratio to be circa 25 basis points for 2026, similar to the underlying run rate that we've seen during 2025. I'll now turn briefly to our macroeconomic outlook on Slide 26. The macroeconomic outlook remains resilient. In the fourth quarter, we've made only minor changes to our base case versus Q3. We now forecast GDP growth of around 1.2% in 2026. Against this backdrop, our unemployment forecast increases marginally, now peaking at 5.3% in the first half of the year. Easing inflation meanwhile, allows for two 25 basis point reductions in the bank base rate during the year to 3.5%. This reflects a slightly lower rate than we previously expected, albeit we still expect a modest pickup later on in the forecast period. And in Housing, we assume growth in house prices of around 2% in 2026 and '27. That is supported by the slightly lower interest rate environment. Let me now turn to our returns and TNAV on Slide 27. In 2025, our return on tangible equity was 12.9% or a robust 14.8%, excluding the motor provision. Within this, restructuring costs were low at GBP 46 million, including GBP 30 million in Q4 with integration costs relating to Lloyds Wealth and Curve. The volatility and other items charge was GBP 70 million. This includes an GBP 87 million benefit in the final 3 months, incorporating a fair value uplift from the Lloyds Wealth acquisition. Tangible net asset value per share meanwhile, increased to 57p, up 4.6p or 9% in 2025. The increase was driven by profits, cash flow hedge reserve unwind and the reduced share count from our buyback programs, offset by shareholder distributions. And looking forward, we continue to expect TNAV per share to grow materially driven by these same factors. Given the momentum across the business, as Charlie said, we are upgrading our expectation for 2026 return on tangible equity to greater than 16%. Turning now to capital generation on Slide 28. The group remains highly capital generative and will become more so. In 2025, we generated capital of 147 basis points or 178 basis points, excluding the motor provision, in line with our guidance. Within this, risk-weighted assets closed the year at GBP 235.5 billion, up GBP 10.9 billion. This was driven by strong lending growth as well as GBP 2 million related to the implementation of CRD IV taken in Q4. This reflects our model outcomes, which are subject to PRA approval and therefore, of course, risk of modification. As planned, we paid down to a CET1 ratio of 13.2% at the end of 2025. And looking forward, we continue to expect 2026 capital generation to be more than 200 basis points. Beyond that, as you know, Basel 3.1 implementation is now scheduled for the 1st of January 2027. We expect this to result in a day 1 RWA reduction of around GBP 6 billion to GBP 8 billion on implementation. Our strong capital generation supports healthy and indeed growing shareholder distributions. So let me talk to that on Slide 29. We continue to grow our shareholder distributions at an attractive pace. For 2025, the Board intends to recommend a final ordinary dividend of 2.43p per share, taking the total dividend to 3.65p, up approximately 15% year-on-year. In addition, we've announced a share buyback of up to GBP 1.75 billion. And together, this represents a total capital return of up to GBP 3.9 billion, up 8% on 2024 and equivalent to around 6% of our current market capitalization. Dividends have grown consistently over our strategic plan with the 2025 dividend now up more than 80% versus '21. They remain at a payout ratio that allows for continued strong growth. Over the same period, our consecutive buybacks have also reduced share count by more than 17%. We remain committed to paying down to our target CET1 ratio of around 13% by the end of 2026. In addition, given our confidence in growing capital generation, we will now review excess capital distributions in addition to ordinary dividends every half year going forward. Let me wrap up on Slide 30. To summarize, in 2025, the group's financial performance showed sustained strength. Strategic execution and business momentum delivered continued balance sheet and income growth alongside cost discipline and asset quality, allowing for growth in shareholder distributions. As we look ahead to 2026 and the culmination of our current strategic plan, we are confident in delivering on the financial guidance you can see set out in this slide. Beyond 2026, we are committed to continuing income growth, improving operating leverage and stronger sustainable returns. That concludes my comments for this morning. Thank you for listening. I'll now hand back to Charlie for closing remarks. Charles Nunn: Thank you, William. So as you can see, our strategic delivery is accelerating, and we're building significant momentum. We're creating a stronger, more diversified, more efficient and more capital-generative group. This, in turn, supports increasing shareholder distributions. We have today upgraded our return on tangible equity guidance for 2026 to be greater than 16% and are confident in the outlook beyond this. I look forward to providing much more detail on the next stage of our strategy and the associated medium-term financial plan in July. Thank you for listening this morning. We're now very happy to take your questions, and I'll hand over to Douglas, who will manage the Q&A. Douglas? Douglas Radcliffe: Thank you, Charlie. We will, as normal, be taking questions -- written questions online as well as questions in the room. [Operator Instructions] Okay. Why don't we start with Guy? Guy Stebbings: It's Guy Stebbings from BNP Paribas. The first question was on deposits. I think it's probably fair to say over the past year, if not longer, deposit flow has been better than expected, but Q4 was a touch softer mainly on the commercial side. I don't know if you could talk to any more in terms of whether that's just seasonality and then your expectations into 2026 in terms of pace of deposit growth, whether you're assuming kind of static mix effects and anything you might be able to elaborate in terms of deposit pass-through assumptions? And then the second question was on costs. Very reassuring performance in '25. The guidance for '26 in terms of limited absolute cost growth is encouraging. Just wondering how much we can sort of read into that, your ability to continue to run the business with limited absolute cost growth? Or is it more a function of the fact that it was a plan that was always expected that in 2026, you would see less growth in that particular year. Obviously, I'm thinking into beyond '26. So appreciating you're not going to be too specific. Douglas Radcliffe: Excellent. Thanks, Guy. I think both deposits and costs are probably questions for yourself, William. William Leon Chalmers: Sure. Yes. Thanks for the questions, Guy. In relation to deposits, the deposit performance, as you say, over recent years has been really very strong, and that's obviously what supported the structural hedge amongst other things within the balance sheet. So a good franchise with some good financial effects. When we look at 2025, we saw deposit growth of almost GBP 14 billion, GBP 13.8 billion over the course of the year, about 3%. So a really pretty good deposit performance during the year. Within that, we saw Retail up GBP 5.5 billion. We saw Commercial Banking up GBP 8.5 billion. So good to see deposit growth in the various different parts of the business, including within the subcomponents of each of those divisions, Retail and Commercial, some pretty healthy deposit performance in respect to the different components. So that's the way in which we see the year. Now within any given quarter, of course, we are going to be managing the deposit base as appropriate based upon making sure that we make the most of the franchise, offering, of course, good customer value and respecting the funding needs of the business. And so within -- on a quarterly basis, you're going to see variations in deposit performance, which reflect each of those imperatives. But over the year, at least, you should expect to see healthy deposit performance as you did in '25. I think in respect of your particular point on Commercial, the 2 points that I would make are seasonal outflows. We see those kind of every quarter or every fourth quarter, I should say, in respect of certain subsectors, education was one over the course of this quarter, indeed, a bit of a mix effect there, too. Alongside also a bit of management in terms of very low-margin deposits, which, as you can imagine, occasionally collect themselves within the Commercial Banking part of the business. So we'll manage that in the interest, as I say, of customer value of the funding position of the bank and of making sure that we make the most of the franchise. The other point I would make in respect of quarter 4, Guy, which is good to see is stability in NIBCA across both the retail and the commercial businesses. And within that, within retail businesses, PCA balance is up GBP 1 billion, which, as you know, is a crucial customer relationship product for us, and therefore, we pay very close attention to it. So it's good to see that being so strong in the course of the fourth quarter. You asked about 2026. I think overall, when we look at '26, we're expecting to see deposit performance, not too dissimilar really to what we saw during the course of '25 in terms of overall volume. There may be some gives and takes in that in terms of the different divisions. We'll obviously manage the business as appropriate. What I would expect to see within that overall deposit book is a slowing down in churn, just as we have seen in the course of '25, including in the latter part of '25. And that is simply off the back of bank base rates, if you like, coming down to lower levels and therefore, deposit churn easing off the back of it. At the same time, we'll also see the effect of 2 bank base rates. That's more of a financial point than a volume point, if you like, but worth bearing in mind. So good performance in '25. We do expect to see continued good performance in '26 of roughly speaking, the same type of proportions. In respect of costs, cost discipline, as I mentioned in my comments, absolutely critical to the group. Cost discipline remains an absolute imperative. When we see our cost performance during the course of 2025, first of all, GBP 9.76 billion in total, that's about a 3% cost growth over '24. Within that, if you exclude severance, which, as you know, bumped up a little in '25, then it's 2.4%. And actually, if you exclude severance plus Lloyds Wealth in the fourth quarter, it's 2.3%. So stripping out those 2 elements, if you like, it's a 2.3% underlying cost rise in '25 versus '24. When we look forward, you'll see from our numbers that we're looking at a cost base, which is expected to be less than GBP 9.9 billion. That is in total about a 1% rise, '26 over '25. And that represents a number of things. It is worth saying actually before going into them, that obviously includes the added costs of Lloyds Wealth, which I think we mentioned at Q3 around GBP 120 million. And then also the added cost of the Curve acquisition as well, which we haven't put a number on, but that obviously is an incremental cost base that we have to absorb. And so the cost increase, if I can call it that, to sub GBP 9.9 billion in '26 takes into account those additional headwinds and effectively absorbs them in our ongoing cost management. Now to your point, what is leading to that cost outcome in '26? A number of things really. We're obviously being helped by inflation coming in a little. That affects things like pay settlements. It obviously affects third-party contracts and the like. So that's all helpful, declining inflation. Alongside of that, that bump in severance that we saw in '25 irons itself out a little bit. So we're seeing a little bit of a benefit from that. But then more importantly, we are seeing the landing of our strategic initiatives or at least those strategic initiatives that are focused on cost benefits. Added to that, the full year benefit of the cost initiatives on a BAU basis that we took in '25. So those 2 factors, the landing and benefit of strategic initiatives, number one, and the full year benefit of '25 initiatives in '26, they're pretty helpful, too. And then I mentioned earlier on that as we come into the final year of our strategic plan, the investment plans, if you like, the investment expenditures are slowing off a little bit. That gives us a little bit of benefit as the cash investment slows. It's about GBP 100 million, put that in the -- if you like, in your considerations. But that is the natural culmination of the strategic initiatives and the investments that we've made, both from the revenue customer proposition side as well as the infrastructure of the business over the course of the '22 through '26 period. You asked about looking forward. You'll have seen in both Charlie's and my presentation that we talked about our commitments beyond '26. And we talked about them in the context of income growth, number one. We talked about them in the context of increased -- improving operating leverage, number two. And we talked about them in the context of improving returns, number three. The second of those 3 points, improved operating leverage effectively means a commitment to reducing the cost-income ratio. When we look forward, we are going to continue to invest in the business, you would expect us to because it's absolutely imperative to maintain the primacy of the franchise and the strength of the franchise today. And that will require investment in the type of sectoral evolution that we're seeing. But you have that all done being committed to within the context of an improving operating leverage, declining cost/income ratio environment. We'll obviously talk more about specifically what that means when we get to the summer of this year, but we felt those commitments were important to make. So you have some sense of direction from us in advance of that. Thank you. Benjamin Toms: It's Ben Toms from RBC. The first question is on NII. I mean you guided for 2026 of GBP 14.9 billion. Just to clarify, should we expect NII and NIM progression every quarter as we go through the year? And is there any lumpiness in the structural hedge maturities that are worth calling out? And then secondly, on capital, you talked about reviewing your capital distribution now on a half yearly basis going forward. How should we think about that for the half 1 of 2026? Will you come down to that 13% by the half year? Or should we think about that as a straight line, so halfway there by the time we get to the half year results? Douglas Radcliffe: Thanks, Ben. Again, I suspect that those are very much questions for William. William Leon Chalmers: Yes. Thanks, Ben, for both of those questions, and I'll answer them in turn. In respect of NII, you asked specifically about the shape of NII over the course of '26. So I'll come back to that, but I just want to make a couple of comments in respect of the overall guidance of 14.9% to put that in context, if you like. When we look at NII performance over the course of '25, we're obviously pleased with the outcome off the back of margin expansion and indeed AIEA growth, including that GBP 22 billion of incremental lending that we did during the year, up 5%. That led to NII growth of 6% during '25. Now we put forward guidance, which shows a further 9% increase in 2026. So a pretty solid growth expectation, if you like, for 2026 going forward. And again, that's built off of similar things. That is to say net interest margin expansion, probably a step more in '26 versus what we saw in '25 actually, plus, of course, AIEA growth expectations. We do expect net interest income to continue to grow in the years beyond that. And that is indeed partly what's behind the first of the 3 comments that both Charlie and I made about expectations after '26. When we look at that, we obviously calibrate the guidance in the context of what we are highly confident in delivering, and that's where GBP 14.9 billion expectation comes from. Within that, there are headwinds and tailwinds in the margin and perhaps we'll come back to that in the course of this discussion alongside AIEA growth expectations, as said. And we've, of course, absorbed a further bank base rate reduction in the course of '26 in calibrating the guidance that we've come up with. In respect of the pattern during '26, I would say, should you expect NII growth or should you expect NII and net interest margin expansion in every quarter over the course of the year? I won't guide too precisely to it. But broadly speaking, yes, you should do. That is going to accelerate and slow down from one quarter to the other for sure. But over the year, you should expect a steady growth in NII off the back of margin expansion quarter-on-quarter. Some quarters, however, will be faster than others. And behind that, of course, is, to your point, the -- a little bit the kind of the ebbs and flows, more the flows clearly of the structural hedge, but flows at different paces, I guess, of the structural hedge. So that's partly what will be behind that net interest margin expansion. The other point I would make is if you're looking at the quarters, just bear in mind that quarter 1 has a lesser day count versus quarter 4. So you need to take that into account in the context of NII expectations for that quarter in particular, simply because we're coming up to it. In relation to the buyback, as you say, we've moved to a buyback of 2x. Why have we done that? Over the last couple of years, at least, we felt that 1x per year buyback was appropriate in the context of giving you clear guidance as to what we expected and in the context or rather appropriate as we reduce the capital ratio of the business down to ultimately 13% at the end of this year. As Charlie said in his comments, as we increase our confidence in the capital generation of the business going forward and as the regulatory picture gets clearer, we feel it is now appropriate to move to 2x per year. And indeed, that gets us to, on average, being closer to our capital target of 13% over the course of the year. So there's good reasons behind it, and it gets us to an outcome that is more consistent with our overall 13% capital target. You asked about timing and how we'll look at it at the half year. We'll obviously let the Board deal with the buyback as appropriate at the half year. We will take into account clearly the position of the existing buyback and where we are at that point. The one point that I would make in that context is that in the past, as you know, we have seen buybacks end in August. We've also seen buybacks end in December. This year, we have a buyback that is a little higher than it was last year. We obviously had a much bigger -- or a much larger market capitalization of the overall company. And therefore, one would expect the buyback to -- if it's constrained by things like average daily traded volume, which these things typically are, to proceed at perhaps a slightly faster pace than it might have done previously. Overall, we will look at the buyback consideration at the half year. We will decide on what the quantum of the buyback should be at that point in time, taking into account the available capital stock of the company, taking into account the business needs on a go-forward basis and of course, ensuring that we preserve the position of the company. You asked specifically about how close we get to 13% at that point. Our objective right now is that we will get to 13% at the end of 2026. That's been our objective for a while now, and we maintain that position as we stand today. We'll take a look at it again at the half year. Douglas Radcliffe: Excellent, why don't we take the next question from Jason in the middle row here. Jason Napier: Jason Napier from UBS. Perhaps one question for William and one for Charlie. William, just coming back to the earlier question on deposits. I think you did a great job of handling the volume side of things. Commensurate with the bigger market cap that almost everyone now has, there's a lot of investor sensitivity around commercial intensity and what's happening to competition. So -- and particularly on the deposit side, I wonder if you could perhaps add a little color on that. And then, Charlie, the firm has done an admirable job of dealing with a really volatile macro environment over the 5-year period of the plan. One of them is the emergence of Gen AI as a thing that we all talk ad nauseam about now. What do you think has happened to the efficient frontier of cost/income ratios for banks over the period of the plan. Where do you think a modern Lloyds -- a fully modernized Lloyds, I should say, ought to operate from that perspective? Douglas Radcliffe: Thank you, Jason. William, I think obviously, deposits is for yourself and then Charlie, the AI side. William Leon Chalmers: Sure. Yes. Thanks for the question, Jason. I think you have to judge us by our results in some respects, at least. So the way in which we respond to the competitive environment is hopefully by delivering sustained franchise growth. And once again, you've seen that in 2026 with GBP 13.8 billion growth in deposits. I mentioned earlier on that we expect continued deposit growth during the course of 2026 and indeed beyond. So I think that's probably the base answer. What would I say in terms of competitive environment? Yes, to a degree, at least, it is increasing in its competitive intensity. I do think there are various different reasons for that. Some of them will be present for a while, i.e. they're more systemic. Some of them may be a little more transitory. We've seen, for example, quite a lot of competition from some of the fintech challenges, and there's much talk about that and the market share that they may be gaining or accessing. How do we respond to that? We respond in the context clearly of enhancing capabilities of our offering. That obviously includes things like app capabilities. Alongside of that propositional improvements, which you've seen a consistent flow of over the course of the last few years. Alongside of that, very competitive pricing in the markets that we want to be when we want to be in them. So we won't necessarily, if you like, be there all the time in every single case, we'll be there where we need to be. And in the context, obviously, of the systemic security that Lloyds offers, the branch offer that it offers, the brand and marketing and so forth. So overall, we see our competitive position versus some of those other factors within the deposit market is gradually strengthening, as said, endorsed by the deposit performance that we've seen across the franchise. One good indicator of that, going back a little to the earlier question is the PCA performance, which for us, as said, is the absolute critical relationship product. Balance is up GBP 1 billion in the course of quarter 4, balance is up GBP 1.5 billion during the course of '25 as a whole. And that is in the context of continuing market share gains from a balance perspective, which is good to see. So Jason, the competition is relevant. It's clearly something that we take very seriously. I do think the results that we show up against that competition withstand scrutiny. Charles Nunn: I might just add one thing to that. I don't want to jump on all of these questions because it's a really important question, obviously. We made the point around market share gains in personal current accounts. We've also done that in business current accounts over the life of this cycle, and those are 2 very important areas for any organization, but especially given our strategy. When you get to savings and investments, we performed very well on Instant Access money, which is money for liquidity purposes. And last year, we had a very strong ISA tax season, but as you get into time deposits, obviously, the margin for shareholders will depend on the pricing and the competitive context. They don't support directly the structural hedge. So we typically compete there from a customer proposition and a broader relationship perspective, but we won't chase market share for the sake of chasing market share where it's not relevant to our customers and where it's not relevant to our shareholders. So we really look at quite a differentiated view of the deposit base. And you're right, it's a competitive market. That's good for customers. Last year, we traded very well and offered great offers. Let's see where the market is this year. The really core part of this is really competing where we have the stable funding and stable deposit base that shows trust. Just on your second question, wow, we could spend the whole of the morning. Thank you for asking me a question, Jason. And look, I'm not going to give you the complete answer because it's -- I think it's partly one of the discussions we'll have in July. I think a couple of thoughts that are very helpful. The first thing is -- we've said a few times now, and we did it in the seminar back in November that about 60% of the GBP 1.9 billion gross cost saves we've delivered over the last few years has been linked to digital and AI, put generative AI aside for a second. And so this ongoing trend around driving very significant lift in efficiency and operating efficiency for financial services, we've been doing that for our whole careers, but it's a significant opportunity at the moment, and it has been what's driving a significant amount of our benefits in the last 3 or 4 years. And when we look at Agentic AI, we think that will enable us to continue that trend of efficiency. So that's the first thought. Second is when you look forward, and we're really quite excited this year, we announced -- we just announced today that we see for just the generative AI use cases we're deploying this year on top of the ones we deployed last year, the 50 use cases that generated GBP 50 million of P&L, we see greater than GBP 100 million of benefit in year. And those benefits will be both revenues and costs. And of course, when you look at our industry, what's more differentiating is our ability to differentiate our services and build broader relationships on the revenue line than driving efficiency. We will do both, but efficiency, if we can do it, other people can do it. What's really exciting for us is some of the differentiation that we're building in through the services we're doing this year. We're launching a couple of examples later this year, which we are currently in testing with our colleagues, one around providing investment advice to the whole market. So you don't have to have a certain size of investments to get that investment advice. [indiscernible] team is leading that. I can see them at the back, which is going to be really interesting. It won't drive massive revenue short term, but it will be very sustainable long term. And then the second one is around really changing how customers have access to their everyday banking and providing a conversational interface to get more out of their everyday spending. And we think that's going to be very, very important for the whole everyday banking personal current account business. Jas is leading that, and he's sat here as well. So we really think there's as much on the revenue as there is efficiency. And then going forward, I won't give you answer on kind of how we see the industry playing out. But those -- that does underpin the confidence that William said we've given you that we see the cost-income ratio continuing to progress positively over the next phase. We'll come back into this. It is also really important to think about, as you know, the mix of businesses. So we happen to have a mix of businesses with a very large retail business, a significant insurance and wealth business, which, as you know, is very good from a returns perspective, but typically historically has been a higher cost/income ratio and then a smaller commercial bank. And I think when you look at Lloyds and other institutions, obviously, the mix of businesses will affect how cost/income ratios progress. We're very ambitious on this, and we are very confident we have the right talent, and we're starting at a fast pace, which is great. So let's see how it develops. We'll come and give more guidance back in July. Douglas Radcliffe: Let's stay on the front row and let's go to Ben first, and we'll go on. Benjamin Caven-Roberts: Ben Caven-Roberts from Goldman Sachs. Just wanted to follow up on the lending. So you mentioned within the NII guide, very strong franchise volume growth in 2026. Could you elaborate a bit on the split between Retail and Commercial and how you see the trends evolving there? William Leon Chalmers: Yes. Thanks, Ben, for the question. Loans and advances GBP 481 billion, as you know. That is a pretty good outcome in respect to '25. So I mentioned earlier on GBP 22 billion growth in lending for the year, which is up 5%. And if you think about where GDP is, it's quite a markup on GDP. So we're pleased with that. I think it is more balanced towards the Retail part of the business over the course of the year. I talked about GBP 10.8 billion in mortgages, for example. We also saw sustained growth across cards, loans, motor and so forth. So a bit of a tilt in that direction. Within the Commercial Bank within '25, decent growth within, as I mentioned in my comments, targeted sectors within CIB. But within BCB, you effectively had a swap out of government repayments off the back of bounce-back loans for a swap in of private sector lending. And those 2 roughly equaled each other out. So that's the pattern for '25. Again, some strong franchise growth in both areas, particularly in Retail. When we look forward, first and foremost, we'll also -- we'll obviously be conditioned by the markets in which we operate. We have taken some relatively prudent assumptions in terms of the expected expansion of those markets. The mortgage market, for example, we are suggesting that lending will be healthy in '26, but maybe a touch down versus what it was in '25. That's a market comment as opposed to a Lloyds Banking Group comment. So we've deliberately taken some relatively prudent assumptions in that space, which means that our Retail lending, we still expect to show healthy AIEA growth to be clear. Will it expand at 5% -- well, will it expand by the same order of magnitude as it did in '25 in Retail? Let's see. I think our market assumptions are a little bit more cautious than that. And therefore, I would expect to see a bit of that reflected in our overall growth within Retail banking balances growth, but maybe not quite at the same pace as we saw during '25. However, within Commercial Banking, I think we see it as a bit of a different picture. That is to say we see sustained growth across the commercial bank. And maybe just to comment on that briefly. First of all, within CIB, the strategic initiatives, the focus on certain areas and so forth, I would expect CIB growth to continue to be healthy just really as it has been during the course of '25 actually. But within BCB, we're now at the point where there's only GBP 1.4 billion or so of bounce back loan balances in place. We are also at the point where we are investing heavily in the proposition there, whether that is sectoral expertise, whether it's relationship managers, whether it's customer journeys and the like. And therefore, the expectation is that the pace of organic growth within BCB should pick up a little bit. Meanwhile, because the bounce back loan stock is now only at GBP 1.4 billion, the headwind that is presented by those repayments should ebb a little bit. The net of that is probably more constructive growth within BCB, which in turn, I think, Ben, when you look at the overall balance, therefore, for '26, you should expect to see healthy loans and advances group -- sorry, healthy loans and advances growth within Lloyds Banking Group for sure. It may be a percentage point or 2 -- well, percentage point, let's say, inside of what we saw in '25. And the balance might be slightly shifting. That is to say, slightly stronger within Commercial, slightly weaker within Retail. But overall, as I said, healthy loans and advances growth with those comments attached. Douglas Radcliffe: And very impressive, Ben. Just one question. Perlie? Pui Mong: Sorry to disappoint I have two. So it's Perlie Mong from Bank of America. Can I ask about mortgage margin competition? So as completion margin is still about 70 basis points, and you mentioned that there's maybe 1 or 2 basis points of tightening in the quarter. I think we've all been hearing about the COVID era loans maturing in half 1 this year. So how are you seeing competition at the front end of the book in January so far? And especially in the context of the budget perhaps having less change to cash ISA than may have expected. So does that change the funding profile of some of your competitors, especially building societies? And then also the mix in the book as well because this year looks like it will have a lot of remortgages coming through. So does that change in mortgages -- remortgages versus first-time buyers change the margin picture as well? So that's number one on mortgage margins. And number two, on NII and non-NII split. So the GBP 14.9 billion is perhaps a touch below consensus. But obviously, the cost/income ratio guidance does imply an even bigger step-up in noninterest income growth versus expectations. So is that a conscious decision to put more resources behind noninterest income growth? And which area within the noninterest income growth are you feeling especially positive about? Douglas Radcliffe: Thank you, Perlie. I think both of those questions will originally come to yourself, William. William Leon Chalmers: Yes. And maybe, Charlie, you want to add. Charles Nunn: Mortgage competition dynamics, and then I can talk about that. William Leon Chalmers: Shall I kick off on mortgage margins briefly and then come over to you before getting to the second of the 2 questions. The mortgage market really as said Perlie, it has been competitive in '25. It continues to be competitive in '26. I mean that's the simplest way to look at it. We've talked about 70 basis points completion margins within mortgages. That's actually been the pattern pretty much quarter-on-quarter. I mean you'll remember quarter 2, I think I said the same thing, quarter 3, I said the same thing, and here we are in quarter 4 saying the same thing again. So 70 basis points throughout the year. But having said that, underneath that headline, you're probably seeing a chip of 1 basis point or so away in each and every quarter. So that's a reflection, if you like, of the competitive mortgage market that we are seeing. What is going on behind that? I think what is going on behind that is that everybody is enjoying the benefits of widening benefits from structural hedge, widening liability margins. And off the back of that, we and everybody else is looking at the margin as a whole. And in that context, we're pleased to see, obviously, the margin expanding by 11 basis points in '25. I mentioned earlier on that we expect to see a more material increase in net interest margins in '26. So I think everybody is looking at it in a fairly holistic way. And therefore, there's a bit of a trade-off going on between being more competitive in the mortgage market, which is being allowed for by the overall widening of our margin and the rest of the sector as a whole. I think that's what's going on. When we look at '26 in response to your question about kind of blocks of activity, yes, we have a mortgage headwind during the course of '26. We've been talking about it, I hope, very consistently over the course of recent years. So that's nothing new for us. We've been, I hope, telling you that for some years now. It is, first and foremost, because of the effect, as you say, a pretty thick 5-year margins that were written back in the, I guess, now the COVID era. That mortgage headwind is slightly compounded by the fact that completion margins, as just said, have come in a little bit versus our expectations. To be clear, we do not expect a heroic recovery in completion margins. We've taken a pretty prudent view on what those completion margins will look like over the course of this year. And of course, in doing so, we, therefore, build up the mortgage headwind a little bit in respect to '26. Now let's see what actually plays out. We might be proven wrong. Completion margins may be a little bit more steady than they are, but we've taken a relatively conservative view of how we expect competitive conditions to play out during the course of the year. And that combined with the '26 maturities means that the mortgage headwind is certainly there for '26. Again, consistent, I think, with what we've highlighted before, but maybe stretched a little bit beyond because of that completion margin pressure that I just highlighted. Now strategically, and Charlie may want to talk more about this, therefore, it is particularly important to us that we develop the franchise proposition, the customer relationship around the mortgage product. The mortgage product stands on its own 2 feet, and it meets its cost of equity. So we're perfectly happy with that on a fully loaded basis. It actually is a very attractive return on equity on a marginal basis. So the product itself stands on its own 2 feet from a financial perspective, but it is so much the better if we can develop the relationship with the customer off the back of it. And I mentioned in my comments earlier on that the protection take-up rate is now at 20%. That's gone up dramatically over the course of the time since I've been here. And indeed, as I mentioned earlier on, we think there is much further to go in that. That is only one example, but it's quite an important example of how we seek to build the customer relationship in the context of the mortgage product. You'll have noticed other examples are in the context of our PCA mortgage combination offering that we give to people. Likewise, GI is another string to the bow in terms of building that relationship. So that's what we do, if you like, to offset some of the pressure that we see within the overall financial point from the mortgage product. And then as I said, we look at the margin in its totality, which is undergoing a very benign and positive transformation right now, as you know. I'll just comment very briefly on the cash ISA and hand; over to Charlie for the question as a whole. I think overall, the pressure that may be induced by cash ISA changes may be felt by others a little bit more than us. That may be because of their deposit funding structure. It may be because of the overall way in which they maintain customer relationships. At the moment, at least, the loan deposit ratio within the business is 97%. It is a very successfully deposit-funded business with a lot of room to grow lending in. From a cash ISA strategic point of view, being obviously the combined Lloyds Banking Group Scottish Widows business that we are, we see actually the cash ISA movement as at least as much of an opportunity to build relationships in the savings space as we do see it as a source of concern in the deposit space. So from our perspective, we're fine with it. Charles Nunn: It's a pretty full answer. Look, maybe just take a step back. Obviously, when we started this strategic cycle, the mortgage business was hugely important, but we've been losing market share for a long period of time. And we kind of set out that we wanted to prove that we could trade at 18% to 20% market share and do it profitably for our shareholders. And that's what we've done. And last year was a very good year in that context. And I think just overall, we'll continue to have that mindset. This is about being relevant to our customers, bringing leading products to market, but we're not going to chase margins in any 1 month or quarter. The market has started competitively in January, but January doesn't make a quarter and a quarter doesn't make a year. So let us trade through that. So that's the first thought. The second one, which is William talked about what we can bring alongside our mortgage products to enhance returns from an overall relationship. The other thing that we've been very focused on, and we've done successfully that has helped us to change what you'll see as the mortgage margin dynamic is think about how we provide our existing mortgage customers or current account customers access to a remortgage or a product transfer and how we use our indirect channel. And those are great when we can do that because we don't pay a product fee or procurement fee to a broker, and we can share some of the value with our customers, and we can target our customers in a way that really brings the best of our products to market. So we've increased our share of direct mortgages to 26% of the market last year. And we think that's a really important point of differentiation. It enables us to compete differently from our competitors. And we've invested heavily. I'm being watched by the leader that's done a lot of this. I'm nervous now what I'm saying. We've invested heavily in our digital capabilities around our home hub, around remortgage journeys, and that really helps customers get a simpler, quicker and good value product, and that helps us. And we've invested heavily in our relationship with our mortgage brokers. And we typically see our completion rates being above the application rates because we provide a very, very good process and journey. And again, that helps us compete in the market. So look, it's a very different market from first-time buyers through buy-to-let through prime mortgages. One other fact, which I've talked about before, we did increase our share of mass affluent mortgages from 9% to over 20%. And again, we know the value of those relationships and the broader relationship in that context. Just on NII/OOI, maybe put it the other way around, I'll say the strategic and then you can add in some of the value because it's a really important question. But when we started this strategic cycle, we laid out very clearly that we wanted to grow more diversified income distribution across the group and get more bias towards other operating income, recognizing we were still looking to grow NII ambitiously as well. But it's been always part of our strategy to do that. And we've now got 4 years consistently of growing at 9% CAGR on other operating income or more actually in '22 because we bounced off a low start in '21, we grew more than that. But I think the real quality of the franchise, the other operating income businesses is starting to show differentiation as we come through this. So we always thought strategically the right thing for our shareholders was to drive that bias towards OOI. The NII, William has gone through, we'll always have a certain conservatism around how we think about NII, but that's our right ambition. So we like the idea of OOI growing faster and giving more differentiation and diversification around the revenues. You asked around which businesses, and maybe I'll pause. I'll do that relatively quickly. And I think we'll do more of this as we look forward in the July strategy. But as William laid out, and hopefully, you've seen this additional disclosure today around our equity investments business and Lloyds Living. We always had a strategy to build quite a diversified set of businesses so that in any one quarter or year, one business may not have the best year. Actually, William explained why because of a very strong year last year and then actually U.K. sterling DCM activity was suppressed this year, our corporate OOI grew slower last year. But the whole point is we know that with the diversification and breadth of businesses, we'll be able to drive strong growth across those businesses over the next few years. And what you saw this year, and you should expect again next year is strong growth in Retail, strong growth in our Insurance and Wealth business and Lloyds Wealth specifically will help that again next year and strong growth in Commercial and in our equity businesses. The growth rates might vary quarter-on-quarter, but the pillars of that growth are well established now and they're moving at pace. So we think that's a really important part of the strategy. William, do you want to flesh out any of the detail? William Leon Chalmers: Sure. Thank you, Charlie. I think I'd probably make 2 points. One is, of course, to flesh out the detail, but I'll come back to that in just a second. The second is I really do not think it is an either/or between NII and OOI. To be clear, we would expect to see meaningful growth in both. So when we look at NII, for example, as you know, we're looking at 9% growth in 2026. We are also looking at sustained NII growth in the period thereafter in the period beyond, fueled by structural hedge as the current headwinds of particularly deposit churn in '26, but also deposit churn and the mortgage headwind in '27 ebb away. So you should see 9% growth in '26 and then sustained growth in the period beyond that. Now just focusing briefly on '26, as I mentioned earlier on, and Charlie just highlighted it, we calibrate guidance to be highly confident of hitting it. That, of course, means a degree of conservatism in the way in which we look at things, including things like market rates and so forth. The headwinds and tailwinds in respect to the margin, they're familiar ones, the ones that I've just highlighted, for example, AIEA growth, as I mentioned in conjunction with the lending question just a second ago, is built off of relatively conservative market assumptions. Let's see how they fare over the course of the year. And then, of course, as I said, we've absorbed a macro -- a further macro change of now 2 bank base rate reductions versus previously 1. That all means that we're highly confident again in '26. It also means that we're highly confident of continued growth in the period thereafter. So, I don't think this is either NII or OOI subject to the resourcing decisions or capital allocation of the business. I think it's very much both. In terms of the detail, the 1 or 2 points I might just add just kind of fill in, in that respect. Retail up 12% during the year, 2025, that is driven by 2 or 3 factors in particular: transport, banking fees of PCA, cards, likewise. So that's a kind of, I suppose, a multipronged engine. Likewise, commercial a bit slower for the reasons that Charlie just mentioned. I would expect that growth rate to pick up in that business during the course of '26, not least because those '24 one-off effects that Charlie just highlighted drop out as well as what we've seen so far, at least a decent start to 2026. Let's see if that continues. And then Insurance, Pensions and Investments, the same drivers as '25, which is to say GI drivers, long-standing the unwind of the CSM being part of that, Workplace pensions continuing to build the business. But again, as Charlie mentioned, the embedding of Lloyds Wealth as it will be called. I think we talked at Q4 about that Lloyds Wealth income stream being an incremental circa GBP 175 million of income in the course of 2026 versus what it delivered during the course of 2025. So a meaningful, if you like, addition from that space. And then Lloyds Living -- or rather LBGI more generally, we've got a combined effect of LDC of housing growth partnership of BGF, but also Lloyds Living within that context. I mentioned Lloyds Living had doubled its OOI during the course of '25. You add together all of those LBGI businesses, and they're up 15% versus where they were the year before. You should expect meaningful growth in the OOI contribution of those businesses going forward. That hopefully just kind of fills in a bit of the blanks. But again, we would expect to see -- expect to deliver sustained growth in NII along the lines just mentioned, OOI growth for '26 ahead of what we saw in '25. Douglas Radcliffe: Excellent. I'm going to take a couple of questions online, then I'll come back to the audience here. Firstly, this question from Aman at Barclays. You are set to generate increasingly significant amounts of surplus capital from here. What should the market's base case expectation be for what you are likely to do with this surplus, buybacks, specials or potentially M&A? William Leon Chalmers: Shall I kick off on that, and then Charlie may want to add. Thank you, Aman, first of all, for the question. I think the start point and perhaps the endpoint for this question is that we are in the business of maximizing the long-term value of the group. That is really what the management team is focused on and indeed the Board. Looking forward, as it has done in the past, that is going to encompass business growth, balance sheet growth as an example of that, GBP 22 billion lending and advances growth last year, for example. Alongside clearly organic investment. We've invested, as you know, GBP 3 billion over the course of 3 years in the strategic cycle, GBP 4 billion over the course of 5 years, in fact, a touch above that as I think we talked about in Q3. That's in pursuit of improving customer propositions, making sure the franchise really progresses. At the same time, building the operational resilience of the bank as examples of other expenditures, if you like, of that cash investment. It also, from time to time, will include looking at least at M&A. But ultimately, it is all underpinned by capital distributions. And that is, as I said before, about maximizing the long-term capital distributions that we're able to give to shareholders. Now just a word on M&A. The M&A bar is pretty high. There's a couple of points to make there. One is it clearly has to be strategically coherent. I guess that goes without saying. But you've seen in the context of the last couple of years or so, a couple of M&A pieces, if you like, that we've undertaken, one being Tusker, one being Embark. Both of those 2 have enhanced capabilities of the business at a rate that was faster, at a risk that was lower and at a price that was cheaper than the organic alternative. When I first came in, we also did a scale add-on, which was the Tesco mortgage book. But it's that type of strategic, if you like, complementarity that we're looking for, either capability enhancement or alternatively scale add-ons. And then as I said, it has to be put through the filter of, is it going to get us to the target zone -- strategic target zone that is -- in a way that is faster than the organic alternative, in a way that is at least lower risk than the organic alternative and in a way that is ideally cheaper than the organic alternative. So we're looking for speed, low risk and value in the context of the M&A that we would choose to undertake or choose to look at, if you like. Only when we meet that high bar, would we choose to divert any money from what would otherwise be distributions to the shareholders to M&A. You've seen the type of things that we've done before. I think the concern is, does it tick all of those boxes. That's the way that we'll look at it. But as I said, any capital allocation, whether it's about balance sheet expansion, whether it's about organic investment in the business, whether it's about M&A, whether it's about capital distributions, is about maximizing the long-term value generation and indeed, ultimately, capital distribution in the business over time. Douglas Radcliffe: The second question online is from Rob Noble at Deutsche. When considering full year '26 distributions, will it be pro forma for the Basel 3.1 reduction in RWAs as of 1st of January 2027? Are there any other regulatory moving parts of RWAs in 2026? Or will they grow in line with loans? I expect both of those for you, William. William Leon Chalmers: Sure. I will kick off and Charlie may want to add about some of the strategic ambitions, if you like. The -- it's obviously far too early to talk about full year '26 capital distributions. We've just gotten to the point of offering GBP 3.9 billion in respect of '25, which in turn, as you know, from both Charlie and my comments, is a 15% increase in the dividend and a GBP 1.75 billion buyback. So we think that's a respectable outcome in terms of '25. To be clear, we do expect to grow capital distributions in respect to '26. That comes off the back of the increased capital generation of in excess of 200 basis points. So there's no debate about the direction that we're going in. But as you can imagine, Rob, I'm going to stop short of making any commitments about it. That will be a question for the Board at the right time. I might just pause for a moment on Basel 3.1. A couple of points to make really here. One is, as you know from our disclosures this morning, we do expect Basel 3.1 to be a positive from the company's point of view. That is to say, to reduce RWAs by the range of GBP 6 billion to GBP 8 billion. We'll see depending on the evolution of the balance sheet and indeed evolution of economics that drive some of the factors behind Basel 3.1, exactly where within that landing zone it ends up, but that's the range that we expect. Why is it that we expect that benefit? It's largely off the back of the commercial business and the fact that we are currently operating on foundation IRB, whereas other commercial businesses that we see in the market are typically on advanced ARB. And therefore, as Basel 3.1 gets implemented, there's less -- or rather maybe put it another way, there is some benefit for us because of our start point. That's where the majority of benefits come from. There is a little bit from retail as well, but that's the overall pattern of the Basel 3.1, as I say, RWA reduction. It's also worth briefly straying off Basel 3.1 for a moment on this, which is to say we have now landed our models for CRD IV. That is consistent with our GBP 2 billion RWA add-on in quarter 4, to be clear. We are now in the process of gaining PRA approval. Until we gain that PRA approval, there is obviously a little bit of risk around the PRA taking a look at it and if you like, entering into discussion with us. So let's see where that lands. We are where we are for good reason, but I just want to highlight that in the context of the Basel 3.1 benefits that we see. Finally, in terms of distributions, Rob, as said, I'm not going to comment on the quantum. I have commented already on the direction. I do think it's important to say in that context that Basel 3.1 is going to give us RWA relief. You can figure out how many basis points of capital that RWA relief equates to we certainly have done. We will look at investments in the business, to be clear. We will clearly look at maximizing long-term value of the company, and that is in the spirit of maximizing long-term capital distributions to shareholders for sure. But we will look at in the context of the overall capital position of the company, where we might deploy investments in the shareholders' best interests rather than necessarily automatically pay everything out in the minute that we get a pound in. That is not to say that we will not pay any element of that Basel 3.1 benefit out. It's not to say that. But it is to say that we will look at the round in the overall capital position of the company, and we will make the appropriate investments to ensure that the franchise stays as strong tomorrow as it is today and is capable of delivering shareholders what they want and need. Charles Nunn: The thing I might add is, William and I were really conscious as we came in today that we weren't able to give you financial guidance beyond 2026 until July. And so what we've tried to do today is do a couple of things. One, give you some confidence in the momentum in the underlying business direction and efficiency that we are delivering over this period, and that momentum will continue. The second thing was to give you some specific numbers where we felt guidance was appropriate. So the structural hedge in '27 and then some of the language William has used around that remaining supportive through the back end of this decade, even with our assumptions around how rates the yield curve will evolve. And then the RWA release we just talked about, again, you can see that we have the capacity to continue to really drive this business forward. And then obviously, the third thing is those 3 statements that we've both repeated a couple of times that we see beyond 2026, the opportunity to increase revenues, increase operating leverage and increase shareholder returns. So we'll come back in July and give you that broader view around what that really means. But you can see we were just trying to sow the seeds for you to really understand why the confidence that we have around this business in '26 and going forward is grounded. Douglas Radcliffe: Thank you. Let's return to the room. Let's take a question from Jonathan at the front. Jonathan Richard Pierce: It's Jonathan Pierce from Jefferies. I've got 2. The first one is just a modeling question really. The fair value unwind and the amortization of purchase intangibles. Consensus has those broadly holding moving forward. My suspicion though is those are going to come down quite notably, certainly by '27, '28. Can you just confirm where that number will be, those 2 items in aggregate, please, a couple of years forward? The second question, I'm sorry to come back to this point on capital generation, but it is clearly a major part of the story. And the guidance for this year for free capital generation of over 200 basis points obviously incorporates RWA growth and all these sorts of things. So we can see there's about GBP 5 billion of free capital from that. You've got another 20 basis points reduction in the equity Tier 1 to come, which is another GBP 500 million. And then you've got the day 1 Basel 3.1 of circa another GBP 1 billion 1st of Jan '27. That's GBP 6.5 billion taking into account organic investments and RWA growth at least. How should we think about the mix of buybacks and dividends moving forward? And in particular, I'm interested in the dividend payout ratio because, William, you've been keen to flag several times in the last few months that the dividend payout ratio is too low, yet again, consensus doesn't really have it moving over the next few years. So is there scope here for that dividend to start growing by somewhat more than 15% a year over the next 2 to 3 years? William Leon Chalmers: Thanks for those questions, Jonathan. I'll take both of them in the first instance. It may be that Charlie wants to expand also on the second in particular. On the fair value and amortization component, that has seen, as you know, a Q4 charge, I think, about GBP 34 million -- GBP 35 million actually. That is more or less consistent with the run rate, primarily related to businesses, many of them going back to the HBOS days and so forth, which in turn are amortizing over the last couple of years and indeed into the foreseeable future. We did see a bit of a step down during the course of the year, and we do see expectations of a bit of step down consistent with your question, actually, Jonathan, over the course of the coming years. And that is as certain instruments that are getting effectively amortized in the context of that line coming off. The HBOS debt instruments are one example of that. And so you should expect, if you like, downward pressures to come from that. The only point I'd make in addition to that is that we are -- as Charlie mentioned, we've done a couple of acquisitions this year, SPW being one, Curve being another. And so that will add to the pile of stuff, if you like, that then needs to be amortized in the future periods. So all being static, I would expect that line to gradually come down for the reasons mentioned, much of it relating to HBOS amortization. Having said that, we've added on a little bit in the context of '25 off the back of those 2 acquisitions. And therefore, we look at the net of those 2 rather than just one point in isolation. The second point I would make on that fair value unwind intangibles point is that, as you know, the bulk of it has nothing to do with capital. So while it may actually help, if you like, the overall build in RoTE over time, not by much, but it will make a positive difference. Nonetheless, don't expect that necessarily to feed into the capital generation of the company. And so just worth bearing that in mind. The second point, the capital generation, without commenting too specifically or directly on your numbers, I can see how you get to them. Maybe that's the best way of putting it. That relates to the capital generation of the company. It relates to the 13.2% down to 13%, which I said we've got a commitment to getting down to at the end of 2026. The Basel 3.1 basis points, you can tell from the GBP 6 billion to GBP 8 billion range that we've got what type of capital contribution that might make. Just as I said earlier on, though, just bear in mind that we're not completely settled on CRD IV until the PRA is signed off, just bear that in mind really. And then what does all that mean for the capital generation of the company and dividend payout ratio and so forth. One point that I'd make at the outset there is that the payout -- the dividend, if you like, needs to take into account recurring earnings streams within the company whereas the buyback is more capable of taking into account lumpy benefits. And therefore, the buyback is more attuned to dealing with things like Basel 3.1, whereas the dividend is more attuned to dealing with the ongoing earnings for the company. And that's an important start point for the way in which we look at it. When we look at the buyback versus dividend equation, we are committed not to a payout ratio within the dividend, as you know, but more to a progressive and sustainable dividend policy. And that, of course, means growth, but it means growth in a sustainable way, which for those of you who are long in the tooth like I am, will remember that is particularly important to Lloyds having the history that it has. So both growth but growth in a sustainable manner for the dividend. You've seen that over the last 2 or 3 years, that's meant 15% dividend growth, which now is 80% above where it was in 2021. And the point of emphasizing the payout ratio is not to say that we're changing our policy or that we have a payout ratio policy, but rather to say that there is a lot of room for progressive and sustainable dividend growth in the periods going forward. And what we'll end up debating with the Board, I'm sure, is do we take a step jump in one period of time for that dividend, i.e., see a sharp growth in 1 year and then, if you like, attenuate the growth in the period thereafter? Or do we keep the 15% or thereabouts growth rate going for some years into the future. And I think the good thing about where the business is right now is that based upon the guidance and expectations as to continued business growth, we have the scope to do one or other of those 2. And that's the point of, if you like, emphasizing the fact that we are on a low payout ratio. It is hard to put a finger on exactly where that changes, but we obviously pay attention to payout ratios that other banks, not just in the U.K. but beyond get to. But again, progressive and sustainable dividend policy is what it is all about. In that context, it's worth just briefly commenting on the buyback and how do we look at the buyback and what's the impact of the price and so forth on the buyback because that's an inevitable part of the equation. First of all, I'd say the buyback in respect of '25, the GBP 1.7 billion that we bought back was bought back at an average share price of 77p per share. So when we look back on it, that obviously looks like good value now. And we very much hope we'll be saying the same thing this time next year, of course. We are committed to the buyback that we have today. We also see significant value in the current share price. And so that commitment to the buyback makes sense in the context of the share price that we're at today. That's in the context of expected earnings growth, expected TNAV growth. It is also in the context of investors who basically see it the same way as we do. That is to say they have a preference for the buyback, and we obviously have to respect that as our owners. Alongside investors and owners who prefer income have it, and they have it from that 15% dividend growth, number one. They also have it because the buyback reduces the number of shares and therefore, helps us accelerate dividend growth on a per share basis, number two. We look at the buyback also with the EPS, the DPS, the TNAV per share benefits that it gives. And then in the round, therefore, we are still very much behind the buyback. We think it's a very sensible thing to do for all the reasons emphasized. That means, I think, Jonathan, looking forward that dividend progressive and sustainable growth is an expectation, certainly a core expectation of us, as I said in my comments, an attractive pace. But I think excess capital distribution, both for the reasons that I just mentioned, also to accommodate, if you like, lumpy capital benefits, Basel 3.1 being the best example, with buyback is a good way to do that. Charles Nunn: It's a pretty full answer. I think we said in the last few years, this is the problem we wanted to have that we get to a place where we have very strong capital distribution and our valuation more fully represents where we are today. And as William said, we think there's more value to come, but this is the right debate for us to be having, and we'll really value input from all of you and our shareholders as well as part of that as we go forward. Douglas Radcliffe: Excellent. Good. We run out of time, but I'll take a couple more questions. I think, Sheel, you had your hand out and Chris. So we start with you, Sheel, and then we'll finish with Chris. Sheel Shah: Sheel Shah, JPMorgan. Two questions from me, please. First, on the IP&I business. The other income has grown strong at 11%, but one area where maybe the strategic initiatives have been a little slower to show there is maybe the net flows. Net flow rate of growth has been maybe at the low single-digit percentage. How much of that is a function of the market? And what do you think is the natural growth rate of this business? And secondly, coming back to AI, the GBP 100 million that you've spoken about, there's a lot of focus on the ROI of these investments. Is that on a gross basis? Or is that including the cost of these investments that you've made? William Leon Chalmers: On the strategic investments, in particular, Sheel? Sheel Shah: Sorry, the AI. William Leon Chalmers: The AI. Charlie, shall I kick off, please? Charles Nunn: You can and I'll add on the... William Leon Chalmers: In terms of IP&I, the business, as you say, has been really successful in terms of growing some of its core activities. You'll notice that the IP&I business recently last year, maybe actually '24, it might be the tail end of, effectively focused the business on 2 or 3 core strategic areas. These include things like GI, it includes things like workplace pensions, for example. At the same time, it sold the bulk business. That was a reflection, if you like, of the strategic focus of the business and a very deliberate capital allocation decision upon those areas where we frankly felt we had a right to win and indeed a path to ensuring that we did so. So that's what's behind the positioning of the business. That's also what's behind the 11% OOI growth in respect of Insurance, Pensions and Investments in 2025, and that added to the acquisition of Schroders Personal Wealth now to be Lloyds Wealth, should add to greater growth, i.e., faster growth in OOI from IP&I going forward into 2026. That's the earnings story. You talked about book growth there. I would just distinguish in doing so between what we describe as the open book growth versus the closed book growth. And what we mean by that is that we're very interested in growing assets fast in the context of those businesses that we are strategically focused on, just as I mentioned a second ago. And if you look at open book AUA new money in 2025, it's almost GBP 8 billion. It's about GBP 4.2 billion in Q4. Of course, we would expect to see that build over the course of time. And off the back of the strategic focus and investments in the businesses that I've just mentioned, Sheel, you should expect to see that. I won't give you a precise run rate that we expect to target the business at. Safe to say that it's strategically focused and concentrated. And in addition to that, with that type of investment, with that type of background and context, we would expect those open book AUAs to grow at a faster base than necessarily or faster pace than necessarily the totality of assets under administration in the entire IP&I business might do. The second of your question, ROI, ROI always takes account of the investment. Charles Nunn: So just any other thing I'd add on the Workplace business is the benefit here of being a joined-up group is really helpful. We have all of our 1 million BCB customers and all our corporate institutional customers. And so the joined-up connectivity between the Workplace team and our Commercial teams is very strong, and you should continue to see us winning mandates, although the percentage of mandates in any 1 year is quite low. As you know, it's only about 2%. The pensions market is switching, workplace pensions, but it's a source of competitive advantage for us. And then the Lloyds Wealth acquisition, we said it both pretty quickly, I think. We see that as an opportunity, obviously, for our retail customers and especially mass affluent, but also our workplace customers and for all big workplace pensions businesses, and we're #2 today. As you know, attrition and consolidation as we get near a deaccumulation phase for people is one of the choices where people decide where they're going to consolidate their pensions. And we now have an advisory proposition we can bring to bear for our customers in the workplace business. So it helps us have another tool for supporting customers when they're making those really important choices and can help us manage attrition on that business. So we do think it's a really attractive business. Now it's at scale, good returns and does have the potential to continue to grow healthily. Douglas Radcliffe: Excellent. Chris? Christopher Cant: It's Chris Cant from Autonomous. Just trying to round things out, I guess, with regards to the commentary on AI and kind of digital leadership, the comment you made about reaching the end of this investment cycle and that being part of what's, I guess, helping control costs in '26 specifically as you look out to the next planning cycle, is it really a case of just redeploying the sort of investment spending that you've been doing over the last 3, 5 years? So changing the focus to focus more on this digital AI leadership angle or should we expect some kind of lumpiness? Like do you feel like you need to have a front load of investment in relation to this Gen AI opportunity that you see? So should we expect that progress towards operating jaws to be gradual? Or should we expect it to be, I guess, back-end loaded? Is there anything you want to say there? That would be helpful. And then just kind of reading between the lines a little bit. I get a distinct impression that you see one of the key opportunity sets within this AI revenue opportunity that you were pointing to as being the fact you have the captive insurer, you have this Workplace business. Could you comment on your inorganic appetite in that space? So you've been linked to Evelyn Partners. I'm not expecting you to comment on a specific transaction, but I'm sure you've seen the same headlines we all have -- I asked you about Schroders last summer, and you bought that. There's the Aegon U.K. workplace business potentially up for sale. I'm just curious, is -- am I right in inferring that that's the key area that you see the next leg of the strategy for OOI growth. The last few years has been a lot about the leasing business, and that's been a huge driver of the overall other income growth. As we look forward, is it more about the fact that you're this joined up group and you can cross-sell and you can deploy AI to do that? And is that where we should be directing our attention because I think we probably all under analyze your insurance business, frankly. Charles Nunn: Do you want to try the first one? We can both do both again. You want to try the first one, I have the second one and then... William Leon Chalmers: Yes, absolutely. Absolutely. Thanks for the question, Chris. In respect of the AI opportunity, it is obviously gathering pace, as Charlie has mentioned in his comments. We've seen some foundation building during the course of '25. We're seeing scaling during the course of '26, and Charlie mentioned the 4 or 5 blocks of activity that, that relates to. When we look at the impact on that in the next strategic plan, if you like, in the period beyond 2026, that opportunity is going to grow meaningfully. It will grow both across the revenue opportunity and just as you said, not just within businesses, but in terms of linking businesses up together for sure. It is also -- you asked about the nature of the operational leverage and whether that is back-end loaded or whether that is, if you like, a continuous commitment. I think it is fair to say, well, maybe make 2 comments. One is the improvement to operational leverage is intended to be about momentum. That is to say that we are delivering sub-50% cost/income ratio in '26. We expect that momentum to be sustained in the years thereafter. Now inevitably, when you make investments early on in the strategic cycle, just as we are in this one, you will see that momentum accelerating towards the end of the strategic cycle. But don't make -- if you like, don't misinterpret that as being a lack of momentum in the years '27, '28 and so forth. So that's the way I would look at it. It is sustained momentum. It will inevitably because of the nature of investments and the way in which they mature, accelerate towards the back end, but that's just the way of things, and you've seen it in the course of this cycle. The final point that I'd make on that perhaps before handing back to Charlie is that I hope that when people reflect upon this strategic cycle, people will believe that we've invested the money wisely. That is to say, we've invested GBP 3 billion over the course of 3 years, just over GBP 4 billion over the course of 5 years. That is starting to yield returns of the type that we're describing today. That is also what is behind our confidence in improved income growth, continuous operating leverage improvements in the period beyond '26 and indeed enhanced RoTEs and therefore, capital generation expectations in the period beyond '26. So when we look at the overall investments in AI, just to mention one class of investments, amongst others, you would expect us to invest wisely. And I very much hope this strategic cycle at least gives confidence in that respect. Charles Nunn: Great. You're close to getting us to talk about beyond 2026, which we are vehemently against because that will be July. Just in terms of your second question, a couple of things. And obviously, you wouldn't expect me to talk about individual companies despite the fact that you pointed out Schroders Personal Wealth last summer. Look, the first thing, again, on OOI growth, it's enhanced, not an old strategy. So we expect to see growth in all of those OOI pillars that we talked about. We're excited about the future of transport. We're excited about the future of our payments business, and we just bought Curve. We've captured market share in credit card payments, something as old-fashioned as that during the cycle, gone from less than 15% to 17.5%, one of the targets we said we would deliver. We delivered that last year, 2 years early. We're excited about the opportunity to continue to grow our commercial businesses that underpin OOI. William talked about the momentum in Lloyds Living as an example. So it's an and strategy. Yes, we are excited about the opportunity to continue to grow our Insurance, Pensions and Investments business. And so we see that as a really significant opportunity, not least because they're great stand-alone businesses themselves, but they are unique in our ability to bring them to our broader group, the connectivity into our commercial franchise, our retail franchise specifically. No one else in this market can do that. And we see there's lots of opportunity to innovate. In terms of acquisitions as a path for that, look, I think William laid out very clearly how we think about those, both our track record, yes, we will do them where they have -- they accelerate our ability to deliver distinctive capabilities strategically and scale that makes a difference for our customers and our shareholders. But we do have a high bar for those, and we'll continue to look at it in that context. I know, Chris, you'll remember back in '22 when we laid out this phase of the strategy, we laid out which businesses we aren't operating at the kind of 20-ish percent market share range. And as you know, there's still a number of these businesses. Actually, our Workplace Pensions business is pretty healthy in terms of its market share, but investments and then some of the associated areas around that, we're not operating at that level. That's also true in some parts of the payment space, in some parts of SME banking. And so we see opportunities to really grow in a number of businesses. And yes, IP&I is definitely one of them. William Leon Chalmers: Chris, just to perhaps finish off on your SPW example, it is worth saying that we acquired their full control of what is a great business that will extend our wealth proposition to the customer base, alongside GBP 18 billion of assets under management, assets under administration as well as an addition of circa GBP 180 million of earnings, and it was all for GBP 0 capital cost. Charles Nunn: And actually, just one more thought on that because we'll look and without doubling down is getting to the end, 300 great advisers, which is quite a material team that we can then apply into our broader group who are advisers we know, we love, some of them worked at Lloyds and we are confident in their conduct outcomes. So for a group like us, that's a hugely important part of making an acquisition like that. So well spotted last summer. Douglas Radcliffe: Excellent. So thank you. That concludes the questions. I don't know Charlie, whether you want to just briefly summarize and conclude the event. Charles Nunn: Well, no, just as always, first of all, thank you, Douglas. Thanks for hosting the questions, and thanks to everyone who's joined in the room. And offline, we really appreciated the questions. Thank you for bearing with us as we've got this gap between this year-end and our July new strategy and financial guidance. We're really already looking forward to July, but let's stay in the moment for a second. I know it's a busy moment. We've brought our results forward, but I think there's 9, 10 other European banks live. So thank you for prioritizing Lloyds over the rest. I don't know if you're going to be able to get the half term if you've got families, but that's hopefully a benefit from all of this. Obviously, our IR team is around for any further questions. As always, we'll be here for a few minutes ourselves. I'll look forward to seeing you in July. As I said, I'm really looking forward to that. William will do the Q1 results. As a team, we're going to be very focused on delivering 2026, and that's what we're going to be doing for the next few months until I see you again. So thank you very much for joining today, and see you very soon.
Operator: Ladies and gentlemen, good day and thank you for standing by. Welcome to the TAL Education Group's fiscal twenty twenty six Third Quarter Earnings Conference Call. All participants will be in a listen only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star then 2. Please be informed, today's conference is being recorded. I would now like to hand the conference over to Ms. Fang Liu, Investor Relations Director. Thank you. Please go ahead. Fang Liu: Thank you all for joining us today for TAL Education Group's third quarter fiscal year twenty twenty six Earnings Conference Call. The earnings release was distributed earlier today and you may find it on the company's IR website, also the newswire. During this call, you will hear from Mr. Alex Peng, President and Chief Financial Officer and Mr. Jackson Ding, Deputy Chief Financial Officer. Following the prepared remarks, Mr. Peng and Mr. Ding will be available to answer your questions. Before we continue, please note that today's discussions will contain forward looking statements made under the Safe Harbor provisions of The U.S. Private Securities Litigation Reform Act of 1995. Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but are not limited to those outlined in our public filings with the SEC. For more information about these risks and uncertainties please refer to our filings with the SEC. Also, our earnings release and this call include discussion of certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures. I would like to turn the call over to Mr. Alex Peng, Alex, please go ahead. Alex Peng: Thank you, Fang, and thanks to all of you for participating in today's conference call. Over the past fiscal quarter, we continue to make steady progress on our strategic priorities. With a consistent focus on supporting the holistic development of our students. Our commitment to innovation, user engagement, and service quality continues to guide our efforts as we refine our offerings and adapt to the evolving learning landscape. Guided by these objectives, our core businesses have continued to operate with stability and consistency. At the same time, we recognize that changes in the market demand and advances in technology continue to introduce new dynamics. Across several of our newer initiatives, including the learning devices business, we face a highly competitive environment. In areas like content, hardware and AI. In response to this evolving environment, we'll continue to advance our strategic initiatives and flexibly allocate resources to build long term capabilities. Consequently, we may face occasional variability and limited visibility in our financial performance due to seasonal demand shifts, competitive pressures and deliberate resource reallocation. While these factors may cause short term fluctuations, we remain focused on building the long term capabilities needed to seize the opportunities in the market.I will now provide detailed updates starting with our Q3 FY twenty twenty six performance. During the quarter, our learning services recorded year over year revenue growth across both offline Peiyou programs and online enrichment offerings. This was driven by sustained user demand and reflects our commitment to providing students with high quality learning experiences through a diverse portfolio of the enrichment programs delivered in both offline and online formats. Meanwhile, we maintain a disciplined approach to expanding the Peiyou learning center network. Balancing demand with operational capacity, efficiencies and long term sustainability. Positive feedback from parents and students alongside solid operating metrics such as retention rates, affirms the trust placed in our products and the consistency of our service standards. Our online enrichment learning programs also maintain year over year growth during the quarter. By leveraging technology driven innovation, we continue to enhance users' learning experience. Building on this approach, we introduced immersive classroom solutions to improve engagement and learning outcomes. We also extended our offerings to include more technology themes such as three d printing, with the goal of fostering interest in emerging technologies and supporting future skill development.Alongside our learning services, our content solutions encompass a wide range of offerings. With learning devices remaining a key focus for our long term development. The learning device market continues to evolve, shaped by ongoing advancements in hardware, software and AI technologies. Given this context, we are focused on further enhancing our devices across three key areas: User learning experience, AI enabled capabilities, and overall effectiveness. Compared with general purpose AI models, we believe an educational AI agent should go beyond simply providing students with correct answers. We believe they should focus on guiding students through the learning process. Adapting explanations to their level of understanding, diagnosing learning gaps, and supporting personalized learning path. Building on this vision, we have incorporated over two decades of educational insight into the interaction logic of our learning devices. Instead of simply providing answers, our devices are designed to apply structured instructional processes and guided teaching approaches with the aim of approximating one on one tutoring experiences. This design enables them to function not only as tools for problem solving, but also learning companions that provide individualized support. Looking ahead, we'll continue to enhance our AI functions including capabilities in problem solving, explanation and other forms of learning assistance. Our goal is to steadily evolve our learning devices into personalized AI companions that inspire thinking and support deeper learning.In addition to learning devices, we're also exploring new product formats to address a range of use cases. At CES twenty twenty six, we showcased several early stage concepts including our AI buddy, which received industry CES picks award. Designed for children aged six to 12, the smart companion uses interactive features such as voice, touch, and motion based interactions to support age appropriate engagement. These initiatives reflect our broader exploration of how technology can support children's development in learning related and everyday use scenarios, and with a continued focus on responsible design and practical application. So with that overview, I'd like to turn to our financial performance for the quarter. Our net revenues were $770,200,000 or 5,480,400,000.0 for the quarter representing year over year increases of 27% and 26.8% in U.S. dollar and RMB terms respectively. Our non-GAAP income from operations and non-GAAP net income attributable to TAL for the quarter were US$104.0 million dollars and US$141.4 million dollars respectively. I will now hand the call over to Jackson who will provide an update on the operational developments across our core business lines and a review of our financial results for the fiscal third quarter. So Jackson, over to you. Jackson Ding: Thank you, Alex. I am pleased to walk you through our operational highlights and financial results across our core businesses for the third fiscal quarter. Please note that all financial data for the quarter are unaudited. During the quarter, Peiyou small class enrichment programs demonstrated stable operations delivering year over year growth driven by increased enrollment. We continued to expand access to high quality enrichment learning programs for a broader user base. Supporting students' holistic development. In our online enrichment learning programs, we have embraced a technology driven approach to enhance the learning experience. For instance, some of our humanities courses now feature immersive online classrooms powered by virtual settings and interactive activities. Designed to boost student engagement and support learning outcomes. Students role play as protagonists from classic literature and collaborate with peers to complete themed challenges, deepening their grasp of character traits and story backgrounds. These immersive programs also incorporate gamified learning mechanisms during class to promote learning and comprehension, followed by out of class challenges that encourage reinforcement of key concepts. This cyclical engagement helps students internalize the material while building the language skills and knowledge needed for effective expression. Looking ahead, we will continue to build on this foundation by further integrating technology into our engagement tools and instructional design. This effort will be supported by sustained investments in content, product development, and services. Our focus remains on the continuous improvement of learning experience with the goal of supporting student engagement while meeting the evolving demands of online learning.Next, let's turn to our learning device business. Our diverse portfolio equipped with intelligent features and learning resources is designed to empower users on their self learning journeys. Operationally, our learning devices delivered year over year growth in both revenue and sales volume this quarter. The average weekly active rate among learning device users remained at approximately 80% with average daily usage per active device at approximately one hour. These metrics reflect sustained engagement even as we expanded both our product lineup and our user base. On the product innovation front, as Alex highlighted, we are transforming learning devices into more intelligent learning tutoring AI companions rather than simple problem solving tools. Our AI Thinky one-on-one, the interactive step by step tutoring AI companion embedded in our learning devices, has facilitated over hundreds of thousands of hours of guided learning. Meanwhile, our AI assistant, Xiao Si, remains a trusted companion for users. As of December 2025, students have activated it 1,000,000,000 times. These developments reaffirm our belief in AI's role in supporting students' learning and development.Earlier this month, we launched the X5 Classic Learning Device, positioned as a comprehensive solution for the mid price segment. This new product further expands our product lineup. Designed as an all rounder, the X5 integrates a systematic learning platform with specialized modules with the aim of structuring and supporting self directed learning. Beyond our business progress, we contributed to the ongoing development of the industry. In October, the standardization administration of China released the national standard for mobile learning terminal function requirements. By sharing practical insights from our device ecosystem, we participated in the formation of the standard. We believe that well defined standards help elevate product quality, protect user interests, and support the industry's sustainable development. That concludes the operational update.And I'd like to now walk you through our key financial results for the third fiscal quarter. Our net revenues were $770,200,000 or RMB5,480.4 million. An increase of 27% and 26.8% year over year, in US dollar and RMB terms, respectively. Cost of revenues increased by 18% to 338,400,000.0 US dollars from 286,700,000.0 US dollars in the 3Q FY 2025. Non-GAAP cost of revenues which excludes share based compensation expenses, increased by 18.4% to 338,000,000 US dollars from 285,400,000.0 US dollars in the 3Q FY 2025. Gross profit increased in the 3Q FY 2026, rising by 35% year over year to 431,800,000.0 US dollars from 319,800,000.0 US dollars for the same period last year. Gross margin increased to 56.1% from 52.7% for the same period last year. Selling and marketing expenses for the quarter were US$220.1 million dollars representing a decrease of 2.8% from 226,400,000.0 US dollars for the same period last year. Non-GAAP selling and marketing expenses which exclude share based compensation expenses, decreased by 2.1% to 217,600,000.0 US dollars from 222,400,000.0 US dollars for the same period last year. Non-GAAP selling and marketing expenses as a percentage of total net revenues decreased from 36.7% to 28.3% year over year. General and administrative expenses increased by 7.1% to 118,600,000.0 US dollars from 110,700,000.0 US dollars in the same period of last year. Non-GAAP general and administrative expenses which excludes share based compensation costs, increased by 10% year over year to 110,700,000.0 US dollars from 100,600,000.0 US dollars for the same period of last year. Non-GAAP general and administrative expenses as a percentage of total net revenues decreased from 16.6% to 14.4% year over year. Total share based compensation expenses allocated to related operating costs and expenses decreased by 30.2% to 10,800,000.0 US dollars in the 3Q FY 2026 from 15,500,000.0 US dollars in the same period of last year.Income from operations was 93,100,000.0 in the 3Q FY 2026, compared with a loss from operations of 17,400,000.0 in the same period of last year. Non-GAAP income from operations which excludes share based compensation expenses, was US$104.0 million dollars compared with a non-GAAP loss from operations of 1,900,000.0 US dollars in the same period last year. Net income attributable to TAL was $130,600,000 in the 3Q FY 2026, compared to net income attributable to TAL of US$23.1 million dollars in the same period of last year. Non-GAAP net income attributable to TAL which excludes share based compensation expenses, was 141,400,000.0 US dollars, compared to a non-GAAP net income attributable to TAL of 38,600,000.0 US dollars in the same period of last year. Moving on to our balance sheet. As of 11/30/2025, we had 2,146,300,000.0 US dollars in cash and cash equivalents, 1,471,100,000.0 US dollars in short term investments and 339,300,000.0 US dollars in current and noncurrent restricted cash. Our deferred revenue balance was 1,162,800,000.0 US dollars, as of the end of the third fiscal quarter. Now turning to our cash flow statement. Net cash provided by operating activities for the 3Q FY 2026 was 526,700,000.0 US dollars.Finally, I would like to briefly address our share repurchase program. In July 2025, the company's Board of Directors authorized a new share repurchase program. Under the program, the company may spend up to approximately $500 million dollars to purchase its common shares over the next twelve months. Between 10/30/2025, and 01/28/2026, the company has repurchased 844,856 common shares and an aggregate consideration of approximately 27,700,000.0 US dollars. That concludes the financial section. Alex, I will now hand the call back to you for business outlook. Alex, please go ahead. Alex Peng: Thanks, Jackson. I'd like to share some thoughts on our outlook for the company's future development. We view the intersection of learning and technology as one of our long term strategic priorities. By integrating technology with our industry expertise, we aim to continue enhancing our product design and service delivery across our businesses. In addition, we are strengthening our go to market capabilities. For newer businesses such as learning devices, we are implementing more agile channel management strategies, dynamically optimizing resource deployment based on market conditions, and performance indicators. At the same time, we are reinforcing our multi channel ecosystem by combining digital and physical touch points to broaden market reach and user engagement. From a financial perspective, as I mentioned previously, improving overall profitability remains a key priority for us. At the same time, we remain mindful of near term variability which may be influenced by factors such as market conditions, investment cycles, and seasonal fluctuations. These factors may also require timely adjustments to our operational execution, potentially resulting in limited short term visibility. Nevertheless, we'll continue to advance our strategic initiatives and strengthen capabilities across our core business lines. Maintaining a focus on long term sustainable development rather than short term financial outcomes. So, that concludes my prepared remarks. Operator, we are now ready to open the call for questions. Thank you. Operator: We will now begin the question and answer session. You may press star then 1. If you are using a speakerphone, please pick up your handset before pressing the keys. The first question today comes from Felix Liu with UBS. Please go ahead. Felix Liu: Thank you, Alex and Jackson for taking my question and congratulations on the very strong quarter. If my memory is correct, this is probably the highest level of the November margin since 2018. So congratulations on that. My question is related to offline Peiyou small class. Could management provide some update on the learning center network expansion in Q3? And your latest perspective on the pace of expansion going forward? With respect to Peiyou revenue, what has been the key drivers of your year over year growth? And could you provide more color on the upcoming winter season as well as growth outlook from here? Thank you. Alex Peng: Thanks, Felix. This is Alex. Let me first of all thank you for your kind remark and your continued long term attention to the company. Let me take this question. So I'll provide an update on Peiyou's Q3 performance and outlook. During the third fiscal quarter, Peiyou offline enrichment programs delivered year over year revenue growth which is largely aligned with the expansion of our learning center network. We really maintain our disciplined operational approach to network expansion. We evaluate factors such as our organizational readiness and capability, our operational efficiency, the regional market demand—really, this does come down to a very micro level of districts and neighborhood—and user acceptance of our offerings. So based on this measured and multidimensional approach, the business remains on a stable growth trajectory. Our operating metrics, really, they show that we built a solid and sustainable business framework, and we aim to maintain this level of operational efficiency for the upcoming winter season. So when I look ahead, I think we'll continue to manage the pace of learning center expansion prudently, balancing growth with operational efficiency, and long term sustainability. So when I look at the drivers of Peiyou's year over year growth, revenue growth during the quarter was primarily driven by increased enrollments while our ASP remained relatively stable. So, this performance really reflects both market demand for high quality enrichment programs and the internal capabilities we've been developing. If you look at these capabilities: product design, service quality, and content development just to name a few. Right? So on the product and service front, we really emphasize a standardized teaching framework while fostering an interactive student centric classroom experience. On the talent front, we train our lecturers in house to ensure consistent teaching quality. So, provided that these growth drivers remain in place, we expect this business line to continue growing. At the same time, given that we are coming off a higher comparison base and we talked about this in the past as well—it's coming off a higher comparison base than in prior years—we anticipate a gradual moderation in the pace of revenue growth in FY 2026. So, Felix, I hope that answered your question. Felix Liu: That's clear and congratulations on the results. Thank you. Operator: The next question comes from Charlotte Wei with HSBC. Please go ahead. Charlotte Wei: Good evening. Thank you for taking my question and congratulations on a strong set of results. My question is related to the top line growth momentum. We noticed that the growth kind of slowed down compared to last quarter. Could you please elaborate the key reasons behind this trend? In addition, how should we think about the revenue growth outlook for different business lines, especially for learning devices for the upcoming quarter? Thank you. Jackson Ding: Charlotte, thanks for the question. This is Jackson and I'll take this one. For your question regarding revenue trend, I think we talked about this a few times in the previous quarters. As we continue to grow, our growth rate will taper off naturally, normalizing to a more moderate growth result. More specifically, if we look at this quarter, the moderation in our top line growth was primarily driven by a deceleration in the growth rate of our learning device business, which stems from multiple factors. First, it reflects the evolving patterns in our learning device business, which is transitioning from its initial rapid expansion phase to a more sustained growth trajectory. Another consideration is the timing of a product launch across fiscal years, creating a different kind of comparable base. If you look at last year's fiscal quarter three, for example, it benefited from late August introduction of some of our new product lines back then. While this year, our major product launches happened earlier in the year in May, boosting fiscal quarter two sales instead. So the shift in product launch cycles resulted in different sales paths between the two fiscal years, leading to a higher comparison base in quarter three of last year.Additionally, as we have consistently emphasized in the previous quarters, we continue to prioritize long term competitiveness. By applying this philosophy across all business lines, we aim to balance sustainable high quality growth with prudent execution. Given factors such as market condition, investment cycles, and seasonal fluctuations, dynamic and timely adjustments to operational actions may be required, potentially resulting in quarterly variability in financial performance. Looking ahead, we expect continued fluctuation in learning device revenue. Now coming back to the group level, we believe year over year growth rate will moderate in the second half of this fiscal year, primarily due to a higher comparison base. Consequently, the year over year growth rate in the second half of this fiscal year is expected to be lower than in the first half. Our growth strategy remains grounded in the value we deliver to our users and the society. This guiding principle informs our business decisions and operations as we continue to develop our business. Over the long term, we believe that sustainable growth is driven by three core factors: continuous innovation, strengthened organizational capabilities, and disciplined operational execution. By maintaining our focus on these fundamentals, we aim to support sustainable development over time as we continue developing solutions that address learning needs and contribute to education development. Charlotte, I hope that answers your question. Charlotte Wei: This is very clear. Thank you, Jackson. Operator: The next question comes from Li Ping Zhao with CICC. Please go ahead. Li Ping Zhao: Good evening, Alex and Jackson. Thanks for taking my questions and congrats on a strong quarter. I have a follow-up question on the learning devices. Could you please share the Q3 sales performance of your learning device and how they performed during the Double 11 promotion period relative to management's expectations before? And how do you view the competitive landscape in the learning device market at present? Thank you. Alex Peng: Hi, Liqing. This is Alex. Thanks for the question. So let me begin with our Q3 sales performance. We saw year over year volume growth driven by enhancements to our product portfolio and channel strategies. I also note the blended ASP remained below RMB4,000, which really reflects a shift in our product mix compared to the same period last year. Financially speaking, the learning device business reported an adjusted operating loss as it remains in an investment phase. We'll continue to allocate resources to strengthen our capabilities and support long term competitiveness in this area. So speaking of competitiveness, if I turn to the competitive landscape question: We are really operating in a dynamic environment where artificial intelligence advancements are fundamentally transforming the educational technology landscape. Our approach really combines vertical domain large models with general AI capabilities to create more intelligent personalized learning experiences.One of the... when I think about it, one of the common challenges in at home learning involves students encountering difficult questions or unclear unfamiliar concepts, but they don't have immediate access to teacher support. Rather than simply providing answers in that moment our AI solutions really aim to emulate the human teaching methodologies. Right? So you break down complex problems, you offer tailored explanations, you take in the student's feedback, and then you guide students through learning progression pathways. So to this end, we are developing our AI agents full stack capabilities across these diverse learning scenarios. Investment in product innovation and channel expansion continue to yield positive feedback, which really underscores the user value we're creating with our products. Our key user engagement metrics remain very solid, with an average weekly active rate exceeding 80% and then average daily user time per active device at approximately one hour. During the recent Double 11 promotion period, if you look at our market share performance, that's really aligned with our expectations. So these outcomes, I think they demonstrate that our learning devices are gaining market traction through growing product market fit and diversified user acquisition channels. So these collectively enhance our long term competitiveness. So I'll also note that we look at AI's integration into education as a long term process shaped by technological breakthroughs and evolving market demands. So short term fluctuations are inevitable. But our commitment to the strategic business remains unwavering. Our vision really extends beyond just the current offerings. As artificial intelligence continues to advance, we aspire to bring the principle of teaching in accordance with individual aptitude to a wider scale. So this really helps ensure that more students, regardless of where they're coming from, or what kind of learning environment they have at home, they really have the access to high quality learning resources. So, Liqing, I hope that answered your question. Li Ping Zhao: Yes, that's very helpful. Thanks, Alex. Operator: The next question comes from Timothy Zhao with Goldman Sachs. Please go ahead. Timothy Zhao: Great. Thank you for taking my question and congrats on the very strong results again. My question is regarding your profitability and the bottom line performance. As I think our colleague just mentioned just now, the operating margin in the third quarter reached the highest level probably over the past five years or so. Just wondering what is the main drivers ahead and also if you can share how is the operating margin performance across different major business lines in the Q3? And what is your outlook in terms of profit margin for the group and for different segments? That'll be very helpful. Thank you. Jackson Ding: Timothy, thank you for the question. This is Jackson. Let me take this one. Let me maybe first address the key drivers of our operating margin performance this quarter. On a year over year basis, the improvement primarily reflects the volatility in our selling and marketing expenses, coupled with disciplined cost management across all business lines that continue to drive operating leverage. In this quarter, online marketing and branding expenses for our learning device business were lower compared to the same period last year. Our marketing expenditures naturally fluctuate as we dynamically adjust spending levels and marketing strategies based on market conditions, campaign performance, and strategic priorities. As we continue building our long term core competitiveness, we actively diversify our marketing approaches across different platforms. Brand related expenses also declined during this period. On a sequential basis, online marketing and branding expenses for learning device business also declined. In addition, for online enrichment learning programs, this quarter is not peak season for online customer acquisition, resulting in lower online marketing expenditure compared to Q2. We consider these adjustments a normal part of resource allocation as we balance short term needs with the long term objectives, and the resulting margin volatility aligns with our expectation.For these reasons, we would caution against using this quarter's margin performance as a benchmark for future periods. For learning device business, we reported adjusted operating loss this quarter. As we've emphasized, we prioritize establishing long term competitiveness over short term profitability for this emerging business. The breakeven time line remains uncertain. We are continuing to refine our offerings through new product development, content expansion, AI driven user experience enhancement, and ongoing optimization in operations and sales channels. Looking at our overall margin profile, it is important to note that we are managing a portfolio comprising both mature profitable businesses and newer initiatives still in the investment phase. This dynamic will result in quarterly margin fluctuations, making it inappropriate to extrapolate current results as indicative of future trends. Timothy, I hope that answers your question. Timothy Zhao: Sure. Thank you for the color. Operator: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Alex Peng: Thanks to everyone again for joining us today. As it is that time of the year, I also bid you an early happy Chinese New Year. And we'll talk to you next quarter. Thank you. Bye bye. Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, everyone. Thank you for attending today's Landmark Bancorp, Inc. Q4 Earnings Call. My name is William, and I will be your moderator today. [Operator Instructions] At this time, I would now like to pass the conference over to our host, Shelley Reed, Investor Relations with Landmark Bancorp. Shelley? Unknown Executive: Thank you. Good morning, and welcome to Landmark Bancorp's Fourth Quarter and Full Year 2025 Earnings Conference Call. My name is Shelley Reed, new to Landmark as of August 2025. Joining me today are several members of our executive leadership team, including our President and CEO, Abby Wendel; Chief Financial Officer, Mark Herpich; and Chief Credit Officer, Raymond McLanahan. During today's call, we may make statements that constitute projections, plans, objectives, future performance, beliefs, expectations or similar forward-looking statements. These statements involve risks and uncertainties, which should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. We caution that such statements are predictions only and that actual results may differ materially. We include more information on these factors in our earnings release furnished with our Form 8-K yesterday as well as our Form 10-K and Form 10-Q filings and subsequent filings with the SEC. Additionally, all statements, including forward-looking statements speak only as of the date they are made, and Landmark undertakes no obligations to update any statement in light of new information or future events. Also, our remarks may reference certain non-GAAP financial metrics we believe provide useful information to investors. Additional disclosures regarding non-GAAP measures including the reconciliation of those non-GAAP metrics to GAAP are contained in our earnings release, which we filed yesterday with the SEC and is also available on the Investors section of our website at banklandmark.com. We caution that these non-GAAP financial metrics should not be viewed as a substitute for operating results determined in accordance with GAAP as contained in our earnings release and other filings with the SEC. A replay of this call will be available through February 5. Access information can be found in our earnings release. I will now turn the conference call over to our President and Chief Executive Officer, Abby Wendel. Abigail Wendel: Thank you, Shelley, and welcome to the team. Good morning, everyone, and thank you for joining our call today to discuss Landmark's earnings and operating results for the fourth quarter and full year of 2025. Landmark's strong fourth quarter results capped off a year of outstanding revenue growth, increased profitability, pricing discipline and per share increases in earnings and tangible book value. These results are a testament to the hard work and dedication of our talented associates. We are pleased to report net income of $4.7 million or diluted earnings per share of $0.77 for the fourth quarter. Tangible book value increased to $20.79 per share, an increase of $0.83 versus the prior quarter and an increase of $4.09 or 24% over year-end 2024. For full year 2025, we reported net income of $18.8 million or $3.07 per share. That's a 43% increase over our 2024 earnings per share. We achieved positive operating leverage in 2025 driven by 17% revenue growth, which outpaced our overhead expense growth. Revenue growth was largely driven by continued expansion in net interest income which increased each quarter throughout 2025. Our net interest margin increased 58 basis points to 3.86% for the full year of 2025, driven by our attractive cost of deposits which improved to 1.56%. For the fourth quarter of 2025, our total cost of deposits was 1.50%, driven by our pricing discipline and the nature of our core deposit base. Our efficiency ratio improved to 62.7% in 2025 from 69.1% in 2024 as we controlled expense growth while enhancing our capabilities to better serve our customers and invest in our talent throughout the organization and across our footprint. Throughout the year, we delivered 11.5% average total loan growth, with loans ending the year at $1.1 billion. Commercial loan production was strong, led by growth in commercial real estate loans and our mortgage team delivered robust results, increasing originations 11% year-over-year. We also worked diligently throughout the year to address a few problem credits to better position our loan portfolio and strengthen our overall balance sheet. We remain diligent in our efforts to monitor and constructively address our nonperforming loans. Our capital ratios remain above well capitalized and our tangible common equity to assets now exceeds 8%. I am pleased to report our Board of Directors has declared a cash dividend of $0.21 per share to be paid February 26 to shareholders of record as of February 12, 2026. This represents the 98th consecutive quarterly cash dividend since the parent company's formation in 2021 -- excuse me, in 2001. I will now turn the call over to Mark Herpich, our CFO, who will review the financial results in detail with you. Mark Herpich: Thanks, Abby, and good morning to everyone. While Abby has just provided a highlight of our overall strong financial performance this year, I'll provide some further details on our fourth quarter results. Net income in the fourth quarter of 2025 totaled $4.7 million compared to $3.3 million in the fourth quarter of 2024, mainly due to continued growth in net interest income. In the fourth quarter of 2025, net interest income totaled $14.8 million, an increase of $695,000 compared to the third quarter of 2025, driven by increased asset yields and lower funding costs. Net interest income also grew $2.4 million compared to the same period last year. Interest income on loans increased $75,000 this quarter to $17.9 million due to higher yields on loans. Average loan balances decreased by $2.1 million, while the tax equivalent yield on the loan portfolio improved 3 basis points to 6.40%. Interest expense on deposits in the fourth quarter of '25 decreased $272,000 compared to the prior quarter as a result of lower cost of deposits despite an increase in average deposit balances during the fourth quarter. Interest expense on borrowed funds also decreased by $325,000 due to lower average balances and borrowing rates. The average rate on interest-bearing deposits decreased 12 basis points to 2.06% mainly due to lower rates on deposits. The average rate on other borrowed funds decreased 16 basis points to 4.93% in the fourth quarter, resulting from lower short-term Fed funds rates. Landmark's net interest margin on a tax equivalent basis improved 20 basis points to 4.03% in the fourth quarter of 2025 as compared to the third quarter of 2025 and improved 52 basis points compared to the fourth quarter of 2024. This quarter, we provided $500,000 to our allowance for credit losses after taking $850,000 provision in the prior quarter. Net charge-offs totaled $341,000 in the fourth quarter of 2025 compared to net charge-offs of $2.3 million in the prior quarter. As discussed previously, the third quarter charge-offs were elevated as we reached resolution with a single commercial credit. At December 31, 2025, our allowance for credit losses of $12.5 million remains strong and represents 1.12% of gross loans. Noninterest income totaled $3.9 million this quarter, a decrease of $169,000 compared to the prior quarter. The decrease was primarily due to a $101,000 loss on the sale of lower-yielding investment securities during the fourth quarter as part of our strategy to reposition our investment securities portfolio to improve future income. Noninterest expense for the fourth quarter of 2025 totaled $12.3 million, an increase of $1.0 million compared to the prior quarter. This increase related primarily to increases of $511,000 in compensation and benefits expense, $173,000 in professional fees and an impairment loss taken on repossessed assets held for sale of $356,000. The increase in compensation and benefits resulted from an increase in the number of employees, coupled with higher incentive compensation tied to improved company performance. The increase in professional fees was driven by higher audit and consulting costs during the quarter. This quarter, we recorded tax expense of $1.2 million, resulting in an effective tax rate of 20% as compared to tax expense of $1.1 million in the third quarter of this year or an effective tax rate of 18.7%. Gross loans decreased $6.3 million in the current quarter compared to the previous quarter and totaled $1.1 billion at year-end. Average loans, however, declined only $2.1 million in the fourth quarter. We experienced decreases in our commercial and residential real estate portfolios, which were offset by increases in our commercial real estate, agriculture and construction loan portfolios. Our investment securities decreased $1.9 million during the fourth quarter of 2025, mainly due to maturities exceeding our level of purchases. Our investment portfolio has an average duration of 4.0 years with a projected 12-month cash flow of $86.4 million. Pretax unrealized net losses on our investment portfolio declined by $1.7 million to $7.5 million this quarter. Our deposits totaled [ $1.4 billion ] at December 31, 2025, an increased by $63.4 million in the fourth quarter compared to the prior quarter. This quarter, interest checking and money market deposits increased by $71.6 million, while certificates of deposits declined by $12.1 million. Seasonal growth in public fund deposit accounts as well as growth in core deposits drove the quarterly increase in deposits. Year-over-year, deposits are also up $60.1 million and noninterest bearing deposits ended the year at 26.3% of total deposits. Our total borrowings declined by $79.8 million during the quarter as deposit growth allowed us to reduce more expensive short-term borrowings. Our loan-to-deposit ratio totaled 79.1% at December 31 and continues to provide us sufficient liquidity to fund future loan growth. Stockholders' equity increased $4.9 million during the fourth quarter to $160.6 million at December 31, 2025, and our book value increased to $26.44 per share at December 31 compared to $25.64 at September 30. The increase in stockholders' equity this quarter mainly resulted from net earnings from the quarter, coupled with a decline in other comprehensive loss. Our consolidated and bank capital ratios as of December 31, 2025, are strong and exceed the regulatory capital levels considered to be well capitalized. Now let me turn the call over to Raymond to highlight some of our loan portfolio and look at our credit risk going forward. Raymond McLanahan: Thanks, Mark, and good morning to everyone. As noted earlier, loan balances for the fourth quarter were down slightly despite overall growth for the year. We saw increases in our commercial real estate and agricultural portfolios, However, these were offset by reductions in our commercial and [ 1-4 ] family portfolios. Our commercial real estate portfolio grew by $4.7 million this quarter due to loan production, net of payoffs, and our agricultural portfolio grew by $2.9 million as a result of increased line utilization. As part of our ongoing efforts to maintain a strong and resilient balance sheet, we continue to proactively monitor the overall credit quality of our loan portfolio to identify emerging risks and minimize future losses. Throughout the year, we have worked to reduce the overall risk in our loan portfolio and reduce our nonperforming loans. As of December 31, 2025, nonperforming loans, primarily nonaccrual loans, decreased slightly from the prior quarter totaled just under $10 million or 0.90% of gross loans. Compared to year-end 2024, we reduced nonperforming loans by $3.1 million, an improvement of 24%. Of our remaining nonperforming loans, $1.9 million are covered by government guarantees, which we are in the process of working to collect. The balance of past due loans between 30 and 89 days still accruing interest decreased slightly, totaling $4.3 million or 0.38% of gross loans. Net loan charge-offs for Q4 totaled $341,000 compared to just $219,000 during Q4 of 2024. Year-to-date, net loan charge-offs represent 0.25% of average loans. Our allowance for credit losses stood at $12.5 million or 1.12% of gross loans. The Kansas economy remains healthy. As of November 30, a seasonally adjusted unemployment rate was 3.8% according to the Bureau of Labor Statistics. Regarding housing, the Kansas Association of Realtors recently reported home sales of 2,560 units, down 9.6% year-over-year while the median sale price rose to $277,000 from $265,000 a year earlier. Homes that sold in November were typically on the market 19 days and sold for 100% of their list prices. Inventory conditions continue to normalize with active listings up to 7,833 units and a month's supply of 2.6 months. With that, I'll thank you, and I'll turn the call back over to Abby. Abigail Wendel: Thank you, Raymond. As we move into 2026, we look forward to building on the foundation set in 2025. We will continue to invest in our talented associates, make strategic investments to better serve our customers and capitalize on growth opportunities in our markets. I am deeply grateful to our associates for their continued dedication to putting people first and building the meaningful connections that empower our customers and strengthen the communities we proudly serve. If there are any follow-up questions to today's call, please see our earnings release for our CFO and Investor Relations contact information. We appreciate everyone being on today's call, and we look forward to talking with you again in April. Operator: Thank you. That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Q1 2026 Plexus Earnings Conference Call. [Operator Instructions] I will now hand the call over to Shawn Harrison, Vice President of Investor Relations. Please go ahead. Shawn Harrison: Good morning, and thank you for joining us today. Some of the statements made and information provided during our call today will be forward-looking statements, including, without limitation, those regarding revenue, gross margin, selling and administrative expense, operating margin, other income and expense, taxes, cash cycle, capital allocation and future business outlook. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied in the forward-looking statements. For a list of factors that could cause actual results to differ materially from those discussed, please refer to the company's periodic SEC filings, particularly the risk factors in our Form 10-K filing for the fiscal year ended September 27, 2025, and the safe harbor and fair disclosure statement in our press release. We encourage participants on the call this morning to access the live webcast and supporting materials at Plexus' website at www.plexus.com, clicking on Investors site at the top of that page. Joining me today are Todd Kelsey, President and Chief Executive Officer; Oliver Mihm, Executive Vice President and Chief Operating Officer; and Pat Jermain, Executive Vice President and Chief Financial Officer. With today's earnings call, Todd will provide summary comments before turning the call over to Oliver and Pat for further details. With that, let me now turn the call over to Todd Kelsey. Todd? Todd Kelsey: Thank you, Shawn. Good morning, everyone. Please advance to Slide 3. Plexus has achieved significant momentum. Our consistent strategy and focus on delivering customer success continues to enable share gains and is facilitating our leadership in growth markets. We've seen strong year-over-year revenue growth to begin our fiscal 2026 as we ramp programs across all of our market sectors. In addition, we are now seeing pockets of stronger end market demand. Our ongoing market share gains are amplifying this revenue growth tailwind. As a result, Plexus now has the potential to meet or exceed the high end of our 9% to 12% revenue growth goal for fiscal 2026. In addition, we see significant opportunities to sustain our revenue growth momentum. Our funnel of qualified manufacturing opportunities remains diverse and robust while our Engineering Solutions funnel of qualified opportunities is the third largest in Plexus' history. We continue to forecast strong operating performance for our fiscal 2026. We anticipate robust growth in operating profit and remain focused on achieving our goal of a 6% non-GAAP operating margin while continuing to invest in talent, technology, facilities and advanced capabilities to support sustained future revenue growth and greater operational efficiency. Finally, although we are investing in support of substantially stronger than previously anticipated revenue growth, we continue to forecast approximately $100 million of free cash flow for the fiscal year highlighting our ongoing efforts to drive working capital efficiency. We will continue to deploy all excess cash to create additional shareholder value. Please advance to Slide 4. Revenue of $1.07 billion met the midpoint of our guidance range as we delivered our fourth consecutive quarter of sequential growth, representing a robust 10% increase year-over-year. A significant expansion in our Healthcare/Life Sciences and Aerospace and Defense market sectors associated with multiple program ramps and stronger-than-anticipated demand from semicap and energy drove our performance. Non-GAAP EPS of $1.78 met the high end of our guidance range, reflecting very strong operating performance in light of significant near-term investments we are making in support of additional capacity, program ramps and technology. Please advance to Slide 5. For the fiscal first quarter, we secured 22 new manufacturing programs, worth $283 million in annualized revenue when fully ramped into production. Included in these wins was a record quarterly performance from our Aerospace and Defense market sector estimated at $220 million in annualized revenue. Our fantastic Aerospace and Defense wins performance underscores strong interest in Plexus' industry-leading solutions as evidenced by expanded relationships with numerous existing customers, significant expansion in our leadership in commercial space and the addition of new and exciting partners deploying disruptive technologies. Finally, I would note we continue to see significant opportunities to drive market share gain and sustained revenue growth from our Aerospace and Defense market sector. Our funnel of qualified Aerospace and Defense manufacturing opportunities is up significantly year-over-year, while our total funnel of Aerospace and Defense engineering solutions opportunities sits at an all-time high. Please advance to Slide 6. At Plexus, we continue to demonstrate our commitment to innovating responsibly as we boldly drive positive change and promote a sustainable future for and through our people, our solutions and our operations, all of which is built on a foundation of trust and transparency. Therefore, I'm pleased to share that our team in Penang, Malaysia was once again recognized as one of HR Asia's Best Companies to work for. This represents the fourth consecutive year receiving this recognition. Along with this honor, the team also accepted HR Asia's Sustainable Workplace Award for the second straight year and the Tech Empowerment Award for the first time. At Plexus, people are the heart of who we are and what we do, and I'm incredibly proud of what these awards represent for our team members and our vision of building a better world. Our commitment to delivering excellence includes reducing our environmental impact throughout our operations. At the end of our fiscal 2025, we partnered with TNB, a utility provider in Malaysia and joined its green electricity tariff program. This partnership provides 100% renewably sourced electricity to our largest global campus in Penang, Malaysia. Through our fiscal first quarter of 2026, we have dramatically reduced our emissions, leveraging this partnership and the continued focus on emission reductions across all of our global locations. Finally, last quarter, we communicated the results of our Volunteer Time Off charitable giving program. Through this program, during the fiscal first quarter, we made financial donations to 24 global charities voted on by our team members. We extend appreciation to our incredible team members, partners and local communities whose contributions have been vital to our ongoing success. Please advance to Slide 7. For our fiscal second quarter, we are guiding revenue of $1.11 billion to $1.15 billion, representing 6% sequential and 15% year-over-year revenue growth at the midpoint. We are also guiding non-GAAP operating margin of 5.6% to 6.0% and non-GAAP EPS of $1.80 to $1.95. We are experiencing robust demand globally for our industry-leading solutions in support of numerous program ramps, inclusive of ongoing market share gains. In addition, we have seen recent strengthening in Healthcare related to surgical and monitoring technologies within semicap, in Industrial equipment and across multiple subsectors of our Aerospace and Defense market sector. We also anticipate delivering strong operating performance for the fiscal second quarter. We expect to leverage this robust revenue forecast and the benefits from our ongoing operational efficiency initiatives to offset sizable headwinds from typical seasonal cost increases, increased variable compensation expense and growth and efficiency investments. Finally, for fiscal 2026, we now see the potential to meet or exceed the high end of our 9% to 12% revenue growth goal. This reflects the positive momentum anticipated for our fiscal second quarter and signs of stronger end market demand. We expect to leverage this improved revenue outlook and our ongoing investments in operational efficiency to drive significant operating profit expansion and robust free cash flow for fiscal 2026. In closing, Plexus is generating significant positive momentum. This is a result of our consistent strategy, which is enabling share gains and leadership in growth markets and from our ongoing investments to further our industry-leading solutions and drive greater long-term operational efficiency. I will now turn the call to Oliver for additional analysis of the performance of our market sectors. Oliver? Oliver Mihm: Thank you, Todd. Good morning. I will begin with a review of the fiscal first quarter performance of each of our market sectors, our expectations for each sector for the fiscal second quarter and directional sector commentary for fiscal 2026. I will also review the annualized revenue contribution of our wins performance for each market sector and then provide an overview of our funnel of qualified manufacturing opportunities. Starting with our Aerospace and Defense sector on Slide 8. Revenue increased 3% sequentially in the fiscal first quarter, slightly below our expectation of a mid-single-digit increase on customer end-of-year inventory management. For the fiscal second quarter, we expect revenue for the Aerospace and Defense sector to be up mid-single digits from demand improvement in our commercial Aerospace and Defense subsectors as well as new program ramps within our commercial aerospace, defense and space subsectors. Our fiscal first quarter wins for the Aerospace and Defense sector were $220 million. This extraordinary quarterly performance nearly matches prior record annual wins performance in F '19 and F '21 of $222 million and $258 million, respectively. Broadly, our customers reference our operational excellence and depth of technical expertise as contributing factors for increasing interest in partnering with Plexus and our continued program awards. For the quarter, our Neenah, Wisconsin site won a substantial program that further expands our leadership in the space subsector. In our security subsector, our Guadalajara and Chicago sites will respectively assemble and service an innovative security detection technology product. This new customer cited our consultative engagement and ability to minimize total product cost with a combined production and services solution as contributing factors for this win. And our Boise, Idaho team is welcoming a new customer with disruptive technology in the unmanned subsector. We anticipate fiscal 2026 revenue growth for the Aerospace and Defense sector to now exceed our 9% to 12% goal. Our continued robust growth outlook is supported by new program ramps with multiple customers and subsectors, strong defense subsector growth and modest growth in our commercial aerospace subsector. Please advance to Slide 9. This first -- fiscal first quarter revenue in our Healthcare/Life Sciences market sector increased 10% sequentially, aligned to our expectation of a high single to low double-digit increase. For the fiscal second quarter, we expect the Healthcare/Life Sciences market sector to be flat to up low single digits sequentially, reflecting modest growth in our therapeutics subsector. Fiscal first quarter Healthcare/Life Sciences sector wins of $40 million and included an award for a next-generation imaging product for our Haining, China location. Our historical operational excellence, agile new product introduction performance and partnership through the quoting process contributed to the win. Our team in Oradea, Romania was awarded mechanical cabinet subassemblies for an imaging product for an existing top medical OEM customer. This share gain award strategically expands our support for this customer to include another region. We continue to have a robust fiscal 2026 outlook for the Healthcare/Life Sciences sector, anticipating revenue growth to now exceed our 9% to 12% goal, supported by contributions from ongoing and new program ramps and improved end market demand across our therapeutics and monitoring subsectors. Advancing to the Industrial sector on Slide 10. Fiscal first quarter revenue declined 8% sequentially, in line with our forecast. Our Industrial sector fiscal second quarter outlook of a high single to low double-digit increase is driven by demand strength and program ramps within our semicap subsector and program ramps and near-term demand improvements within our industrial equipment subsector. Industrial market sector wins for the fiscal second quarter of $23 million included an award from an existing semicap customer for our Neenah, Wisconsin facility. This award covers product launch volumes for a next-generation product. Our team in Oradea, Romania was awarded the assembly of a robotic solution that supports material handling and indoor logistics. This transition from our customers' internal manufacturing operations was awarded in part due to the strength of our advanced engineering and manufacturing capabilities. Our improved fiscal 2026 industrial sector revenue growth outlook is supported by new program ramps and robust growth that's well into the double digits for our semicap subsector and program ramps in our industrial equipment subsector, offsetting demand softness within other subsectors. As a result, we now anticipate fiscal 2026 revenue growth for the Industrial sector to approach our 9% to 12% growth goal. Please advance to Slide 11 for a review of our funnel of qualified manufacturing opportunities. The funnel of qualified opportunities remains robust at $3.6 billion. Notably, our aerospace and defense sector momentum continues to build. Even with the extraordinary wins performance this quarter, our funnel of Aerospace and Defense qualified manufacturing opportunities only saw a modest sequential decrease, reflecting a strong backfill of opportunities. Further, the Aerospace and Defense sector's total funnel for our engineering solutions achieved a record high in the fiscal first quarter. In summary, Plexus has significant momentum as evidenced by our improved revenue growth outlook. Our passion for delivering excellence and creating customer success, supported by our focus on partnership and technical and operational expertise continues to be rewarded through customer recognition, market share gains and new customer partnerships. Ongoing new program ramps, inclusive of share gains and improved end market demand all support Plexus meeting or exceeding the high end of our 9% to 12% revenue growth goal for fiscal 2026. I'll now turn the call over to Pat. Pat? Patrick Jermain: Thank you, Oliver, and good morning, everyone. Our fiscal first quarter results are summarized on Slide 12. Gross margin of 9.9% was consistent with our guidance and consistent with the last quarter despite a slight margin impact from the opening of our new Malaysia facility. Selling and administrative expense of $51.7 million met guidance and was consistent with last quarter. As a percentage of revenue, SG&A sequentially declined given revenue leverage. Non-GAAP operating margin of 5.8% also met our guidance. Nonoperating expense of $3.4 million was favorable to expectations due to lower-than-anticipated interest expense and foreign exchange losses. Non-GAAP diluted EPS of $1.78 was toward the top end of our guidance. Turning to our cash flow and balance sheet on Slide 13. For the fiscal first quarter, cash from operations consumed approximately $16 million to support significant program ramps planned this year. We also spent $35 million on capital expenditures with a large portion of this related to carryover payments for our new Malaysia facility. The result was a cash outflow of approximately $51 million. For the fiscal first quarter, we acquired approximately 153,000 shares of our stock for $22.4 million. At the end of the quarter, we had approximately $63 million remaining on the current repurchase authorization. Similar to last quarter, we ended the fiscal first quarter in a net cash position. We had $60 million outstanding under our revolving credit facility with $440 million available to borrow. For the fiscal first quarter, we delivered a return on invested capital of 13.2%, which was 420 basis points above our weighted average cost of capital and a strong result to be in fiscal 2026. Cash cycle at the end of the fiscal first quarter was 69 days, which was within our guidance range and 6 days higher than last quarter. Please turn to Slide 14 for additional details. The sequential change in our cash cycle was primarily due to the 6-day increase in inventory days tied to investments to support sizable, anticipated revenue growth. As Todd mentioned, Plexus now has the potential to meet or exceed the high end of our 9% to 12% revenue target this year, which is requiring greater investments in working capital. While these investments have increased our cash cycle, I'm pleased to see our net cash cycle remain in the 60s. As Todd has already provided the revenue and EPS guidance for the fiscal second quarter, I'll review some additional details, which are summarized on Slide 15. Fiscal second quarter gross margin is expected to be in the range of 9.9% to 10.2%. At the midpoint, gross margin would be slightly above last quarter despite seasonal compensation cost increases and the reset of payroll taxes for U.S. employees. We expect to offset these cost impacts through productivity improvements and additional fixed cost leverage from the anticipated robust sequential revenue growth. We anticipate selling and administrative expense in the range of $54 million to $55 million. This includes more than $1 million of seasonal compensation headwinds and additional variable incentive compensation expense linked to our strong performance. Note that the SG&A estimate is inclusive of approximately $6.8 million of stock-based compensation expense. For the second quarter, fiscal second quarter non-GAAP operating margin is expected to be in the range of 5.6% to 6%, exclusive of stock-based compensation expense. As the year progresses, we believe there will be an opportunity to meet or exceed our 6% non-GAAP margin target. Non-operating expense is anticipated to be approximately $5.3 million, which is sequentially higher primarily due to greater interest expense. Prior quarters have benefited from the capitalization of interest expense associated with site additions. We are estimating an effective tax rate between 16% and 18% for both the fiscal second quarter and for fiscal 2026. Diluted shares outstanding are expected to be approximately 27.2 million. Our expectation for the balance sheet is that working capital investments will increase compared to the fiscal first quarter. However, based on our robust revenue forecast, we expect this level of working capital will result in a sequential improvement to cash cycle days. As such, we are estimating cash cycle days in the range of 65 to 69 days, which represents a 2-day sequential improvement at the midpoint. With higher investments in working capital, we expect breakeven to a slight usage of cash for the fiscal second quarter. Despite the first half usage of cash to support anticipated revenue growth, we reconfirm our fiscal 2026 expectation for free cash flow of approximately $100 million. One final comment on fiscal 2026. In support of our revenue growth, we now expect capital spending to be in the range of $100 million to $120 million, which is slightly higher than the previous estimate. With that, Shaley, let's now open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of David Williams with Benchmark. David Williams: Congratulations on the really strong performance and outlook here. Todd Kelsey: Thank you, David. David Williams: Yes. I guess my first question for you, Todd, is what's changed do you think over the last 3 to 6 months? And obviously, the quarter is really strong in your outlook as well. But now you're talking about exceeding or meeting that 9% to 12% target. It feels like things have materially changed. And I'm just wondering if that's more market-driven or more of the program wins that you're seeing. Just any color on what do you think is the major driver of your success here? Todd Kelsey: Yes. David, I would call it a combination of both. We're certainly getting some very strong program wins, and you may have noticed the dollar value this quarter, the wins is substantially higher than typical for us as well, too, which is suggesting some larger programs coming in. Those ramps are going well in the new program ramps that we have underway right now, which is helping, particularly, I think Healthcare is being driven in a big way from program ramps, but somewhat in Industrial with semicap. But then we're also seeing end markets improve. We're seeing major changes in the semicap market right now. I would say we're in the early stages of seeing demand improvement right now, though we started to see things come through about a month ago, and we're seeing some bullish news out there even as of today. So it remains to be seen if that continues to improve in the future. But we're also seeing upticks in Healthcare, although a little bit more modest, and in certain subsectors of Aerospace and Defense. But one thing I'd also note, though, with regards to Aerospace and Defense is we're not seeing the full pull-through from Boeing yet. So while we're seeing some modest improvement, we're not seeing the full pull-through from their increasing volumes. David Williams: Okay. Great. Really nice commentary there. And I guess maybe secondly, just kind of thinking about that semicap equipment, as you mentioned and just seeing the early demand, how long does that typically take to translate into revenue or when you'll see those design win ramps? If we talk about CapEx being added today and having those discussions, is that a year? Is it 2 years? How long should we think about for that semicap to kind of show up in your revenue? Todd Kelsey: Well, David, demand increases will show up significantly faster. So that's in the quarter to 2-quarter range. It's really just a matter of getting the proper materials pipelined. And in many cases, with many of our customers, we have buffer stock inventory so we can respond fairly rapidly. So that will be quick. I mean if it becomes capital or footprint or things like that, then we're talking the year-plus time range. But we have ample available capacity right now. Operator: Our next question comes from the line of Jim Ricchiuti with Needham & Company. James Ricchiuti: So I was hoping to drill into that Aerospace and Defense demand and the wins you're seeing. First, is the demand -- it sounds like it's coming from traditional defense. It looks like you're still anticipating some of the commercial aerospace strength in maybe going forward. But I'm also wondering if you're seeing any momentum in some of the more -- the emerging areas, demand area, obviously, there's been a lot of attention on drones or [indiscernible] I think you highlighted commercial space. So I wonder if you could just elaborate on what you're seeing in that market. Oliver Mihm: Yes. Sure, Jim. This is Oliver. So hitting it from a couple of different angles. I'd say that new program ramps across all of the subsectors within that sector continue to contribute to our outlook here and our foregoing momentum. So that's certainly a big piece of it. In terms of just underlying demand, certainly seeing some underlying demand strength in defense. We talked about some incremental growth in commercial aerospace. But as Todd just highlighted, specifically within commercial aerospace, seeing Boeing or Airbus increase their production rates is currently not contemplated in our outlook. From a defense perspective, I'd say also that -- candidly, the implied spending from news headlines has not trickled through in any substantial way for us here yet in terms of demand signal from our end customers. So there's also potential upside going forward in that particular subsector. The other thing I think we're just excited about is, as you highlighted or hinted at, our leadership in the space subsector continues to build and create momentum for us. We've had some substantial wins there recently and again this quarter. And then also, we talked about in our prepared remarks, the disruptive technology and the opportunity for those particular programs to create additional revenue growth here in the out quarters as we ramp those programs. James Ricchiuti: Got it. That's helpful. Follow-up question. Maybe, Pat, for you. I'm wondering, you may have given it, but can you quantify the headwind on gross margins in the quarter from Malaysia, the new Malaysia facility? And does that ease? Or will it continue in Q2? Patrick Jermain: Yes. It was fairly minimal in Q1. It was a little less than 10 basis points of a headwind overall to margins. We'll see in Q2 very close to breakeven. But then encouraging the back half of this year, we're actually going to be approaching our -- close to our corporate average for margins within that site. And probably even more encouraging is what the tailwinds we're seeing from our new Thailand facility, which was profitable in fiscal '25, but the improvement in F '26 is looking to benefit margins by about 25 to 30 basis points overall margin. So really positive back half of this year with Thailand. And part of the reason why I think we can get to our 6% or above back half of this year. Shawn Harrison: Jim, it's Shawn. Just as a little bit of follow-up. We had a ribbon cutting a few weeks ago with one of our key customers at that new site in Malaysia. Extremely excited about that. And I know we've had other key customers into that site recently and feedback has been fantastic. So to Pat's comments, really expect some strong contributions from our newer facilities in Asia as we move throughout fiscal 2026. Operator: Your next question is from Melissa Fairbanks with Raymond James. Melissa Dailey Fairbanks: Congratulations on the great quarter and guide. Excited to see you put that stronger full year guide into print. I appreciate all the commentary about working capital investment to support a lot faster growth. We've heard from a number of your suppliers this week suggesting they're seeing increasing lead times across a wider range of components now. I'm wondering if you're starting to see that already and if this is either impacting customer plans for program ramps and/or your own internal working capital investments, specifically related to shortening or tightening lead times. Oliver Mihm: Yes. Melissa, this is Oliver. We are certainly seeing some of our supply-based commodities ticking up in terms of lead time. So more specifically, our semiconductor commodity space, printed circuit board specifically out of the APAC region also increasing a bit in lead time. But as we hinted at or talked to earlier here in some of the Q&A, really working to get ahead of that. So with customers, we're prepositioning inventory, we're being thoughtful about what specific aspects of their bill of material would warrant prepositioning to mitigate risk and ensure supply. For instance, within memory, that's something that we've extended out our PO coverage to our suppliers, working with customers to ensure we've got extended forecast visibility and basically just coming up with a creative partnership with our customers to ensure that we're covering the risk there and can ensure continuity of supply. Todd Kelsey: Yes. One of the things I'd add too, Melissa, is if you compare this back to a few years ago when lead times were stretched, I think we're in a significantly better position to not only manage inventory better, but also support our customers better through our redesign sales inventory operations planning process through some of the other systems and tools that we put in place. So we feel like we're in really good shape here as lead times begin to tighten a little bit. Melissa Dailey Fairbanks: Okay. Great. Yes. Let's hope we don't get back to the conditions of a few years ago. As a follow-up question -- yes, right. So my next question, I'm excited to see new program ramps ramping next time I visit the Neenah location. But I'm just wondering if with all of these new manufacturing wins and program ramps across a multiple number of locations and end markets, how close are we to needing new capacity additions? Or are you able to support all of this growth that we're expected to see this year and maybe into next year with the existing location or the existing footprint rather? Todd Kelsey: Yes. We're in pretty good shape from a footprint standpoint, Melissa. I mean we think we could comfortably support about $6 billion in revenue with the existing footprint. Of course, it depends a bit on geography and where the growth is if it ends up concentrated in an area. But we're in -- right now, we're in good shape with a significant available capacity in all our regions. Oliver Mihm: I'll jump in and add there and note that part of our technology and efficiency focus within operations is not just focused on P&L improvements, but also focused on essentially what I just call broadly asset utilization, whether that be machine assets in terms of machines or assets in terms of bricks-and-mortar footprint. So we've historically talked -- previously talked about our AutoStore, so where we're taking our warehouse and putting that into a 3-dimensional cube with robots that are running around picking up bins. And that yielded specifically a 60% reduction in space, and then we can convert that floor space to revenue. And then also, I'll reflect on a specific software tool that we're utilizing to drive efficiency and how we use our surface mount technology machines. And just in the past few quarters here, we have redeployed multiple SMT lines, 7 lines, which then creates additional footprint space for, say, higher level assembly as well as CapEx avoidance. Patrick Jermain: Yes. And from that standpoint, Melissa, capital spending, I see a shifting over the next few years from more footprint additions to these automation investments. And from a percentage standpoint, we've been running around 2.5% or below percentage of revenue for capital spending. I think we'll be in that range in the next few years. But again, it's more of a shift away from footprint to investments within our sites. Melissa Dailey Fairbanks: Okay. Great. Super, super helpful. I thought you guys were going to mention AI, but you missed your chance. Todd Kelsey: Well, we could talk about it, if you like. Operator: [Operator Instructions] Our next question comes from the line of Steve Barger with KeyBanc Capital Markets. Unknown Analyst: This is [indiscernible] on for Steve. The first one from us is on Industrial. It's a little bit of a 2-parter. First, I just wanted to follow up on the semicap commentary. We heard from 2 large semicap OEMs yesterday that called for pretty strong growth this calendar year. They said that pull-ins are happening quickly and demand is almost overwhelmingly strong. I wanted to ask, do you agree with one of their outlooks for greater than 20% growth that's second half weighted? Is that what you're seeing in your order book with your mix of semicap customers? And then the second part was if you could just walk through the puts and takes of the non-semicap industrial markets, that would be helpful for how we think about the consolidated segment. Oliver Mihm: Yes. Steve, this is Oliver. From a semicap perspective, certainly, our prepared remarks should reflect how bullish we're feeling here in fiscal '26. And certainly, we're seeing a variety of different growth rates coming through from customers, from industry metrics. I guess a couple of thoughts there. One is, and Todd hit this earlier, it's still early days, right? So this is something we've seen here just through the last quarter, the uptick in demand from our customers. So in terms of our outlook, we feel confident that we can outgrow the market. Exactly how that's going to play out. I think early days is the right phrase to use to quantify that. I'd also note that as we're contemplating and giving you metrics about how we're looking at growth, we're working on our fiscal year basis, which ends in September versus a lot of the industry and customer commentaries coming across from a calendar year basis. So that's a little bit off, and we're just talking about essentially for us, 3 quarters inside the calendar year. Across the rest of the sector, candidly, I think there's a lot of other things to be enthusiastic about. Certainly, within comms, and we noted this earlier, generally a little bit still muted in demand. So we're seeing inflection, but still opportunity for further upside there. Within comms, we see the tech transition unfolding from a comparable basis year-over-year. Recall that throughout F '25, we mentioned in a number of these calls how we had captured some legacy orders as the transition was bumping along, right? And so that's part of our comparable there. Another subsector we're really excited about is energy, whether that be infrastructure, distribution, control systems, storage. We're excited about our growth with our customers there. We're also excited about our funnel. We've seen a strong rate of increase with technology specifically in support of the data center like power management and storage, thermal cooling, thermal density -- in support of thermal density, and we've got some several good-sized opportunities in the funnel there. Unknown Analyst: Understood. That's very helpful. Then the second one from us. I kind of wanted to drill into your automation and efficiency-focused initiatives, maybe give you an opportunity to expand on the AI initiatives you have going on. I know you highlighted some activities you're doing. But could you just give us any color on the breadth of the initiative across your manufacturing base, the time line and the potential financial benefits? I mean do you think that can benefit sales return? Or are you more focused on the margin benefits from those activities? Oliver Mihm: Yes. I'll highlight a couple of different things we're doing here and take the opportunity to build in some of our AI-driven activities and then maybe others can jump in as well. One thing that we're really excited about is how we're using automated robots to drive material deployment from our warehouses, which are converting to these AutoStore 3D cube, which I talked about earlier. These robots piloted that in fiscal '25 and just to show that the pace and alignment across the organization as we adopt these technologies by spring of this calendar year here, 2026, we're going to have full site deployment of that technology across all of our sites, essentially eliminating human work, transferring materials from the warehouse to the floor for what I'll just say is generally lighter items, right? And then just thinking about that, didn't stop there. So one of our sites just in the past few weeks conducted a Kaizen activity, optimized their floor layout to now better support that technology and as a consequence, reduced as far as 75% reduction in the mileage that we're driving across -- for the material deployment. Each of those deployed bots replaces roughly 1.5 to 2 FTEs. ROI on that, less than 12 months. So we're pretty excited about that kind of deployment, I should say. Yes. And then from an AI perspective, we're building that in a number of different ways. So we're building AI and machine learning into how we can -- how we handle work orders that are in play, and we're specifically expecting a significant reduction in WIP on the production floor as a result of that. Also now using AI and some camera technology to help us define optimal standard work times, which will then enable us to reduce overall labor -- or sorry, improve labor efficiency in our high mix, high-level assembly aspects of our production floor. Patrick Jermain: Yes. So Jacob, a lot of what Oliver has talked about is definitely going to benefit margins. It will also help with reduced capital spending. One other AI application is around the quoting process and how can we speed up the quoting process. So that will have an impact on revenue as well, bringing in new wins. Todd Kelsey: So one of the things that's worth mentioning, too, is we have a two-pronged attack or approach for how we're attacking or AI and leveraging it throughout the facility. One, we have a dedicated team of data scientists and programmers, which are tackling large enterprise-level issues similar to the ones that Oliver and Pat talked about. But we've also fully deployed AI tools to the desks of all our employees, and that's getting well over 30% daily usage from our staff. So our teams are heavily leveraging AI in the way they go about doing their work. Operator: Our next question comes from the line of Anja Soderstrom with Sidoti. Anja Soderstrom: Congratulations on the nice performance here and outlook. Most of my questions have been addressed, but did you quantify to what magnitude your seasonal bonus pay are going to pressure the margins for the second quarter? Patrick Jermain: Yes. We didn't say it in number terms, but it's about 50, 60 basis points of a headwind that we're overcoming. So again, to maintain operating margin consistent with Q1, we're overcoming a lot of headwinds there. And again, that's a combination of improving profitability with our new Malaysia facility, Thailand, just the sheer revenue growth, better leverage of our fixed costs. And then what we've been talking about, a lot of productivity improvements, driving efficiencies and margin improvement there. Anja Soderstrom: Okay. And then do you expect further improvements in the Malaysia and Thailand facilities in the second half, right? And continue... Patrick Jermain: We do. Yes. And typically, what we see is this hit in the March quarter from the compensation headwinds, and then we start to earn through that with productivity improvements in the back half of the year. And with sequential revenue growth as well, we'll be leveraging our fixed cost even further. Anja Soderstrom: Okay. And then in terms of taxes, it seems like that's going to come down. What are the puts and takes for the tax rate? And why is that expected to come down? Patrick Jermain: I don't think we were guiding that, Anja. We're keeping our range at 16% to 18%. So I think the Street had us at 17%, and that's where we continue to think it will fall. If you go back to last year, it was a very low rate because we had a lot of reversals of some reserves that took place in fiscal '25. So that rate was 8% and now we're guiding up to 17%. And the real increase is around global minimum tax that's taking effect in certain jurisdictions. But yes, I think we're going to maintain that 17%. Anja Soderstrom: Okay. And then you mentioned in Industrial that you won a new robotics program that was transitioning out from internal manufacturing. Is that a new customer? Or -- and do you have more opportunities to win more programs from them? Oliver Mihm: That customer is not new. We're currently doing work for that customer in the Americas region. What's new is we're now going to be -- that particular win I talked about is in our EMEA region. And yes, we absolutely have further opportunity with that customer, including opportunities that are currently in our funnel of qualified manufacturing opportunities. Operator: Our next question comes from Jim Ricchiuti with Needham & Company. James Ricchiuti: I just had a quick one. I believe in the Q4 call, you alluded to some programs or it may have been one program that I believe was in A&D that slipped a bit. And I was just wondering if there was any catch-up in Q1? Or is the -- has that timing shift moved to later in the year? Todd Kelsey: Yes, that's on track now, Jim. James Ricchiuti: Okay. So it's -- you're anticipating that over the next few quarters. I don't know how significant that was. Todd Kelsey: Yes. It was enough to impact the A&D results, but I wouldn't call it a big needle mover on Plexus overall revenue. I mean yes, it has a positive impact, but it's not going to flow through in a huge way. Operator: There are no further questions at this time. I will now turn the call back to Todd Kelsey, CEO, for closing remarks. Todd Kelsey: All right. Thank you, Shaley. I'd like to thank shareholders, investors, analysts and our Plexus team members who joined the call this morning. In closing, we're generating significant momentum, and I anticipate fiscal 2026 to be a great year for Plexus as we celebrate our 40th year as a publicly traded company. Our strong start and outlook is a testament to our consistent strategy and our more than 20,000 team members globally who focus on delivering for our customers each and every day. Thank you again to our team members, our customers and shareholders. Have a nice day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning, and welcome to the Fourth Quarter 2025 earnings call for Annaly Capital Management. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Sean Kensil, Director of Investor Relations. Please go ahead. Sean Kensil: Good morning, and welcome to the fourth quarter 2025 earnings call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Content referenced in today's call can be found in our fourth quarter 2025 Investor Presentation and fourth quarter 2025 financial supplement, both found under the Presentations section of our website. Please also note this event is being recorded. Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co-Chief Investment Officer; Serena Wolfe, Chief Financial Officer; Mike Fania, Co-Chief Investment Officer and Head of Residential Credit; V.S. Srinivasan, Head of Agency and Ken Adler, Head of Mortgage Servicing Rights. And with that, I'll turn the call over to David. David Finkelstein: Thank you, Sean. Good morning, everyone, and thank you all for joining us for our fourth quarter earnings call. Today, I'll open with a brief overview of the macro and market environment and then touch on our performance for the quarter and the year, following which I'll provide an update on each of our 3 investment strategies and conclude with our outlook for 2026. Serena will then discuss our financials before opening up the call to Q&A. Now starting with the macro landscape. The fourth quarter supported the prevailing narrative of a solid U.S. economy. Although official data flow was disrupted by the government shutdown. Reports received thus far suggest that the expansion continues at an above-trend pace. The labor market remains soft, however, as hiring slowed further in Q4, but limited layoffs and a reduction in labor force growth have muted the rise in the unemployment rate. Fixed income markets exhibited another strong quarter, in turn, helping 2025 register the highest total return in the U.S. aggregate bond index since 2020. The market benefited from continued strong inflows into bond funds and the ongoing decrease in both implied and realized rate volatility to the lowest levels since 2021. This decline in volatility was supported by a more predictable outlook for monetary policy and following 75 basis points of aggregate rate cuts in 2025, markets currently priced nearly 2 additional cuts later this year. The pace and realization of those projected cuts will be dependent on developments in the labor market, stability and inflation, and the composition of the FOMC going forward. The yield curve further steepened during the quarter as short-term yields fell, while long-term yields rose modestly. Swap spreads continue to widen partially driven by a shift on the part of the Fed from quantitative tightening to balance sheet expansion through reserve management purchases and bills, which served to increase the stability in short-term funding markets. And amid this constructive environment, our portfolio generated an economic return of 8.6% for the fourth quarter, with all 3 businesses contributing solid returns. For the full year 2025, we've delivered an economic return of just over 20% and a total shareholder return of 40%, underscoring the strength and resilience of our diversified housing finance strategies. And notably, we've been able to produce these results with a conservative leverage profile and our economic leverage decreased modestly to 5.6x on the quarter. Our earnings available for distribution rose marginally to $0.74 again outearning our dividend And also to note, we remained active in capital markets, raising $560 million of common equity through our ATM in Q4 bringing total equity raised in 2025 to $2.9 billion, inclusive of our Series J preferred stock issuance this past summer. With the capital raised, we were able to accretively grow our portfolio by 30% on the year with each of our 3 strategies demonstrating double-digit growth. Now turning to our investment businesses and beginning with Agency. Our portfolio ended 2025 at $93 billion in market value, an increase of nearly $6 billion in the quarter and $22 billion over the course of the year with Agency ending the year representing 62% of the firm's capital. In addition to MBS benefiting fundamentally from lower volatility in a steeper yield curve, sector has exhibited a highly supportive supply and demand picture as well. In particular, strong and consistent bond fund inflows, REIT equity raises, and GSE portfolio growth of $50 billion through year-end against the backdrop of net MBS supply surprising to the downside, helped fuel spread contraction in the second half of 2025. With respect to our portfolio activity, our purchase is centered on adding 5% coupons evenly split between pools and TBAs. Given the range-bound rate environment and steeper curve, we were comfortable taking on current coupon exposure to drive higher returns in light of the anticipated reduced hedging costs. And we also grew our Agency CMBS portfolio by roughly $1 billion given the sector's relative attractiveness compared to lower coupon MBS. With mortgage rates approaching 6% and recent prepay activity highlighting a more reactive borrower, higher coupons lagged on the coupon stack. However, we have deliberately constructed our specified pool portfolio with enough call protection to withstand a lower rate environment. For example, our 6% and 6.5% coupon pools have prepaid 40% slower than that a generic cheapest to deliver collateral, and we anticipate our holdings in these coupons should provide durable carry for years to come. Now our hedge position remained broadly stable this quarter, consistent with our strategy of maintaining a conservative rate posture. With volatility at some of the lowest levels we've experienced over the past 5 years, our duration management focused predominantly on hedging new asset purchases using a combination of both treasury futures and swaps. Now shifting to residential credit. Our portfolio ended the fourth quarter at $8 billion in market value, up $1.1 billion quarter-over-quarter, representing approximately 19% of the firm's capital. Non-Agency residential credit was relatively range-bound throughout the quarter with AAA non-QM spreads, ending the year marginally tighter at 125 to the curve. Q4 represented another record quarter for our Onslow Bay franchise as we achieved all-time highs across lock volume, fundings and securitization issuance. During the quarter, our correspondent channel locked and funded $6.4 billion and $5 billion, respectively. We settled an additional $800 million of whole loans via bulk acquisitions and we closed 8 securitizations totaling $4.6 billion. And this securitization activity resulted in the creation of $570 million of proprietary OBX assets on the quarter with mid-teens expected ROEs. And throughout the entire year, we locked over $23 billion of loans to the correspondent and funded $16.5 billion exclusively through that channel, representing an increase of 30% and 40% year-over-year, respectively. During 2025, we closed 29 securitizations for an aggregate $15.2 billion, generating approximately $1.9 billion of high-quality retained assets for Annaly in our joint venture while remaining firmly entrenched as the largest nonbank issuer in the residential credit sector. And even with the continued growth in the Onslow Bay channel and securitization program, we remain disciplined on credit with our current locked pipeline representing a 762 weighted average FICO and a 68 original LTV with limited layer risk. Now the first few weeks of 2026 have been marked by credit spread tightening as both the corporate credit and structured finance asset classes have strengthened given the movement in the Agency MBS market. Now this is a supportive backdrop for our business as declining cost of funds and stability in capital markets should keep our volumes elevated. Given our market leadership, Annaly remains well positioned to continue to benefit from the growth and liquidity of not only the non-QM market, but also the broader non-agency market, which is expected to experience the highest growth securitization issuance since 2007 this year. Now turning to MSR. Our portfolio ended the fourth quarter at $3.8 billion in market value including unsettled commitments, representing a nearly $280 million increase quarter-over-quarter and a 15% increase year-over-year, and MSR ended the year representing 19% of the firm's capital. And during the quarter, we committed to purchase $22 billion in principal balance or roughly $330 million in market value of MSR with a weighted average note rate of 3.46%. Now these purchases were across 5 bulk packages in our flow channels, of which $150 million of market value is expected to settle in Q1. And notably, we are the second largest buyer of conventional MSR in 2025, onboarding $59 billion in UPB throughout the year, and we ranked as the sixth largest nonbank agency servicer. Bulk supply was ample this past year, and we expect this pace of activity to continue in 2026 due to increasing origination volumes, coupled with compressed gain on sale margins necessitating MSR sales as demonstrated throughout 2025. Now regarding our flow business, we're focused on expanding our footprint and are now active across all GSE platforms, providing access to current coupon MSR, which we plan to purchase opportunistically. Our MSR valuation multiple increased marginally on the quarter driven by a steeper yield curve, modest spread tightening and lower volatility. Fundamental performance within the MSR portfolio continues to be strong and cash flows remain durable. The portfolio paid 4.6% CPR in Q4, unchanged quarter-over-quarter while serious delinquencies remain muted at 55 basis points. And with a weighted average note rate of 3.28% our portfolio is still 250 basis points out of the money. As we continue to enhance our subservicing and recapture relationships, we look forward to growing our MSR portfolio in the coming year taking advantage of the role we've created as a preferred partner to the originator and servicer community. Now to conclude with our outlook, as we look further into 2026, each of our investment strategies is well positioned to continue delivering strong results for our shareholders. The agency spread tightening following the GSE's recent MBS purchase announcement has been pronounced, but it is important to note that not only are technicals in the market vastly better than at any time since the Fed was actively buying MBS. Also MBS hedging costs should be meaningfully lower given the decline in volatility supporting low to mid-teen prospective returns. And we anticipate the non-Agency market to continue to grow as a share of total origination and Onslow Bay is uniquely positioned to maintain its healthy pace of loan acquisitions and securitization issuance. The non-QM market, in particular, has matured into a more liquid institutional asset class and our early positioning gives us significant competitive advantages in loan selection and execution. And our best-in-class MSR portfolio remains distinguished with an average note rate that is significantly out of the money and an exceptional credit profile which provides our portfolio with a stable cash flow vehicle, supporting our overall yield and returns. And most importantly, we believe our diversified housing model will continue to perform for our shareholders in the year ahead. In an environment where spreads across various asset classes have tightened unevenly, the optionality to invest in the most accretive assets is an important lever to drive returns that monoline peer strategies are not afforded. And accordingly, while Agency will certainly continue to remain the anchor of our portfolio, our non-Agency strategies will likely see additional capital allocation, all else equal. We do, however, have the earnings power and the liquidity to be both patient and opportunistic and the scale to maintain our market leadership across housing finance and our diversification enables us to be resilient across different rate cycles and market environments. And now with that, I'll hand it over to Serena to discuss the financials. Serena Wolfe: Thank you, David. Today, I will provide a brief overview of the financial highlights for the quarter ended December 31, 2025, as well as select full year measures. Consistent with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. Starting with book value. As of December 31, 2025, our book value per share increased 5% from $19.25 in the prior quarter to $20.21. After accounting for our $0.70 dividend, we achieved an economic return of 8.6% in Q4. This brings our full year 2025 economic return to 20.2%. Strong investment gains drove this quarter's performance. We benefited from spread tightening driven by lower volatility as favorable technical factors. Gains on our interest rate swaps also supported results as swap spreads widened. Earnings available for distribution per share increased by $0.01 to $0.74. And again, as David mentioned earlier, exceeded our dividend for the quarter. This increase in EAD was driven by a 30 basis point improvement in our average repo rate to 4.2% and higher average investment balances resulting from growth in our Agency and Residential loan portfolios. For the full year, average yields rose 26 basis points year-over-year from 5.13% in 2024 to 5.39% in 2025. However, these benefits were partially offset by lower levels of swap income due to lower average receive rates. Net interest spread and net interest margin, both excluding PAA, remained strong and comparable to prior quarters at 1.49% and 1.69%, respectively. For the full year 2025, net interest spread and net interest margin, both excluding PAA, reached 1.4% and 1.7%, an improvement of 18 basis points and 13 basis points, respectively further demonstrating the returns from our disciplined investing and funding teams. Turning to financing. We added $6.7 billion of repo principal at attractive spreads while deploying the proceeds from accretive ATM issuances during the quarter. This led to a Q4 reported ending repo rate of 4.02%, down 34 basis points. Additionally, our weighted average repo days ended the quarter at 35 days, 14 days lower than the prior quarter. Our economic leverage ratio remained historically low at 5.6x, down 1 tick from the third quarter's end. Meanwhile, total warehouse capacity across our residential credit and MSR businesses reached $6.9 billion, with $2.7 billion of that committed. We continue to maintain ample capacity in both businesses with utilization rates at 47% for residential credit and 50% for MSR. As for liquidity, we ended the fourth quarter with $7.8 billion in unencumbered assets, including $6.1 billion in cash and unencumbered agency MBS. We also have about $1.5 billion in fair value of MSR pledged committed warehouse facilities but still undrawn, which can be quickly converted to cash, subject to market advance rates. As a result, our total assets available for financing are approximately $9.4 billion, up $500 million from the third quarter. This represents about 58% of our total capital base and provides significant liquidity and flexibility. Finally, regarding OpEx, our efficiency ratios again improved significantly during the quarter, down 10 basis points to 1.31% and brought the full year ratio to 1.42%, illustrating the efficiencies of our size and scale. Now that concludes our prepared remarks, and we'll now open the line for questions. Thank you, operator. Operator: [Operator Instructions] And today's first question comes from Alyssa DeStefano with KBW. Bose George: This is Bose with KBW. The first question, could you give us an update on mark-to-market book values? David Finkelstein: Sure, Bose. So as of Tuesday, our book was up 4%, inclusive of the dividend accrual so 3% netting that out after yesterday, maybe a fraction of 1% higher than that. Bose George: Okay. Great. And then can you just talk about the portfolio returns or the blended ROEs on the portfolio given the spread tightening since quarter end? And then can you just translate that into a comfort level with your dividend in 2026. David Finkelstein: Sure. So overall, we could still achieve an upwards of mid-teens returns. When we look at the Agency market, obviously, we've gotten a considerable amount of tightening. But versus swaps, you still get there. And we're confident in the durability of the swaps market as a hedge given the fact that the Fed's obviously, as I mentioned in my prepared remarks, much more considerate of balance sheet availability. And we haven't really tightened that much or rather -- sorry, widen that much since that announcement. So we feel like the swaps market is a perfectly good place to hedge and you can get that return. In the resi market, the whole loan channel to securitization is still giving us those returns. MSR is a little bit lighter. But when you consider the hedging benefits and diversification benefits will take that. And then when you look at our overall balance sheet, where we own assets is very supportive of the dividend yield. So we feel good about it. We outearned in Q4. We expect outearned certainly in Q1, and we feel like the dividend is safe here. Operator: And our next question today comes from Jason Stewart at Compass Point. Jason Stewart: Obviously, on the MSR portfolio, the current portfolio is pretty well insulated from modestly lower interest rates. But could you expand on your comment about being opportunistic for coupon MSR and how you're expecting that market to trade as prepays increase? David Finkelstein: Sure. I'll hand it off to Ken for that. Ken Adler: Yes. I mean we've now set up the infrastructure to be fully active in that space. And the primary way we've done that is through the Fannie and Freddie MSR exchange platforms. And we're now active with close to 100 counterparties today, and we provide pricing every day. What's really interesting about new production pricing is it really doesn't move that much with interest rates because it's always set at the current mortgage rate. So really, what it is, is about the value change after you buy it, I think. And given the improved ability to do recapture for the industry, that's been much more insulated than it's been in past regimes. So we're there, and we don't see it as valuable to us at this time based on where we can buy the lower note rate stuff. So to the extent relative value changes and that becomes more attractive, you will see us more active in that area. David Finkelstein: Yes. And I'll just add, Jason, to the extent we're a financial participant, the low note rate MSR has worked well and let the operating platforms, the originators focus on production coupon and their management of the borrower, but we do expect origination obviously, to pick up a lot this year with a 6% mortgage rate. And so as a consequence, you'll see a lot of production coupon MSR hitting the market. And we've gotten comfortable, very comfortable with our recapture partners at our servicers to where we can manage that quite well. So we'll see how the market develops, but we'd like to get more into the production MSR space. Jason Stewart: Okay. That's helpful. And just 1 more point on that. How much would you need to see valuations change for it to hit return hurdles in terms of current coupon production. Ken Adler: Yes. Well, what's going on is when originators sell MSRs, they want to sell the MSR that's least valuable to them. And that is the lower note rate MSR because there's a lower chance that customer is going to become active. So in today's world, when they originate and Dave alluded to this in the prepared comments, when they originate a loan, the profitability on that origination does not allow MSR retention to retain all the MSR. In fact, they have to sell a majority of the MSR to be liquidity neutral. So what we're seeing is originators prefer to sell the lower note rate MSR so that's more valuable to us because that's what they're selling. We expect that flow to dry up and then the relative value shifts to the current coupon. But also, as Dave alluded to, we're well set up based on network of people to buy from and then a network of people to both subservice and perform recapture for us. Operator: And our next question today comes from Eric Hagen at BTIG. Eric Hagen: Lots of speculation out there right now for things the administration can do to lower mortgage rates further, including a potential cut to guarantee fees. I mean can you weigh in on this? And how you think a big G-fee cut could impact the prepayment environment? David Finkelstein: Sure. So obviously, a G-fee cut is something that's been talked about. Our view -- and we've been communicated about this to policymakers is that a G-fee cut on purchased loans is perfectly appropriate. We're concerned that if you do broad G-fee cut and impact existing loans, you're going to damage the MBS market and widen spreads. And I think that there's been an awareness of that. And furthermore, if you can find it to purchase loans, you don't negatively impact the ROEs of the GSEs, and that's certainly a consideration. So perhaps they do something like give it a year holiday on purchased loans, we think that would make sense to help first-time homeowners and new buyers get into the housing market. Eric Hagen: Okay. That's great. You mentioned the cost of hedging should be lower as a result of the GSEs being back in the market, spread volatility being lower. I mean what metric would you use to maybe like compare the cost of hedging over time? And how would you maybe compare the attractiveness of raising capital when spreads are widened kind of more attractive versus an environment of tighter spreads and lower spread volatility? David Finkelstein: Yes. So the first question in terms of measuring spread volatility, like here is our view as it relates to the GSEs and their involvement. We don't have a lot of clarity. We know there's a $200 billion mandate, but we don't know what role the GSEs are going to play. I think it would be highly productive if they evolved into a spread stabilizing force for the MBS market, and that was somewhat of the role they played pre-financial crisis. And it gave investors' confidence that mortgage spreads would remain relatively stable. And as a consequence, it incentivize participation in the market. And then overall, given higher participation, you got a tighter spread as a consequence of others doing the work for the GSEs because you knew that they would be there when they got too wide and provide support for the market. And they also were economically focused and sold when mortgages were tight. That would be a good outcome. They clearly don't have the capacity that they did pre-financial crisis but they got a lot of dry powder. So we'd like to see that evolution, but we'll have to wait to see. In terms of measuring spreads, in volatility, spread vol has been very stable for the last 6 months, and it's been quite comforting. We haven't had to spend a lot of money at all hedging and you see that in our economic return. So we feel quite good about that. And then Srini, you want to dive into your second question again -- second part of your question again, Eric? Eric Hagen: Sure. Yes, we're just looking at how you might compare the attractiveness of raising capital in the different spread environments. David Finkelstein: So look, I'll jump in there, and then Srini can add. When spreads were extraordinarily wide. It was obviously a catalyst to raise capital because there was a tremendous amount of upside. Compare that to today, where spreads are meaningfully tighter, obviously, from a relative value standpoint, it doesn't look as attractive. But when you consider the fact that the stability of spreads is higher, it gives you some confidence. But candidly, if I had to choose between 1 environment or over the other, I'd rather have wider spreads, with a little bit more uncertainty in terms of raising capital. So from that standpoint, I would expect that the pace of capital raising may not be as high as in that environment. But nonetheless, the amount of support for the Agency market, given the fact that you have very strong technicals from obviously the GSEs, but also money managers, REITs raising capital, et cetera. That's quite comforting. And to the earlier part of the question about volatility, where the cycle lows, and that's supported by what we're seeing day-to-day in markets. Another point to note is that the Fed is shoring up balance sheet, as I talked about in my prepared remarks and in Bose's question, the fact that the Fed went from QT to adding reserves in the system is a very good sign for balance sheet intensive products, whether it's treasuries or Agency MBS, the ability to finance is key. And I think it's been a little bit underappreciated. So the Agency market is a safe place right now. It's just that spreads are obviously at the tight end of the range. They're close to QE type levels. The safety of those returns is there, but the abundance of yield is not quite there. V.S. Srinivasan: And going forward, there could be pockets of opportunity if we get more clarity on what policy changes come about, post the GSE announcement to purchase MBS, higher coupons really have not tightened that much because that has increased policy uncertainty. So as we get some clarity there, there could be pockets of opportunity. Operator: And our next question today comes from Doug Harter at UBS. Douglas Harter: David, you were just talking about the lower risk environment that we're in today. I guess as you look out, like how do you handicap the risks that, that could change, what might be the factors that could cause kind of an end to this low-risk environment with more volatility. David Finkelstein: Sure. From a macro standpoint, then I'll drill down a little bit on the mortgage market. But the 2 biggest risks that we see are the global fiscal picture and the amount of debt out there, including that in the United States and a little bit of complacency around it, and you could end up with the vol environment because of the amount of debt in the world. And I think it's probably under-recognized the risk of that. And another macro risk is just the euphoria in asset markets and asset pricing. It's been a pretty remarkable run across markets, and there's real signs out there that people should be -- investors should be a little bit concerned. Just look at the price of gold as a safety store of value. It's doubled since the beginning of last year and up 27%, 28% this year. So I think there's some nervousness out there, and it's a little bit hard to invest and we could get a correction broadly in assets. Now as it relates to the Agency market, specifically in our markets, valuation as well is a risk. We are at the very tight end of the range on Agency MBS. It's justified given the facts I mentioned earlier, but nonetheless, they're relatively tight. Another risk as Eric discussed is housing policy uncertainty and what role the GSEs will play and what the administration will do to potentially increase affordability and how that could impact the convexity profile of the Agency market. So those are 2 things we're watching quite closely in terms of risks in the Agency market specifically. Operator: And our next question today comes from Rick Shane at JPMorgan. Richard Shane: Look, you guys are seeing attractive opportunities buying MSRs, low coupon MSRs. I assume you're basically seeing that as an attractive IO. Given discounts in MBS for lower coupons, does it make sense? Is it attractive to be buying lower coupon MBS at this point as well. I'm just curious, particularly as sort of on the margin, you're starting to get more questions about prepayment. David Finkelstein: Yes, you're just saying as a hedge to our MSR and the runoff. Richard Shane: Exactly. Give yourself an opportunity to pick up some discount accretion if speeds pick up and also potentially is an attractive yield. David Finkelstein: Yes. And look, the first point I'd note is that the valuation on low coupon MBS is quite tight. So there's better ways, I think, to manage that type of risk, whether it be through duration or other factors. There's a little bit of policy risk in low note rate MSR, but we feel it's very safe. And I think when it comes to housing policy changes, you could see legislation that reduces capital gains tax so you could get some turnover in low coupon MSR but those are at the margin. Otherwise, I think the borrower in a 3-odd percent note rate loan really ascribes the value to that loan, and there's some real reluctance to give it up. So we do feel like it's a safe durable asset and we do hedge some of that uncertainty through duration but to couple it with low coupon MBS. And we do have some, and that is obviously a consideration, Rick, but the valuations just don't warrant it. Richard Shane: Got it. And is there enough liquidity in the lower coupons that if you felt like there -- the bid-ask was attractive that you could deploy capital there? Or is it -- and that's a nuance just as equity guys, I don't think -- at least I fully appreciate. David Finkelstein: Yes. Yes. And there is liquidity in low coupons. It's not as good as production and slightly higher. But if you wanted to compile a bigger position in local bonds, it wouldn't be hard. I mentioned we added DUS to the portfolio, Agency CMBS. In our view, relative to lower coupon MBS that was meaningfully cheaper. And so to get a good convexity profile and longer duration assets that was sufficient for us last quarter. Richard Shane: Got it. Okay. That makes sense because that's got a super low prepayment characteristics because those are... David Finkelstein: Exactly. Locked out. Operator: And our next question today comes from Harsh Hemnani with Green Street. Harsh Hemnani: Thank you. So I think on the prepared remarks, you characterized the current environment as spreads have tightened across all housing finance assets, but unevenly. And it seems like credit is starting to look a little bit more attractive on a relative value basis and we saw that section of the portfolio grow a little faster than the rest of the businesses this quarter. I guess, as you look out over the next year or so, your long-term target for the equity allocation is like 60% Agency MBS and 20% across the other 2 each. Can you help us put some bands around that? How much could we see credit exposure or MSR even increase from your -- over that 20% number? David Finkelstein: Sure. And I did allude to this, Harsh, so thank you for the question. So in 2025, we grew the Agency portfolio of 30% each resi and MSR by 15% through the capital raises that we undertook. And that was the right weighting to go with, given how well Agency has done. So we're perfectly happy with it. But now we're at a little bit of a different balance when it comes to valuations, and we do from a capital allocation perspective, favor resi credit, even though it has tightened and MSR for that matter. And we like those percentages if we did add capital to switch. We'd like to grow resi and MSR 30% and Agency, less than that. So the objective today from a capital allocation standpoint is to increase MSR and resi. It's episodic in terms of the opportunities, notwithstanding the consistency of the pipeline for our whole loan correspondent channel, but we would like to grow those businesses. And we've said in the past that the longer term weighting we would like to achieve is 50% Agency, not below that and 30% resi, 20% MSR. We don't have to get there right away, but that is an objective. We have to be very considerate with respect to the credit environment. But nonetheless, when you look at the health of the loans we're acquiring, and our portfolio, we're very comfortable with the credit we're doing. And so we're hopeful we can grow it. And I don't expect us to get to those objectives over the near term in terms of down to 50% Agency, but we'd like to at the margin increase MSR and resi here. Operator: And our next question comes from Trevor Cranston of Citizens JMP. Trevor Cranston: You talked some about the impact of the GSE portfolio buying on the market. I was curious if you could share your views on the likelihood or feasibility of the portfolio caps potentially being increased at some point as they get closer to current cap size? And then also, I was just curious if you guys have seen or if you expect to see any impact from their portfolio buying on the swap or funding markets? David Finkelstein: Yes. So as it relates to the caps, it's hard to say. Obviously, everybody probably saw that post from the FHFA Director last Friday, I believe it was talking about they don't intend to increase the caps, but we just don't know. But when you look today, they came into the year with, I think it's $178 billion in capacity between the 2 of them. So we're a long ways away from hitting those caps, and we'll see how it evolves. But we don't have a good answer as to whether or not those caps will actually be increased. Obviously, they can do it in conjunction with treasury and it doesn't require Congress. So we'll have to wait and see how the year evolves on that front. And sorry, the second part of your question, Trevor. Hedging, yes. Trevor Cranston: Yes. Whether you're seeing any impact from the GSE buying on swap markets. David Finkelstein: Not as much. You could argue that swap spreads should be wider given the adjustments the Fed has made with respect to their asset purchases, and we didn't get, as I mentioned earlier, a meaningful amount of widening based on the greater availability of balance sheet. And it could indicate some involvement from the GSEs. We don't have information on that. I do know from our experience pre-financial crisis, and I was on the sell side interacting quite extensively with the GSEs. If past is prologue in terms of how they behave, they would hedge those purchases and use swaps because that will enhance the yield relative to shorting treasuries, for example, and they can get a decent ROE out of it. So we would expect that to be the case whether they're actively engaged in the swaps market today. I don't have a good answer for their involvement. And as it relates to funding markets, the GSEs are active participants in the funding markets with their liquidity and their capital during parts of the month and their absence might be a factor. However, what I would say is that they're buying MBS, which is a balance sheet-intensive product, and is funded in many circumstances. So they're taking assets out of the market that might otherwise be funded. And so even though they're not providing as much liquidity in the repo market that should offset -- the asset purchases should offset the lack of funding. And really what matters, I think, in terms of funding markets is reserves in the system. And that's the key factor we look at, and they're now back to slightly over $1 trillion -- or $3 trillion, and we feel like funding markets are still going to be fine without their participation. And Srini, you got another point. V.S. Srinivasan: The 1 thing I would add is just the size of the GSE book. I mean if they bought the entire $200 billion, it's about $100 million DV01 so if you assume they have done 5% or 10%, you're talking about $5 million, $10 million DV01, it's just not large enough for you to see any impact on swaps spreads right away. It will take time. Operator: And that concludes our question-and-answer session. I'd like to turn the conference back over to David Finkelstein for any closing remarks. David Finkelstein: Thank you, Rocco, and thank you, everybody, for joining us today. Have a good rest of the winter, and we'll talk to you real soon. Operator: Thank you, sir. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Good morning, and welcome to Washington Trust Bancorp, Inc.'s conference call. My name is Lydia, and I'll be your operator today. [Operator Instructions] As a reminder, today's call is being recorded. And now I'll turn the call over to Sharon Walsh, Senior Vice President, Director of Marketing and Corporate Communications. Please go ahead. Sharon Walsh: Thank you, Lydia. Good morning, and welcome to Washington Trust Bancorp, Inc.'s Conference Call for the Fourth Quarter of 2025. Joining us this morning are members of Washington Trust's executive team, Ned Handy, Chairman and Chief Executive Officer; Mary Noons, President and Chief Operating Officer; Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer; and Bill Wray, Senior Executive Vice President and Chief Risk Officer. Please note that today's presentation may contain forward-looking statements, and our actual results could differ materially from what is discussed on today's call. Our complete safe harbor statement is contained in our earnings release, which was issued yesterday as well as other documents that are filed with the SEC. All of these materials and other public filings are available on our Investor Relations website, ir.washtrust.com. Washington Trust trades on NASDAQ under the symbol WASH. I'm now pleased to introduce today's host, Washington Trust's Chairman and Chief Executive Officer, Ned Handy. Ned? Edward Handy: Thanks, Sharon. Good morning, and thank you for joining our fourth quarter conference call. We respect and appreciate your time and interest in Washington Trust. I'll begin with a brief overview of our results, and then Ron will provide more detail on our financial results for the quarter and the year. After our remarks, Mary and Bill will join us for the Q&A session. This quarter's results reflected continued earnings momentum and improving profitability. The quarter's performance was driven by margin expansion, continued in-market deposit growth and increased revenues from wealth management. We closed out the year with a well-positioned balance sheet, a normalized provision for credit losses and improved asset quality metrics. During 2025, we laid important groundwork for future growth with targeted investments in our Wealth Management and Commercial Banking business lines. This included the wealth asset purchase from Lighthouse Financial Management and the hiring of our new Chief Commercial Banking Officer, Jim Brown, who has an extensive network and proven record in leading high-performing commercial banking teams. In this new year, we are continuing to build upon the positive momentum from these strategic investments. Last week, we brought on a dedicated institutional banking team to serve education, health care and nonprofit providers throughout the Northeast region. This investment in our commercial banking business will help improve our balance sheet with high-quality C&I loans and strong deposit opportunities. We also expect to see wealth management opportunities come about. The ability to scale this high-quality new client base with an efficient staffing model will enhance earnings going forward. We're very excited about this key addition to Jim's commercial team and the growth potential that lies ahead. We're also looking forward to our de novo branch opening later this year in one of Rhode Island's fastest-growing communities, the city of Pawtucket, which will increase our presence in the northern part of the state. All these efforts will enhance our value as a full-service community bank and long-term partner to our customers and provide a solid foundation for the year ahead. With that, I'll turn the call over to Ron for some additional details on the quarter and the year. We'll then be glad to address any of your questions. Ron? Ronald Ohsberg: Thank you, Ned, and good morning, everyone. In the fourth quarter, we reported net income of $16 million or $0.83 per share compared to $10.8 million or $0.56 per share for the preceding quarter. On an adjusted basis, EPS was up 41% compared to last year's fourth quarter. Net interest income was $40.7 million, up by 5% from Q3 and 24% year-over-year. The margin was 2.56%, up by 16 basis points and up by 61 basis points year-over-year. A better funding mix with higher in-market deposits and lower wholesale funding as well as deposit rate management contributed to this improvement. Q4 included $516,000 of loan prepayment fee income, which benefited the NIM by 3 basis points. Noninterest income was up 5% compared to Q3 and up by 15% year-over-year on an adjusted basis. Wealth management revenues were up 5% and average AUA for the fourth quarter increased by 4% and 9% year-over-year. Mortgage banking revenues totaled $3.3 million, down seasonally by 7% and up 14% year-over-year. Origination and sales volumes increased by 21% and 25%, respectively. Our mortgage pipeline at December 31 was $81 million, down seasonally by 37% from the end of September. Full year mortgage originations totaled $667 million, up by 31% from 2024. Q4 loan-related derivative income was up by $810,000 in the quarter. Noninterest expense totaled $38 million in Q4, up by 6%. On a full year adjusted basis, noninterest expense was up by 7%. In the fourth quarter, salaries and benefits expense was up by $973,000 or 4%, reflecting higher levels of performance and volume-based compensation as well as increased staffing. Other noninterest expenses were up by $1.3 million in Q4, largely due to a $1 million contribution made to our charitable foundation. Our full year effective tax rate was 22.5%. We expect our full year 2026 rate to be approximately 22%. Turning to the balance sheet. Total loans were stable, increasing modestly by $12 million from September 30. End market deposits were up by 1% from the end of Q3 and 9% year-over-year, and wholesale funding was down $165 million or 21% from the end of September. Total equity amounted to $544 million, up by $11 million from the end of Q3. The dividend remained at $0.56 per share. Turning to credit. In the fourth quarter, the provision for credit losses normalized and our asset quality metrics improved. At December 31, nonaccruing loans were 25 basis points on total loans. Nonaccruing commercial loans were 0. Past due loans were 22 basis points on total loans. There was one CRE loan past due at December 31, and that was brought current in January. And we had net recoveries for the quarter of $160,000. And at this point, I'll turn the call back to Ned. Edward Handy: Thank you, Ron, and we'll now take any questions you might have. Operator: [Operator Instructions] Our first question today comes from Mark Fitzgibbon with Piper Sandler. Mark Fitzgibbon: I guess first question, Ron, I'm curious how you're thinking about the margin? Do you feel like that sort of mid-2.50% level is kind of sustainable, as we move into the early part of 2026? Ronald Ohsberg: I do, Mark. And I can give you kind of the full year outlook on the NIM. I think you're all aware of the swap termination that will happen at the end of April. So I'll talk about that first. So in the second quarter, we expect the margin to increase 9 basis points related to that item and another 4 basis points in the third quarter. So that's a run rate benefit of 13 basis points that will be fully baked in, in the third quarter. Outside of that, if we talk about organic expansion, we're projecting 3 to 4 basis points per quarter. That is assuming no changes in the Fed funds rate. So that would bring our Q4 estimate to 2.78% to 2.82%. Mark Fitzgibbon: Okay. Great. Secondly, I guess, I know credit is really good here, but optically, the reserve looks a little light relative to your peers. How do you guys think about that? And is there a conscious plan to sort of nudge that up over time with maybe qualitative factors? Ronald Ohsberg: Yes. Bill, do you want to jump in on that? William Wray: Sure. Mark, we, as you know, follow the CECL guidelines, which essentially say this is our lifetime loss estimate. And we are on the lower side of the spectrum with our peers, although not unduly so. We run the numbers. We look at our history, and we're very comfortable that it's adequate for our portfolio. And so I think you can expect it may tick up a few bps, tick down a few bps here or there, but we're comfortable in that mid-70 coverage range just based on our portfolio and the loss estimates for it. But it obviously is something we spend a lot of time on, and we'll be more conservative on the call side when it's merited. Mark Fitzgibbon: Okay. And then... Ronald Ohsberg: I'm sorry, Mark. I would just make one other point. I mean we still have a relatively large residential portfolio. And so the reserve allocation on that is less than commercial, right? And we'd like to see our residentials come down, to be honest, but that does have an impact on the weighted average reserve coverage. Mark Fitzgibbon: Okay. Great. And then Ned, in your opening comments, you made a point that you think there's going to be some wealth management opportunities. Should we take that to mean you're looking at potential M&A in that -- in the wealth side? Or is that more sort of organic hiring and that sort of thing? Edward Handy: Actually, Mark, I was referring specifically to the institutional banking team, which is -- serves in large part the not-for-profit sector -- higher end not-for-profit sector. So that was really focused on endowments and retirement funds that might come with that with growth in that portfolio. Operator: Our next question comes from Damon DelMonte with KBW. Damon Del Monte: I just want to kind of start off with the outlook on expenses, kind of good control going in here to year-end. Kind of Ron, just wondering what your thoughts are on kind of the full year outlook and maybe any variability from a quarter-to-quarter perspective? Ronald Ohsberg: Yes. So Damon, I guess I'll break it salaries and benefits versus all other. In Q1, we're looking at a 6% increase in expenses, which factors in annual merit raises, which come into play at the beginning of the year, FICA resets and those types of things. But we've also made this investment in the institutional team that's coming on board. We also have, I think, as everyone probably has increased medical insurance, those types of things. So that's what we're kind of seeing for Q1 on the salaries and benefits line. All other expenses, we're looking at year-over-year, like 5% increase. And we also have the branch coming online. So that's going to add to our -- both our salary run rate as well as our expense run rate, call it, a total of $600,000 over the course of the year, starting in late summer, early fall. Damon Del Monte: Got it. Okay. Okay. Great. And then kind of can you just give a little update on kind of your outlook with loan growth? Are you optimistic that we can start to get back to that low mid-single-digit range kind of given what you're seeing as well as the recent hires to the commercial lending team? I guess, yes, just some color on the outlook for loan growth would be great. Ronald Ohsberg: Yes. Yes. Listen, net loan growth wasn't where we wanted it to be kind of closing out the year. But we're expecting 4% to 5% growth in CRE, which would be kind of standard. The C&I team, we think, will grow at a rate faster than that. So I'm not going to put a target on that. They're just getting situated, and then we expect residential to be a net runoff like it was this year. So I would say, all in, we're looking at, I would say, a very solid 5% year-over-year, which is an improvement over where we've been in 2025. And we'll leave it at that. But we do have a lot of confidence in this team that we've just brought in, and -- but we'll set the target there for now. Edward Handy: Yes. And Damon, I would just add a little more color. I mean we had $180 million of credit formation in the quarter. We just had a lot of payoffs, and the payoffs were some expected, some earlier than expected. And you saw that we got a pretty sizable prepayment penalty on one of them. But we don't expect that level of prepayment to -- of early prepayment to continue. But the new team has been with us for 9 days. So we don't -- we haven't seen pipeline growth yet. I think we'll be much better positioned next quarter to share our expectations. We have great expectations. They're a very seasoned team that's been in the market for a long time. They look at a lot of potential deal flow as they have for years and years. And so we have high hopes and great expectations, all in the C&I space, which we've been talking about for a while, figuring out strategically how to kind of change the balance sheet around and grow the C&I side a little faster. The growth that Ron talked about on the CRE side is a little bit due to the continued concentration level. And so we're being careful on that front and really want to focus on helping this team be successful on the C&I front. Operator: Our next question today comes from Laurie Hunsicker with Seaport Research Partners. Laura Havener Hunsicker: Just to circle back to the C&I group, can you share with us how many people are there and how much they did last year collectively? Maybe where they... Edward Handy: I don't have details on what they did last year collectively, but there are 4 people in the team that came over. There is -- we will add a treasury management specialist to that team because of their tendency to deliver deposits. They are -- they've had a -- the leader of the group has 30-plus years in this space in the Northeast region, very well known, and they've been highly successful at prior institutions. So yes, we're very confident, Laurie. And again, I think they've been here 9 days. Let's take a little time to build the pipeline up, but we'll report in detail, I think, probably as soon as next quarter. Laura Havener Hunsicker: Okay. And where did they come from? Edward Handy: They were most recently at Brookline. Laura Havener Hunsicker: Got you. Okay. Got you. So then is that focus basically in the Greater Boston MSA? Edward Handy: I'm sorry, Laurie, ask that one more time. Laura Havener Hunsicker: Yes. So the loan focus, is that going to be in the Greater Boston MSA? Edward Handy: Northeast region. So broader than just the Boston MSA. Laura Havener Hunsicker: Got you. Okay. And then going to expenses, Ron, the 1 quarter increase -- sorry, the 6% increase for 1 quarter of fourth quarter, that's obviously netting out the charitable foundation charge. Is that correct? Or are you thinking about from the $38 million... Ronald Ohsberg: Yes. Laura Havener Hunsicker: Okay. Okay. And then how should we think about the charitable foundation charge in '26? I think you previously guided to $500,000, but should we be thinking that at... Ronald Ohsberg: Yes. We penciled in $750,000 for the end of the year. Laura Havener Hunsicker: Okay. Great. And then I guess, branching, obviously, we've got that Pawtucket coming. Is there anything else you're thinking about? Or should we be thinking about kind of maybe one branch in '27 as well? How do you think about that? Edward Handy: Yes. So for '26, Pawtucket, but Michelle Kyle, our Head of Retail Banking, has developed a plan that we're reviewing as part of our strategic outlook that it may not be full-service branches. It might be alternative delivery, ATMs and the like that she's developing a sort of full sketch on. So nothing else on the docket in 2026, but I think it's safe to say that we will continue to invest in our retail footprint in the outer years. Laurie, we've done 1 or 2 branches a year for the last 5 years. I don't -- I think that order of magnitude is probably reasonable going forward. The form of it might be a little different. Laura Havener Hunsicker: Okay. Okay. That's great. And obviously, credit, you're probably one of the few banks in the entire country with 0 CRE nonperformers, 0 C&I nonperformers and booking recoveries. But just a very quick question. The $6 million of office classified, any color on that? And when does that mature? Ronald Ohsberg: Yes. Bill, do you want to take that one? William Wray: Sure. Sure. That matures in 2031. So plenty of running room there, extremely strong with dedicated sponsors. Occupancy right now is in the mid-40%, but growing. So the building is getting close to breakeven. I think it's just going to be a long, slow nursing process, but the sponsors are fully committed, and they are building it up slowly. So we feel comfortable about it. That's why it's accruing. And by the way, it's completely current. So we think we're going to nurse our way through on this one. Laura Havener Hunsicker: Great. Great. Well, congratulations on credit. Really, really great. Okay. So putting it all together, your earnings power, obviously very, very strong. In 3Q, you had dialed back comments around buybacks, and we're seeing buybacks ramp up across the board. As we're looking here, your CET1 almost 12%, your risk-based 13%. I mean why wouldn't you revisit buybacks here? How do you think about that? Ronald Ohsberg: Yes. Laurie, I think it's our -- kind of our standard answer that we take it under consideration all the time and taking into account other ways that we think that we need to deploy capital. So not saying that we're going to do more and not saying that we won't, but we'll just have to take that as it comes. Laura Havener Hunsicker: Okay. And then just remind me, what's existing in your current authorization? Ronald Ohsberg: I don't have that information off the top, Laurie. I have to look that up. Operator: And our next question comes from Ross Haberman with Rlh Investments. Ross Haberman: Most of my questions have been answered. Could you just talk about your wealth management and what you're doing to basically expand that a little faster in '26? Edward Handy: Thank you, Ross. So yes, we've added some business development officers. We are hopeful, although I think we need some -- a little more than 9 days' time to pass, but we're hopeful that this team that is focused mostly on the nonprofit sector will help us with the various things that will come out of that client base, which is generally higher ed, health care and private schools, that sort of thing that tend to have endowments and retirement plans. So we're hopeful there. M&A, we're happy with the Lighthouse deal that we did in 2025. That's a part of the ongoing strategy. It's probably not the primary focus and prices are high. And so we have to be careful about price and culture and fit. And we're -- again, we're happy with what we bought in 2025. And so we're not aggressively looking for opportunities, but we're opportunistic, and we'll keep our eyes open on the M&A front. And in that case, it would be relatively smaller tuck-in transactions that, again, that fit with our style of how we go to market and how we run the group... Ross Haberman: And just one follow-up -- sorry. Edward Handy: I was just going to say... Ross Haberman: Return on assets? Ronald Ohsberg: On wealth? Ross Haberman: On wealth, yes, yes, sorry. Your fee structure -- sorry, your average fees, is it somewhere between 0.5 and 100 basis points? Ronald Ohsberg: Yes. I would say all in on average, it's about, I think, 60 basis points... Edward Handy: Yes. Ross Haberman: Got it. Okay. I'm sorry, I cut you guys off. You were going to say something, I apologize. Edward Handy: No, no. You got the 60 basis points, right? Ross Haberman: Yes, I did. Edward Handy: Okay. I was just going to say that we've also added some -- a person in the financial planning side of things. So we think that's a great retention tool. We think it's a great way to appeal to sort of next gen and full families. And so we're -- we continue to invest in that side of the business. Ronald Ohsberg: And Laurie, just to follow up on your question, we had 850,000 authorized, and we've got 582,000 shares remaining. Operator: [Operator Instructions] We have nothing else on the line. So I'll pass you back over to Ned for any closing comments. Edward Handy: Thank you, Lydia, and thank you all. As we move into the new year, we remain committed to delivering value as a full-service community bank and long-term financial partner to our customers with a disciplined focus on long-term performance. So really appreciate your time today and your interest and support, and we look forward to speaking to you all again soon. Have a great day, everybody. Operator: This concludes our call today. Thank you very much for joining. You may now disconnect your lines.
Charles Nunn: Good morning, everyone, and thank you for joining our 2025 full year results presentation. It's great that the move to prelims has allowed us to update you earlier than prior years. This means that our organization can make a fast start and increase our focus on the year ahead as we enter the final stage of the strategy that we laid out in early 2022. I'm very pleased with our ongoing strategic transformation, and 2025 was another strong year for the group. We're building significant momentum that sets us up well to deliver upgraded 2026 commitments and stronger sustainable returns for the period. I'm very excited about the plans we're developing for our next strategic phase, and you'll hear more about this in July alongside our half year results. As usual, following my opening remarks, I'll hand over to William, who will run through the financials in detail. We'll then have plenty of time to take questions. Let me begin on Slide 3. I'd like to start by highlighting the following key messages. Firstly, our strategic delivery is accelerating and building momentum across the business. We're on track to meet or exceed our 2026 strategic targeted outcomes, delivering clear benefits for all stakeholders. Secondly, our continued strategic execution underpins sustained strength in financial performance and growth in shareholder distributions. We've announced a 15% increase in the ordinary dividend alongside a shareback (sic) share buyback of up to GBP 1.75 billion. And finally, we're confident in our outlook. We are upgrading our guidance for 2026 and are committed to further improvements in financial performance beyond this. Turning now to a performance overview on Slide 4. We delivered strong outcomes for all stakeholders in 2025. Our clear purpose of Helping Britain Prosper continues to drive attractive growth opportunities. This includes supporting our customers during a record ISA season and funding the growth ambitions of businesses that create opportunities across the U.K. These actions drive healthy franchise momentum, delivering growth across both sides of the balance sheet and market share gains in key focus areas such as personal current accounts. Taken together, the group is delivering sustained strength in financial performance. We returned to top line revenue growth during 2025 with increases in both NII and OOI, the latter up 9%. This supports a return on tangible equity of 14.8% and 178 basis points of capital generation, excluding the motor finance provision taken earlier in the year. On Slide 5, I'll provide a brief update on our outlook for the U.K. economy. As you've heard from me previously, we're constructive on our outlook for the U.K. We continue to forecast a resilient but slower growth economy with interest rates falling gradually in 2026. In addition, the financial position of both households and businesses continues to strengthen with emerging signs of growing capacity to spend and invest. Combined with the government's focus on regulatory reform and driving growth in key sectors, we believe the economy has the potential to move to a higher medium-term growth trajectory than is forecast today. We are well positioned against this backdrop with our strategy focused on faster-growing high-potential sectors such as housing, pensions, investments and infrastructure. We're already driving growth in these areas, leveraging our competitive advantages as the U.K.'s only integrated financial services provider. As a result, we expect the group to continue to grow faster than the wider economy over the coming years. I'll now turn to highlight our strategic progress, starting on Slide 6. We continue to successfully deliver a significant transformation. Over the last 4 years, we have meaningfully grown the balance sheet, driven diversified revenue growth, improved our cost and capital efficiency while significantly derisking the business and established a digital and AI leadership position. These actions have both enhanced the franchise and delivered attractive returns to our shareholders, including total capital distributions of around GBP 15 billion. We're now entering the final phase of our 5-year strategic plan with delivery accelerating and momentum growing. This is translating into significant financial benefits. We've generated GBP 1.4 billion of additional revenues from strategic initiatives to date and are today upgrading our 2026 target to circa GBP 2 billion. As part of this, we expect the other income contribution to be circa GBP 0.9 billion, ahead of our original '26 guidance. At the same time, we've now realized circa GBP 1.9 billion of gross cost savings, having met our upgraded 2024 target of GBP 1.2 billion last year. As you'd expect, we remain committed to driving further improvements in operating leverage. To bring this to life, I'll now spend a few minutes discussing our progress in more detail. Let me begin with our growth areas, starting with Retail and IP&I on Slide 7. In Retail, we are the leading provider across key products in our own and third-party channels. We further strengthened our position through growth in high-value areas and continue to develop our product range and capabilities to meet more customer needs. Mobile app users are now up circa 45% since 2021. In '26, we'll roll out in-app AI agents for these customers with these currently in [ colleague beta ] testing. In IP&I, we're deepening relationships as an integrated bancassurance provider, expanding our product offering through exciting partnerships. We're also transforming engagement through our Scottish Widows app with further growth expected in 2026 as we launch to the open market. Complementing our strategic delivery, we announced the acquisition of Schroders Personal Wealth in the second half of last year. It's early days, but we're really pleased with our progress, and we'll rebrand the business to Lloyds Wealth in the coming months. The acquisition is an important enabler to delivering our ambition for a market-leading end-to-end wealth offering, providing us with an opportunity to deepen relationships with our mass affluent customers and workplace clients. Let me continue on Slide 8. Our Commercial Banking division captures both BCB and CIB businesses. In BCB, we're building the best digitally led relationship bank, building upon our strong deposit franchise and rolling out new mobile-first journeys to support growth in targeted sectors. Our BCB gross net lending increased by 15% in 2025, and we are committed to further growth this year. And in CIB, we're driving revenue diversification through growth opportunities aligned to our simple cash, debt and risk management model. For example, FX volumes increased by over 20% in the year, supported by the launch of a market-leading algorithmic trading solution. We were also awarded a landmark U.K. Government banking services contract, a testament to the investment we've made in our award-winning cash management and payments platform. Finally, equity investments is a growing contributor to the group, now representing nearly 10% of group OOI. Lloyds Living has now grown to nearly 8,000 homes since launching in 2021, whilst LDC generated more than GBP 600 million of exit proceeds during the year. On Slide 9, I'll now talk about the ongoing drivers of OOI more broadly. Since 2021, we've delivered strong OOI growth across each of our business units, reflecting a resilient and diversified portfolio. For example, our Retail business has benefited from growth in our Motor franchise, whilst Commercial Banking has been supported by renewed focus in our Markets business. We've also realized the benefits from improved cross-group collaboration such as increasing protection take-up rates across mortgage journeys and leveraging the full breadth of the group to meet the ancillary needs of commercial clients. We delivered 9% growth in 2025, consistent with prior years and are confident in our outlook. Going forward, other income will also benefit from the full impact of the Lloyds Wealth acquisition, and we expect to unlock more value from this business over time. Turning now to cost and capital efficiency on Slide 10. We remain focused on delivering an organization that drives continued improvements in cost efficiency and capital intensity. As I mentioned earlier, we've now delivered circa GBP 1.9 billion of gross cost savings since 2021. This has been supported by the ongoing shift to mobile first and consequent refinement of our physical footprint as well as actions taken to reduce both the size and complexity of our legacy technology estate. These savings reinforce our confidence in delivering a cost/income ratio of below 50% in 2026. On capital efficiency, we've now delivered GBP 24 billion of gross RWA optimization since 2021. We continue to target more than 200 basis points of capital generation in 2026 and we'll now consider excess capital distributions every half year, reflective of our increasing confidence. I'll now move to Slide 11 and focus on our enablers of people, technology and data. As you heard in our digital and AI seminar in November, we're making strong progress against our clear strategic priorities. We have significantly enhanced our infrastructure, actively managing our legacy estate and increasingly building on modern technology. The ongoing investment in our people is critical to our success with circa 9,000 technology and data hires since 2021. These actions have created the platform for increased innovation. Digital-first propositions such as your credit score are driving clear benefits for both customers and the group. Our strong execution to this point means we're well positioned to take advantage of future opportunities. We're innovating and leading across new and emerging technologies, launching industry-first use cases at scale in the U.K. These areas will be critical to driving further enhancements to operating leverage in the future. I was incredibly proud to see that our efforts were recognized across the industry during the year. But importantly, we're not done. I see further significant potential in the coming years. Now turning to Slide 12, where I'll provide more detail on how we're thinking about AI specifically. In 2025, we scaled 50 Gen AI use cases into full production, demonstrating significant potential and generating GBP 50 million of in-year P&L benefit. It should be stressed that this is based on a narrow definition of the latest technology with the full spectrum of digital and AI initiatives contributing around 70% of our upgraded strategic initiatives revenue and over 60% of the total gross cost savings realized since 2021. This represents a strong foundation for us to accelerate our progress in '26, where we intend to increase the number of use cases with a particular focus on high-value agentic opportunities. This will deliver more than GBP 100 million of P&L benefit in 2026, capturing both revenues and costs with significant upside beyond this as use cases are scaled and mature. This is just the start of the journey, and we will, of course, talk more about our plans in this space as part of our strategic update in July. I'll now turn to Slide 13 and bring this together with a view on how we're building operating leverage in 2026. We've increased our net income by GBP 3 billion over the last 4 years. During this period, we have mitigated several headwinds, including those from the mortgage book and deposit churn with these partially offset by the structural hedge earnings growth of more than GBP 3 billion. As a result, the majority of this growth has been linked to management of the BAU business and the GBP 1.4 billion of strategic initiatives revenue, including a significant OOI contribution. We expect to deliver continued improvements in net income in 2026. Whilst headwinds will persist, these will be more than offset by an additional GBP 1.5 billion of structural hedge earnings and continued growth within the core franchise. This accelerating income growth, combined with flattening costs will further improve operating leverage and underpin the delivery of a cost/income ratio below 50% in '26. Let me now close on Slide 14. So as you've heard, we are successfully executing our strategy. This is reinforcing our competitive advantages and underpinning the delivery of strong shareholder outcomes. Indeed, reflective of our momentum, we are today upgrading our return on tangible equity target to be greater than 16% for 2026. Our confidence extends beyond this, and we're excited about sharing our updated strategic plan with you in July. We'll provide more details on the actions we'll be taking to further strengthen and grow the core franchise, address new diversified growth opportunities and deliver continued improvements in productivity, enabled by our leadership position across new and emerging technologies. We will, of course, share more detail on our medium-term financials at that stage, too. Beyond 2026, we are committed to continuing income growth, improving operating leverage and stronger sustainable returns. Thanks for listening. I'll now return briefly at the end. But for now, I'll hand over to William to cover the financials. William Leon Chalmers: Thank you, Charlie. Good morning, everybody, and thank you again for joining. As usual, I'll provide an overview of the group's financial performance, starting on Slide 16. Lloyds Bank Group delivered sustained strength in its financial performance in 2025, in line with guidance. Statutory profit after tax was GBP 4.8 billion, equating to a return on tangible equity of 12.9% or 14.8%, excluding the Q3 motor provision. Within this, we delivered robust net income for the full year of GBP 18.3 billion, up 7% versus 2024. This was driven by sustained growth across NII and other income, up 6% and 9%, respectively. In the fourth quarter, net income was 2% higher versus Q3. This was driven by a 4 basis point increase in the net interest margin, continued balance sheet growth and further momentum in other income. Operating costs for 2025 were GBP 9.76 billion, up 3% year-on-year as continued investment, business growth and inflationary pressures were partly mitigated by further efficiency savings. Remediation charge for the full year was GBP 968 million, GBP 800 million of this relates to the additional motor finance charge in Q3. Credit performance meanwhile remained strong with an impairment charge of GBP 795 million for the full year, equating to an asset quality ratio of 17 basis points. Tangible net asset value per share ended the year at 57p, up 4.6p in 2025. Our performance for the year included capital generation of 147 basis points or 178 basis points, excluding the motor provision. This enabled a 15% increase in the ordinary dividend and a GBP 1.75 billion buyback while maintaining a 13.2% CET1 ratio. Let me now turn to Slide 17 to look at Q4 growth in lending and deposits. We saw a healthy balance sheet momentum in 2025. Lending balances closed the year at GBP 481 billion, up GBP 22 million or 5%. In Q4, lending balances grew by GBP 4 billion. Within this, retail saw growth across all of our business lines. Mortgages were up GBP 2.1 billion, strong but slightly slower than Q3 given higher maturities. Highlights elsewhere in Retail include credit cards, which grew GBP 0.5 billion with continued market share gains and European retail also up GBP 0.5 billion in the fourth quarter. Commercial lending was GBP 0.2 million higher. This represents further growth in targeted areas within CIB and business-as-usual performance within BCB, partly offset by continued government-backed lending repayments. Turning to liability franchise. Total deposits increased by GBP 13.8 billion or 3% in the year. Q4 was down slightly by GBP 0.2 billion. The fourth quarter saw growth in retail deposits across both savings and notably PCAs, with deposit churn continuing to ease as we had expected. Commercial deposits meanwhile, were down GBP 1.5 billion in Q4, driven by actions on low-margin funding as well as by seasonal outflows in BCB. And alongside these developments, insurance, pensions and investments saw open book net new money flows of GBP 7.9 billion for the year, including GBP 4.2 billion in Q4. This, of course, now includes inflows from Lloyds Wealth. Let me turn to net interest income on Slide 18. Net interest income for the year was GBP 13.6 billion, in line with our guidance. This represents an increase of 6% year-on-year, with Q4 up 2% versus the prior quarter. Across both the year and Q4, strong hedge income and business volume growth were partly offset by mortgage repricing and deposit churn headwinds. Average interest-earning assets of GBP 463 billion for the full year were up 3% compared to 2024. Q4 AIEAs were just over GBP 470 billion, up GBP 4.8 billion. Our net interest margin increased 11 basis points to 3.06%. This included a Q4 margin of 3.10%, up 4 basis points on Q3, driven by a significant pickup in hedge income, again, as we had expected. The nonbanking NII charge in 2025 was GBP 515 million, up GBP 46 million or 10% year-on-year, supporting growth in OOI. For 2026, we are guiding to NII of around GBP 14.9 billion. Within this, we expect margin expansion alongside continued healthy balance sheet growth across both retail and commercial. Our guidance incorporates further hedge income uplift of circa GBP 1.5 billion, partly offset by mortgage refinancing and easing deposit churn. Alongside, we also expect some growth in nonbanking NII charge consistent with associated business growth in OOI. Let me turn to mortgages on Slide 19. Mortgages grew by GBP 10.8 billion or 3% in 2025 to GBP 323 billion, supported by a growing market and a flow share of around 19%. We've continued to benefit from our strategic investment in the Homes ecosystem, enabling us to build customer relationships, including in higher-value direct lending and to retain more balances. It remains a competitive market. Q4 completion margins were again around 70 basis points with a further 1 or 2 basis points of tightening during the quarter. We continue to enhance the customer journey by integrating protection and home insurance. In 2025, we saw protection take-up rates in mortgages increase by 5 percentage points to 20%. There is further to go. I'll now turn to Slide 20 to look at developments in consumer and commercial lending. We saw a strong performance across our consumer portfolios in 2025 and a strengthening performance in commercial. Combined, cards, loans and motor grew GBP 4.1 billion or 10% year-on-year. We are taking market share in all 3 segments, driven by leveraging better data to add personalization and by launching innovative new products such as Lloyds Ultra within credit cards. Turning to Commercial Banking. Lending was up GBP 2.7 billion in the year or GBP 4.1 billion, excluding government-backed lending repayments. We saw encouraging progress in CIB, particularly in strategic areas such as infrastructure and project finance. This was partially offset by BCB lending, which held steady when excluding government-backed lending repayments or down GBP 1.4 billion if they are included. Let me turn to developments in the deposit franchise on Slide 21. Our deposit franchise continues to perform well. Total deposits ended the year at GBP 496.5 billion, up GBP 13.8 billion or 3%. Retail deposits were up GBP 5.5 billion or 2% in the year. Within this, current account balances grew by GBP 1.5 billion, representing growth in our market share of balances during the period. Retail savings meanwhile, grew by GBP 4.3 billion or 2%. This was driven by targeted participation throughout the year with a strong ISA season in the first half, followed by slower growth in H2 as we managed our portfolio. In Commercial, deposits grew strongly by GBP 8.5 billion or 5% on the back of growth in our targeted sectors. Notably, noninterest-bearing deposits stabilized and indeed grew a little in the second half. The performance and stability of our deposits are what underpin the structural hedge, which I will now talk to on Slide 22. The structural hedge is a strengthening tailwind to NII. The hedge notional stood at GBP 244 billion at the year-end, up GBP 2 billion over the year, supported by our high-quality deposit franchise. Hedge income in 2025 was around GBP 5.5 billion, a material step-up from last year and a little above our guidance. During Q4, the weighted average life increased to about 3.75 years built off continued strength in our deposit balances. And as previously guided, we expect a roughly GBP 1.5 billion step-up in hedge income to circa GBP 7 billion in 2026. We then expect hedge income to reach around GBP 8 billion in 2027 and to continue growing to the end of the decade as yields converge with market rates and as the notional slowly builds. Let's now turn to other income on Slide 23. Other operating income performance in 2025 was once again strong. OOI was GBP 6.1 billion in the year, up 9% versus 2024 and up 2% in Q4 versus Q3. The latter was supported, of course, by the full acquisition of Lloyds Wealth. Growth over 2025 has been broad-based. Retail is up 12% with strength in motor leasing as well as growth in cards and banking fees. Commercial was up 1% with solid growth in our Markets and Transaction Banking businesses, offset by lower loan markets activity. Insurance, Pensions and Investments meanwhile, grew by 11%, driven by strong performance in general insurance and workplace as we continue to focus on our strategic choices in this area. And our equity investments business was up 15%. This was particularly driven by Lloyds Living more than doubling its OOI during the year. Operating lease depreciation was GBP 1.45 billion in the year, up 10% versus 2024. This was driven by fleet growth, higher-value vehicles and to an extent, electric vehicle price movements, altogether, essentially in line with the OOI growth generated by the vehicle leasing business. Moving to costs on Slide 24. Cost discipline remains critical to the group. Operating costs were GBP 9.76 billion in 2025, in line with guidance, excluding the impact of the Lloyds Wealth acquisition in Q4. Year-on-year cost growth of 3% is on the back of continued strategic investment, volume growth and inflationary pressures, partly offset by further efficiencies. As Charlie highlighted earlier, since 2021, we have now delivered cumulative gross cost savings of circa GBP 1.9 billion, thereby creating capacity for strategic investment across the business. The 2025 cost/income ratio was 58.6% or 53.3%, excluding remediation. And looking ahead, as you know, we remain committed to delivering a 2026 cost/income ratio of less than 50%. Based on our current plan, that implies operating expenses of less than GBP 9.9 billion. This is in line with the flattening cost trajectory that we have previously indicated as our investment in this strategic cycle culminates. On top of that, inflation moderates and cost benefits are fully realized. Remediation for 2025 was GBP 968 million, including the GBP 800 million motor provision taken in Q3. There is no update on motor in Q4. We wait to see the detail of the FCA's final proposals post the consultation in the next couple of months. Let me turn to credit performance on Slide 25. Credit performance remains strong, reflecting our prime customer base, prudent approach to risk and healthy customer behaviors. Across Retail, new to arrears remain low and stable. Early warning indicators likewise are also benign. In Commercial, after some idiosyncratic cases in H1, the H2 picture has been very constructive. The 2025 impairment charge was GBP 795 million, equating to an asset quality ratio of 17 basis points. This incorporates a small MES charge, but also benefits from model calibrations and refinements. Indeed, we consider the underlying charge to be just below 25 basis points. The Q4 impairment charge is GBP 177 million or 14 basis points, including a GBP 47 million MES charge to reflect a slightly higher unemployment peak. Our stock of ECLs on the balance sheet now stands at GBP 3.4 billion. That's around GBP 0.4 billion in excess of our base case and leaving us well covered. Looking forward, we expect the asset quality ratio to be circa 25 basis points for 2026, similar to the underlying run rate that we've seen during 2025. I'll now turn briefly to our macroeconomic outlook on Slide 26. The macroeconomic outlook remains resilient. In the fourth quarter, we've made only minor changes to our base case versus Q3. We now forecast GDP growth of around 1.2% in 2026. Against this backdrop, our unemployment forecast increases marginally, now peaking at 5.3% in the first half of the year. Easing inflation meanwhile, allows for two 25 basis point reductions in the bank base rate during the year to 3.5%. This reflects a slightly lower rate than we previously expected, albeit we still expect a modest pickup later on in the forecast period. And in Housing, we assume growth in house prices of around 2% in 2026 and '27. That is supported by the slightly lower interest rate environment. Let me now turn to our returns and TNAV on Slide 27. In 2025, our return on tangible equity was 12.9% or a robust 14.8%, excluding the motor provision. Within this, restructuring costs were low at GBP 46 million, including GBP 30 million in Q4 with integration costs relating to Lloyds Wealth and Curve. The volatility and other items charge was GBP 70 million. This includes an GBP 87 million benefit in the final 3 months, incorporating a fair value uplift from the Lloyds Wealth acquisition. Tangible net asset value per share meanwhile, increased to 57p, up 4.6p or 9% in 2025. The increase was driven by profits, cash flow hedge reserve unwind and the reduced share count from our buyback programs, offset by shareholder distributions. And looking forward, we continue to expect TNAV per share to grow materially driven by these same factors. Given the momentum across the business, as Charlie said, we are upgrading our expectation for 2026 return on tangible equity to greater than 16%. Turning now to capital generation on Slide 28. The group remains highly capital generative and will become more so. In 2025, we generated capital of 147 basis points or 178 basis points, excluding the motor provision, in line with our guidance. Within this, risk-weighted assets closed the year at GBP 235.5 billion, up GBP 10.9 billion. This was driven by strong lending growth as well as GBP 2 million related to the implementation of CRD IV taken in Q4. This reflects our model outcomes, which are subject to PRA approval and therefore, of course, risk of modification. As planned, we paid down to a CET1 ratio of 13.2% at the end of 2025. And looking forward, we continue to expect 2026 capital generation to be more than 200 basis points. Beyond that, as you know, Basel 3.1 implementation is now scheduled for the 1st of January 2027. We expect this to result in a day 1 RWA reduction of around GBP 6 billion to GBP 8 billion on implementation. Our strong capital generation supports healthy and indeed growing shareholder distributions. So let me talk to that on Slide 29. We continue to grow our shareholder distributions at an attractive pace. For 2025, the Board intends to recommend a final ordinary dividend of 2.43p per share, taking the total dividend to 3.65p, up approximately 15% year-on-year. In addition, we've announced a share buyback of up to GBP 1.75 billion. And together, this represents a total capital return of up to GBP 3.9 billion, up 8% on 2024 and equivalent to around 6% of our current market capitalization. Dividends have grown consistently over our strategic plan with the 2025 dividend now up more than 80% versus '21. They remain at a payout ratio that allows for continued strong growth. Over the same period, our consecutive buybacks have also reduced share count by more than 17%. We remain committed to paying down to our target CET1 ratio of around 13% by the end of 2026. In addition, given our confidence in growing capital generation, we will now review excess capital distributions in addition to ordinary dividends every half year going forward. Let me wrap up on Slide 30. To summarize, in 2025, the group's financial performance showed sustained strength. Strategic execution and business momentum delivered continued balance sheet and income growth alongside cost discipline and asset quality, allowing for growth in shareholder distributions. As we look ahead to 2026 and the culmination of our current strategic plan, we are confident in delivering on the financial guidance you can see set out in this slide. Beyond 2026, we are committed to continuing income growth, improving operating leverage and stronger sustainable returns. That concludes my comments for this morning. Thank you for listening. I'll now hand back to Charlie for closing remarks. Charles Nunn: Thank you, William. So as you can see, our strategic delivery is accelerating, and we're building significant momentum. We're creating a stronger, more diversified, more efficient and more capital-generative group. This, in turn, supports increasing shareholder distributions. We have today upgraded our return on tangible equity guidance for 2026 to be greater than 16% and are confident in the outlook beyond this. I look forward to providing much more detail on the next stage of our strategy and the associated medium-term financial plan in July. Thank you for listening this morning. We're now very happy to take your questions, and I'll hand over to Douglas, who will manage the Q&A. Douglas? Douglas Radcliffe: Thank you, Charlie. We will, as normal, be taking questions -- written questions online as well as questions in the room. [Operator Instructions] Okay. Why don't we start with Guy? Guy Stebbings: It's Guy Stebbings from BNP Paribas. The first question was on deposits. I think it's probably fair to say over the past year, if not longer, deposit flow has been better than expected, but Q4 was a touch softer mainly on the commercial side. I don't know if you could talk to any more in terms of whether that's just seasonality and then your expectations into 2026 in terms of pace of deposit growth, whether you're assuming kind of static mix effects and anything you might be able to elaborate in terms of deposit pass-through assumptions? And then the second question was on costs. Very reassuring performance in '25. The guidance for '26 in terms of limited absolute cost growth is encouraging. Just wondering how much we can sort of read into that, your ability to continue to run the business with limited absolute cost growth? Or is it more a function of the fact that it was a plan that was always expected that in 2026, you would see less growth in that particular year. Obviously, I'm thinking into beyond '26. So appreciating you're not going to be too specific. Douglas Radcliffe: Excellent. Thanks, Guy. I think both deposits and costs are probably questions for yourself, William. William Leon Chalmers: Sure. Yes. Thanks for the questions, Guy. In relation to deposits, the deposit performance, as you say, over recent years has been really very strong, and that's obviously what supported the structural hedge amongst other things within the balance sheet. So a good franchise with some good financial effects. When we look at 2025, we saw deposit growth of almost GBP 14 billion, GBP 13.8 billion over the course of the year, about 3%. So a really pretty good deposit performance during the year. Within that, we saw Retail up GBP 5.5 billion. We saw Commercial Banking up GBP 8.5 billion. So good to see deposit growth in the various different parts of the business, including within the subcomponents of each of those divisions, Retail and Commercial, some pretty healthy deposit performance in respect to the different components. So that's the way in which we see the year. Now within any given quarter, of course, we are going to be managing the deposit base as appropriate based upon making sure that we make the most of the franchise, offering, of course, good customer value and respecting the funding needs of the business. And so within -- on a quarterly basis, you're going to see variations in deposit performance, which reflect each of those imperatives. But over the year, at least, you should expect to see healthy deposit performance as you did in '25. I think in respect of your particular point on Commercial, the 2 points that I would make are seasonal outflows. We see those kind of every quarter or every fourth quarter, I should say, in respect of certain subsectors, education was one over the course of this quarter, indeed, a bit of a mix effect there, too. Alongside also a bit of management in terms of very low-margin deposits, which, as you can imagine, occasionally collect themselves within the Commercial Banking part of the business. So we'll manage that in the interest, as I say, of customer value of the funding position of the bank and of making sure that we make the most of the franchise. The other point I would make in respect of quarter 4, Guy, which is good to see is stability in NIBCA across both the retail and the commercial businesses. And within that, within retail businesses, PCA balance is up GBP 1 billion, which, as you know, is a crucial customer relationship product for us, and therefore, we pay very close attention to it. So it's good to see that being so strong in the course of the fourth quarter. You asked about 2026. I think overall, when we look at '26, we're expecting to see deposit performance, not too dissimilar really to what we saw during the course of '25 in terms of overall volume. There may be some gives and takes in that in terms of the different divisions. We'll obviously manage the business as appropriate. What I would expect to see within that overall deposit book is a slowing down in churn, just as we have seen in the course of '25, including in the latter part of '25. And that is simply off the back of bank base rates, if you like, coming down to lower levels and therefore, deposit churn easing off the back of it. At the same time, we'll also see the effect of 2 bank base rates. That's more of a financial point than a volume point, if you like, but worth bearing in mind. So good performance in '25. We do expect to see continued good performance in '26 of roughly speaking, the same type of proportions. In respect of costs, cost discipline, as I mentioned in my comments, absolutely critical to the group. Cost discipline remains an absolute imperative. When we see our cost performance during the course of 2025, first of all, GBP 9.76 billion in total, that's about a 3% cost growth over '24. Within that, if you exclude severance, which, as you know, bumped up a little in '25, then it's 2.4%. And actually, if you exclude severance plus Lloyds Wealth in the fourth quarter, it's 2.3%. So stripping out those 2 elements, if you like, it's a 2.3% underlying cost rise in '25 versus '24. When we look forward, you'll see from our numbers that we're looking at a cost base, which is expected to be less than GBP 9.9 billion. That is in total about a 1% rise, '26 over '25. And that represents a number of things. It is worth saying actually before going into them, that obviously includes the added costs of Lloyds Wealth, which I think we mentioned at Q3 around GBP 120 million. And then also the added cost of the Curve acquisition as well, which we haven't put a number on, but that obviously is an incremental cost base that we have to absorb. And so the cost increase, if I can call it that, to sub GBP 9.9 billion in '26 takes into account those additional headwinds and effectively absorbs them in our ongoing cost management. Now to your point, what is leading to that cost outcome in '26? A number of things really. We're obviously being helped by inflation coming in a little. That affects things like pay settlements. It obviously affects third-party contracts and the like. So that's all helpful, declining inflation. Alongside of that, that bump in severance that we saw in '25 irons itself out a little bit. So we're seeing a little bit of a benefit from that. But then more importantly, we are seeing the landing of our strategic initiatives or at least those strategic initiatives that are focused on cost benefits. Added to that, the full year benefit of the cost initiatives on a BAU basis that we took in '25. So those 2 factors, the landing and benefit of strategic initiatives, number one, and the full year benefit of '25 initiatives in '26, they're pretty helpful, too. And then I mentioned earlier on that as we come into the final year of our strategic plan, the investment plans, if you like, the investment expenditures are slowing off a little bit. That gives us a little bit of benefit as the cash investment slows. It's about GBP 100 million, put that in the -- if you like, in your considerations. But that is the natural culmination of the strategic initiatives and the investments that we've made, both from the revenue customer proposition side as well as the infrastructure of the business over the course of the '22 through '26 period. You asked about looking forward. You'll have seen in both Charlie's and my presentation that we talked about our commitments beyond '26. And we talked about them in the context of income growth, number one. We talked about them in the context of increased -- improving operating leverage, number two. And we talked about them in the context of improving returns, number three. The second of those 3 points, improved operating leverage effectively means a commitment to reducing the cost-income ratio. When we look forward, we are going to continue to invest in the business, you would expect us to because it's absolutely imperative to maintain the primacy of the franchise and the strength of the franchise today. And that will require investment in the type of sectoral evolution that we're seeing. But you have that all done being committed to within the context of an improving operating leverage, declining cost/income ratio environment. We'll obviously talk more about specifically what that means when we get to the summer of this year, but we felt those commitments were important to make. So you have some sense of direction from us in advance of that. Thank you. Benjamin Toms: It's Ben Toms from RBC. The first question is on NII. I mean you guided for 2026 of GBP 14.9 billion. Just to clarify, should we expect NII and NIM progression every quarter as we go through the year? And is there any lumpiness in the structural hedge maturities that are worth calling out? And then secondly, on capital, you talked about reviewing your capital distribution now on a half yearly basis going forward. How should we think about that for the half 1 of 2026? Will you come down to that 13% by the half year? Or should we think about that as a straight line, so halfway there by the time we get to the half year results? Douglas Radcliffe: Thanks, Ben. Again, I suspect that those are very much questions for William. William Leon Chalmers: Yes. Thanks, Ben, for both of those questions, and I'll answer them in turn. In respect of NII, you asked specifically about the shape of NII over the course of '26. So I'll come back to that, but I just want to make a couple of comments in respect of the overall guidance of 14.9% to put that in context, if you like. When we look at NII performance over the course of '25, we're obviously pleased with the outcome off the back of margin expansion and indeed AIEA growth, including that GBP 22 billion of incremental lending that we did during the year, up 5%. That led to NII growth of 6% during '25. Now we put forward guidance, which shows a further 9% increase in 2026. So a pretty solid growth expectation, if you like, for 2026 going forward. And again, that's built off of similar things. That is to say net interest margin expansion, probably a step more in '26 versus what we saw in '25 actually, plus, of course, AIEA growth expectations. We do expect net interest income to continue to grow in the years beyond that. And that is indeed partly what's behind the first of the 3 comments that both Charlie and I made about expectations after '26. When we look at that, we obviously calibrate the guidance in the context of what we are highly confident in delivering, and that's where GBP 14.9 billion expectation comes from. Within that, there are headwinds and tailwinds in the margin and perhaps we'll come back to that in the course of this discussion alongside AIEA growth expectations, as said. And we've, of course, absorbed a further bank base rate reduction in the course of '26 in calibrating the guidance that we've come up with. In respect of the pattern during '26, I would say, should you expect NII growth or should you expect NII and net interest margin expansion in every quarter over the course of the year? I won't guide too precisely to it. But broadly speaking, yes, you should do. That is going to accelerate and slow down from one quarter to the other for sure. But over the year, you should expect a steady growth in NII off the back of margin expansion quarter-on-quarter. Some quarters, however, will be faster than others. And behind that, of course, is, to your point, the -- a little bit the kind of the ebbs and flows, more the flows clearly of the structural hedge, but flows at different paces, I guess, of the structural hedge. So that's partly what will be behind that net interest margin expansion. The other point I would make is if you're looking at the quarters, just bear in mind that quarter 1 has a lesser day count versus quarter 4. So you need to take that into account in the context of NII expectations for that quarter in particular, simply because we're coming up to it. In relation to the buyback, as you say, we've moved to a buyback of 2x. Why have we done that? Over the last couple of years, at least, we felt that 1x per year buyback was appropriate in the context of giving you clear guidance as to what we expected and in the context or rather appropriate as we reduce the capital ratio of the business down to ultimately 13% at the end of this year. As Charlie said in his comments, as we increase our confidence in the capital generation of the business going forward and as the regulatory picture gets clearer, we feel it is now appropriate to move to 2x per year. And indeed, that gets us to, on average, being closer to our capital target of 13% over the course of the year. So there's good reasons behind it, and it gets us to an outcome that is more consistent with our overall 13% capital target. You asked about timing and how we'll look at it at the half year. We'll obviously let the Board deal with the buyback as appropriate at the half year. We will take into account clearly the position of the existing buyback and where we are at that point. The one point that I would make in that context is that in the past, as you know, we have seen buybacks end in August. We've also seen buybacks end in December. This year, we have a buyback that is a little higher than it was last year. We obviously had a much bigger -- or a much larger market capitalization of the overall company. And therefore, one would expect the buyback to -- if it's constrained by things like average daily traded volume, which these things typically are, to proceed at perhaps a slightly faster pace than it might have done previously. Overall, we will look at the buyback consideration at the half year. We will decide on what the quantum of the buyback should be at that point in time, taking into account the available capital stock of the company, taking into account the business needs on a go-forward basis and of course, ensuring that we preserve the position of the company. You asked specifically about how close we get to 13% at that point. Our objective right now is that we will get to 13% at the end of 2026. That's been our objective for a while now, and we maintain that position as we stand today. We'll take a look at it again at the half year. Douglas Radcliffe: Excellent, why don't we take the next question from Jason in the middle row here. Jason Napier: Jason Napier from UBS. Perhaps one question for William and one for Charlie. William, just coming back to the earlier question on deposits. I think you did a great job of handling the volume side of things. Commensurate with the bigger market cap that almost everyone now has, there's a lot of investor sensitivity around commercial intensity and what's happening to competition. So -- and particularly on the deposit side, I wonder if you could perhaps add a little color on that. And then, Charlie, the firm has done an admirable job of dealing with a really volatile macro environment over the 5-year period of the plan. One of them is the emergence of Gen AI as a thing that we all talk ad nauseam about now. What do you think has happened to the efficient frontier of cost/income ratios for banks over the period of the plan. Where do you think a modern Lloyds -- a fully modernized Lloyds, I should say, ought to operate from that perspective? Douglas Radcliffe: Thank you, Jason. William, I think obviously, deposits is for yourself and then Charlie, the AI side. William Leon Chalmers: Sure. Yes. Thanks for the question, Jason. I think you have to judge us by our results in some respects, at least. So the way in which we respond to the competitive environment is hopefully by delivering sustained franchise growth. And once again, you've seen that in 2026 with GBP 13.8 billion growth in deposits. I mentioned earlier on that we expect continued deposit growth during the course of 2026 and indeed beyond. So I think that's probably the base answer. What would I say in terms of competitive environment? Yes, to a degree, at least, it is increasing in its competitive intensity. I do think there are various different reasons for that. Some of them will be present for a while, i.e. they're more systemic. Some of them may be a little more transitory. We've seen, for example, quite a lot of competition from some of the fintech challenges, and there's much talk about that and the market share that they may be gaining or accessing. How do we respond to that? We respond in the context clearly of enhancing capabilities of our offering. That obviously includes things like app capabilities. Alongside of that propositional improvements, which you've seen a consistent flow of over the course of the last few years. Alongside of that, very competitive pricing in the markets that we want to be when we want to be in them. So we won't necessarily, if you like, be there all the time in every single case, we'll be there where we need to be. And in the context, obviously, of the systemic security that Lloyds offers, the branch offer that it offers, the brand and marketing and so forth. So overall, we see our competitive position versus some of those other factors within the deposit market is gradually strengthening, as said, endorsed by the deposit performance that we've seen across the franchise. One good indicator of that, going back a little to the earlier question is the PCA performance, which for us, as said, is the absolute critical relationship product. Balance is up GBP 1 billion in the course of quarter 4, balance is up GBP 1.5 billion during the course of '25 as a whole. And that is in the context of continuing market share gains from a balance perspective, which is good to see. So Jason, the competition is relevant. It's clearly something that we take very seriously. I do think the results that we show up against that competition withstand scrutiny. Charles Nunn: I might just add one thing to that. I don't want to jump on all of these questions because it's a really important question, obviously. We made the point around market share gains in personal current accounts. We've also done that in business current accounts over the life of this cycle, and those are 2 very important areas for any organization, but especially given our strategy. When you get to savings and investments, we performed very well on Instant Access money, which is money for liquidity purposes. And last year, we had a very strong ISA tax season, but as you get into time deposits, obviously, the margin for shareholders will depend on the pricing and the competitive context. They don't support directly the structural hedge. So we typically compete there from a customer proposition and a broader relationship perspective, but we won't chase market share for the sake of chasing market share where it's not relevant to our customers and where it's not relevant to our shareholders. So we really look at quite a differentiated view of the deposit base. And you're right, it's a competitive market. That's good for customers. Last year, we traded very well and offered great offers. Let's see where the market is this year. The really core part of this is really competing where we have the stable funding and stable deposit base that shows trust. Just on your second question, wow, we could spend the whole of the morning. Thank you for asking me a question, Jason. And look, I'm not going to give you the complete answer because it's -- I think it's partly one of the discussions we'll have in July. I think a couple of thoughts that are very helpful. The first thing is -- we've said a few times now, and we did it in the seminar back in November that about 60% of the GBP 1.9 billion gross cost saves we've delivered over the last few years has been linked to digital and AI, put generative AI aside for a second. And so this ongoing trend around driving very significant lift in efficiency and operating efficiency for financial services, we've been doing that for our whole careers, but it's a significant opportunity at the moment, and it has been what's driving a significant amount of our benefits in the last 3 or 4 years. And when we look at Agentic AI, we think that will enable us to continue that trend of efficiency. So that's the first thought. Second is when you look forward, and we're really quite excited this year, we announced -- we just announced today that we see for just the generative AI use cases we're deploying this year on top of the ones we deployed last year, the 50 use cases that generated GBP 50 million of P&L, we see greater than GBP 100 million of benefit in year. And those benefits will be both revenues and costs. And of course, when you look at our industry, what's more differentiating is our ability to differentiate our services and build broader relationships on the revenue line than driving efficiency. We will do both, but efficiency, if we can do it, other people can do it. What's really exciting for us is some of the differentiation that we're building in through the services we're doing this year. We're launching a couple of examples later this year, which we are currently in testing with our colleagues, one around providing investment advice to the whole market. So you don't have to have a certain size of investments to get that investment advice. [indiscernible] team is leading that. I can see them at the back, which is going to be really interesting. It won't drive massive revenue short term, but it will be very sustainable long term. And then the second one is around really changing how customers have access to their everyday banking and providing a conversational interface to get more out of their everyday spending. And we think that's going to be very, very important for the whole everyday banking personal current account business. Jas is leading that, and he's sat here as well. So we really think there's as much on the revenue as there is efficiency. And then going forward, I won't give you answer on kind of how we see the industry playing out. But those -- that does underpin the confidence that William said we've given you that we see the cost-income ratio continuing to progress positively over the next phase. We'll come back into this. It is also really important to think about, as you know, the mix of businesses. So we happen to have a mix of businesses with a very large retail business, a significant insurance and wealth business, which, as you know, is very good from a returns perspective, but typically historically has been a higher cost/income ratio and then a smaller commercial bank. And I think when you look at Lloyds and other institutions, obviously, the mix of businesses will affect how cost/income ratios progress. We're very ambitious on this, and we are very confident we have the right talent, and we're starting at a fast pace, which is great. So let's see how it develops. We'll come and give more guidance back in July. Douglas Radcliffe: Let's stay on the front row and let's go to Ben first, and we'll go on. Benjamin Caven-Roberts: Ben Caven-Roberts from Goldman Sachs. Just wanted to follow up on the lending. So you mentioned within the NII guide, very strong franchise volume growth in 2026. Could you elaborate a bit on the split between Retail and Commercial and how you see the trends evolving there? William Leon Chalmers: Yes. Thanks, Ben, for the question. Loans and advances GBP 481 billion, as you know. That is a pretty good outcome in respect to '25. So I mentioned earlier on GBP 22 billion growth in lending for the year, which is up 5%. And if you think about where GDP is, it's quite a markup on GDP. So we're pleased with that. I think it is more balanced towards the Retail part of the business over the course of the year. I talked about GBP 10.8 billion in mortgages, for example. We also saw sustained growth across cards, loans, motor and so forth. So a bit of a tilt in that direction. Within the Commercial Bank within '25, decent growth within, as I mentioned in my comments, targeted sectors within CIB. But within BCB, you effectively had a swap out of government repayments off the back of bounce-back loans for a swap in of private sector lending. And those 2 roughly equaled each other out. So that's the pattern for '25. Again, some strong franchise growth in both areas, particularly in Retail. When we look forward, first and foremost, we'll also -- we'll obviously be conditioned by the markets in which we operate. We have taken some relatively prudent assumptions in terms of the expected expansion of those markets. The mortgage market, for example, we are suggesting that lending will be healthy in '26, but maybe a touch down versus what it was in '25. That's a market comment as opposed to a Lloyds Banking Group comment. So we've deliberately taken some relatively prudent assumptions in that space, which means that our Retail lending, we still expect to show healthy AIEA growth to be clear. Will it expand at 5% -- well, will it expand by the same order of magnitude as it did in '25 in Retail? Let's see. I think our market assumptions are a little bit more cautious than that. And therefore, I would expect to see a bit of that reflected in our overall growth within Retail banking balances growth, but maybe not quite at the same pace as we saw during '25. However, within Commercial Banking, I think we see it as a bit of a different picture. That is to say we see sustained growth across the commercial bank. And maybe just to comment on that briefly. First of all, within CIB, the strategic initiatives, the focus on certain areas and so forth, I would expect CIB growth to continue to be healthy just really as it has been during the course of '25 actually. But within BCB, we're now at the point where there's only GBP 1.4 billion or so of bounce back loan balances in place. We are also at the point where we are investing heavily in the proposition there, whether that is sectoral expertise, whether it's relationship managers, whether it's customer journeys and the like. And therefore, the expectation is that the pace of organic growth within BCB should pick up a little bit. Meanwhile, because the bounce back loan stock is now only at GBP 1.4 billion, the headwind that is presented by those repayments should ebb a little bit. The net of that is probably more constructive growth within BCB, which in turn, I think, Ben, when you look at the overall balance, therefore, for '26, you should expect to see healthy loans and advances group -- sorry, healthy loans and advances growth within Lloyds Banking Group for sure. It may be a percentage point or 2 -- well, percentage point, let's say, inside of what we saw in '25. And the balance might be slightly shifting. That is to say, slightly stronger within Commercial, slightly weaker within Retail. But overall, as I said, healthy loans and advances growth with those comments attached. Douglas Radcliffe: And very impressive, Ben. Just one question. Perlie? Pui Mong: Sorry to disappoint I have two. So it's Perlie Mong from Bank of America. Can I ask about mortgage margin competition? So as completion margin is still about 70 basis points, and you mentioned that there's maybe 1 or 2 basis points of tightening in the quarter. I think we've all been hearing about the COVID era loans maturing in half 1 this year. So how are you seeing competition at the front end of the book in January so far? And especially in the context of the budget perhaps having less change to cash ISA than may have expected. So does that change the funding profile of some of your competitors, especially building societies? And then also the mix in the book as well because this year looks like it will have a lot of remortgages coming through. So does that change in mortgages -- remortgages versus first-time buyers change the margin picture as well? So that's number one on mortgage margins. And number two, on NII and non-NII split. So the GBP 14.9 billion is perhaps a touch below consensus. But obviously, the cost/income ratio guidance does imply an even bigger step-up in noninterest income growth versus expectations. So is that a conscious decision to put more resources behind noninterest income growth? And which area within the noninterest income growth are you feeling especially positive about? Douglas Radcliffe: Thank you, Perlie. I think both of those questions will originally come to yourself, William. William Leon Chalmers: Yes. And maybe, Charlie, you want to add. Charles Nunn: Mortgage competition dynamics, and then I can talk about that. William Leon Chalmers: Shall I kick off on mortgage margins briefly and then come over to you before getting to the second of the 2 questions. The mortgage market really as said Perlie, it has been competitive in '25. It continues to be competitive in '26. I mean that's the simplest way to look at it. We've talked about 70 basis points completion margins within mortgages. That's actually been the pattern pretty much quarter-on-quarter. I mean you'll remember quarter 2, I think I said the same thing, quarter 3, I said the same thing, and here we are in quarter 4 saying the same thing again. So 70 basis points throughout the year. But having said that, underneath that headline, you're probably seeing a chip of 1 basis point or so away in each and every quarter. So that's a reflection, if you like, of the competitive mortgage market that we are seeing. What is going on behind that? I think what is going on behind that is that everybody is enjoying the benefits of widening benefits from structural hedge, widening liability margins. And off the back of that, we and everybody else is looking at the margin as a whole. And in that context, we're pleased to see, obviously, the margin expanding by 11 basis points in '25. I mentioned earlier on that we expect to see a more material increase in net interest margins in '26. So I think everybody is looking at it in a fairly holistic way. And therefore, there's a bit of a trade-off going on between being more competitive in the mortgage market, which is being allowed for by the overall widening of our margin and the rest of the sector as a whole. I think that's what's going on. When we look at '26 in response to your question about kind of blocks of activity, yes, we have a mortgage headwind during the course of '26. We've been talking about it, I hope, very consistently over the course of recent years. So that's nothing new for us. We've been, I hope, telling you that for some years now. It is, first and foremost, because of the effect, as you say, a pretty thick 5-year margins that were written back in the, I guess, now the COVID era. That mortgage headwind is slightly compounded by the fact that completion margins, as just said, have come in a little bit versus our expectations. To be clear, we do not expect a heroic recovery in completion margins. We've taken a pretty prudent view on what those completion margins will look like over the course of this year. And of course, in doing so, we, therefore, build up the mortgage headwind a little bit in respect to '26. Now let's see what actually plays out. We might be proven wrong. Completion margins may be a little bit more steady than they are, but we've taken a relatively conservative view of how we expect competitive conditions to play out during the course of the year. And that combined with the '26 maturities means that the mortgage headwind is certainly there for '26. Again, consistent, I think, with what we've highlighted before, but maybe stretched a little bit beyond because of that completion margin pressure that I just highlighted. Now strategically, and Charlie may want to talk more about this, therefore, it is particularly important to us that we develop the franchise proposition, the customer relationship around the mortgage product. The mortgage product stands on its own 2 feet, and it meets its cost of equity. So we're perfectly happy with that on a fully loaded basis. It actually is a very attractive return on equity on a marginal basis. So the product itself stands on its own 2 feet from a financial perspective, but it is so much the better if we can develop the relationship with the customer off the back of it. And I mentioned in my comments earlier on that the protection take-up rate is now at 20%. That's gone up dramatically over the course of the time since I've been here. And indeed, as I mentioned earlier on, we think there is much further to go in that. That is only one example, but it's quite an important example of how we seek to build the customer relationship in the context of the mortgage product. You'll have noticed other examples are in the context of our PCA mortgage combination offering that we give to people. Likewise, GI is another string to the bow in terms of building that relationship. So that's what we do, if you like, to offset some of the pressure that we see within the overall financial point from the mortgage product. And then as I said, we look at the margin in its totality, which is undergoing a very benign and positive transformation right now, as you know. I'll just comment very briefly on the cash ISA and hand; over to Charlie for the question as a whole. I think overall, the pressure that may be induced by cash ISA changes may be felt by others a little bit more than us. That may be because of their deposit funding structure. It may be because of the overall way in which they maintain customer relationships. At the moment, at least, the loan deposit ratio within the business is 97%. It is a very successfully deposit-funded business with a lot of room to grow lending in. From a cash ISA strategic point of view, being obviously the combined Lloyds Banking Group Scottish Widows business that we are, we see actually the cash ISA movement as at least as much of an opportunity to build relationships in the savings space as we do see it as a source of concern in the deposit space. So from our perspective, we're fine with it. Charles Nunn: It's a pretty full answer. Look, maybe just take a step back. Obviously, when we started this strategic cycle, the mortgage business was hugely important, but we've been losing market share for a long period of time. And we kind of set out that we wanted to prove that we could trade at 18% to 20% market share and do it profitably for our shareholders. And that's what we've done. And last year was a very good year in that context. And I think just overall, we'll continue to have that mindset. This is about being relevant to our customers, bringing leading products to market, but we're not going to chase margins in any 1 month or quarter. The market has started competitively in January, but January doesn't make a quarter and a quarter doesn't make a year. So let us trade through that. So that's the first thought. The second one, which is William talked about what we can bring alongside our mortgage products to enhance returns from an overall relationship. The other thing that we've been very focused on, and we've done successfully that has helped us to change what you'll see as the mortgage margin dynamic is think about how we provide our existing mortgage customers or current account customers access to a remortgage or a product transfer and how we use our indirect channel. And those are great when we can do that because we don't pay a product fee or procurement fee to a broker, and we can share some of the value with our customers, and we can target our customers in a way that really brings the best of our products to market. So we've increased our share of direct mortgages to 26% of the market last year. And we think that's a really important point of differentiation. It enables us to compete differently from our competitors. And we've invested heavily. I'm being watched by the leader that's done a lot of this. I'm nervous now what I'm saying. We've invested heavily in our digital capabilities around our home hub, around remortgage journeys, and that really helps customers get a simpler, quicker and good value product, and that helps us. And we've invested heavily in our relationship with our mortgage brokers. And we typically see our completion rates being above the application rates because we provide a very, very good process and journey. And again, that helps us compete in the market. So look, it's a very different market from first-time buyers through buy-to-let through prime mortgages. One other fact, which I've talked about before, we did increase our share of mass affluent mortgages from 9% to over 20%. And again, we know the value of those relationships and the broader relationship in that context. Just on NII/OOI, maybe put it the other way around, I'll say the strategic and then you can add in some of the value because it's a really important question. But when we started this strategic cycle, we laid out very clearly that we wanted to grow more diversified income distribution across the group and get more bias towards other operating income, recognizing we were still looking to grow NII ambitiously as well. But it's been always part of our strategy to do that. And we've now got 4 years consistently of growing at 9% CAGR on other operating income or more actually in '22 because we bounced off a low start in '21, we grew more than that. But I think the real quality of the franchise, the other operating income businesses is starting to show differentiation as we come through this. So we always thought strategically the right thing for our shareholders was to drive that bias towards OOI. The NII, William has gone through, we'll always have a certain conservatism around how we think about NII, but that's our right ambition. So we like the idea of OOI growing faster and giving more differentiation and diversification around the revenues. You asked around which businesses, and maybe I'll pause. I'll do that relatively quickly. And I think we'll do more of this as we look forward in the July strategy. But as William laid out, and hopefully, you've seen this additional disclosure today around our equity investments business and Lloyds Living. We always had a strategy to build quite a diversified set of businesses so that in any one quarter or year, one business may not have the best year. Actually, William explained why because of a very strong year last year and then actually U.K. sterling DCM activity was suppressed this year, our corporate OOI grew slower last year. But the whole point is we know that with the diversification and breadth of businesses, we'll be able to drive strong growth across those businesses over the next few years. And what you saw this year, and you should expect again next year is strong growth in Retail, strong growth in our Insurance and Wealth business and Lloyds Wealth specifically will help that again next year and strong growth in Commercial and in our equity businesses. The growth rates might vary quarter-on-quarter, but the pillars of that growth are well established now and they're moving at pace. So we think that's a really important part of the strategy. William, do you want to flesh out any of the detail? William Leon Chalmers: Sure. Thank you, Charlie. I think I'd probably make 2 points. One is, of course, to flesh out the detail, but I'll come back to that in just a second. The second is I really do not think it is an either/or between NII and OOI. To be clear, we would expect to see meaningful growth in both. So when we look at NII, for example, as you know, we're looking at 9% growth in 2026. We are also looking at sustained NII growth in the period thereafter in the period beyond, fueled by structural hedge as the current headwinds of particularly deposit churn in '26, but also deposit churn and the mortgage headwind in '27 ebb away. So you should see 9% growth in '26 and then sustained growth in the period beyond that. Now just focusing briefly on '26, as I mentioned earlier on, and Charlie just highlighted it, we calibrate guidance to be highly confident of hitting it. That, of course, means a degree of conservatism in the way in which we look at things, including things like market rates and so forth. The headwinds and tailwinds in respect to the margin, they're familiar ones, the ones that I've just highlighted, for example, AIEA growth, as I mentioned in conjunction with the lending question just a second ago, is built off of relatively conservative market assumptions. Let's see how they fare over the course of the year. And then, of course, as I said, we've absorbed a macro -- a further macro change of now 2 bank base rate reductions versus previously 1. That all means that we're highly confident again in '26. It also means that we're highly confident of continued growth in the period thereafter. So, I don't think this is either NII or OOI subject to the resourcing decisions or capital allocation of the business. I think it's very much both. In terms of the detail, the 1 or 2 points I might just add just kind of fill in, in that respect. Retail up 12% during the year, 2025, that is driven by 2 or 3 factors in particular: transport, banking fees of PCA, cards, likewise. So that's a kind of, I suppose, a multipronged engine. Likewise, commercial a bit slower for the reasons that Charlie just mentioned. I would expect that growth rate to pick up in that business during the course of '26, not least because those '24 one-off effects that Charlie just highlighted drop out as well as what we've seen so far, at least a decent start to 2026. Let's see if that continues. And then Insurance, Pensions and Investments, the same drivers as '25, which is to say GI drivers, long-standing the unwind of the CSM being part of that, Workplace pensions continuing to build the business. But again, as Charlie mentioned, the embedding of Lloyds Wealth as it will be called. I think we talked at Q4 about that Lloyds Wealth income stream being an incremental circa GBP 175 million of income in the course of 2026 versus what it delivered during the course of 2025. So a meaningful, if you like, addition from that space. And then Lloyds Living -- or rather LBGI more generally, we've got a combined effect of LDC of housing growth partnership of BGF, but also Lloyds Living within that context. I mentioned Lloyds Living had doubled its OOI during the course of '25. You add together all of those LBGI businesses, and they're up 15% versus where they were the year before. You should expect meaningful growth in the OOI contribution of those businesses going forward. That hopefully just kind of fills in a bit of the blanks. But again, we would expect to see -- expect to deliver sustained growth in NII along the lines just mentioned, OOI growth for '26 ahead of what we saw in '25. Douglas Radcliffe: Excellent. I'm going to take a couple of questions online, then I'll come back to the audience here. Firstly, this question from Aman at Barclays. You are set to generate increasingly significant amounts of surplus capital from here. What should the market's base case expectation be for what you are likely to do with this surplus, buybacks, specials or potentially M&A? William Leon Chalmers: Shall I kick off on that, and then Charlie may want to add. Thank you, Aman, first of all, for the question. I think the start point and perhaps the endpoint for this question is that we are in the business of maximizing the long-term value of the group. That is really what the management team is focused on and indeed the Board. Looking forward, as it has done in the past, that is going to encompass business growth, balance sheet growth as an example of that, GBP 22 billion lending and advances growth last year, for example. Alongside clearly organic investment. We've invested, as you know, GBP 3 billion over the course of 3 years in the strategic cycle, GBP 4 billion over the course of 5 years, in fact, a touch above that as I think we talked about in Q3. That's in pursuit of improving customer propositions, making sure the franchise really progresses. At the same time, building the operational resilience of the bank as examples of other expenditures, if you like, of that cash investment. It also, from time to time, will include looking at least at M&A. But ultimately, it is all underpinned by capital distributions. And that is, as I said before, about maximizing the long-term capital distributions that we're able to give to shareholders. Now just a word on M&A. The M&A bar is pretty high. There's a couple of points to make there. One is it clearly has to be strategically coherent. I guess that goes without saying. But you've seen in the context of the last couple of years or so, a couple of M&A pieces, if you like, that we've undertaken, one being Tusker, one being Embark. Both of those 2 have enhanced capabilities of the business at a rate that was faster, at a risk that was lower and at a price that was cheaper than the organic alternative. When I first came in, we also did a scale add-on, which was the Tesco mortgage book. But it's that type of strategic, if you like, complementarity that we're looking for, either capability enhancement or alternatively scale add-ons. And then as I said, it has to be put through the filter of, is it going to get us to the target zone -- strategic target zone that is -- in a way that is faster than the organic alternative, in a way that is at least lower risk than the organic alternative and in a way that is ideally cheaper than the organic alternative. So we're looking for speed, low risk and value in the context of the M&A that we would choose to undertake or choose to look at, if you like. Only when we meet that high bar, would we choose to divert any money from what would otherwise be distributions to the shareholders to M&A. You've seen the type of things that we've done before. I think the concern is, does it tick all of those boxes. That's the way that we'll look at it. But as I said, any capital allocation, whether it's about balance sheet expansion, whether it's about organic investment in the business, whether it's about M&A, whether it's about capital distributions, is about maximizing the long-term value generation and indeed, ultimately, capital distribution in the business over time. Douglas Radcliffe: The second question online is from Rob Noble at Deutsche. When considering full year '26 distributions, will it be pro forma for the Basel 3.1 reduction in RWAs as of 1st of January 2027? Are there any other regulatory moving parts of RWAs in 2026? Or will they grow in line with loans? I expect both of those for you, William. William Leon Chalmers: Sure. I will kick off and Charlie may want to add about some of the strategic ambitions, if you like. The -- it's obviously far too early to talk about full year '26 capital distributions. We've just gotten to the point of offering GBP 3.9 billion in respect of '25, which in turn, as you know, from both Charlie and my comments, is a 15% increase in the dividend and a GBP 1.75 billion buyback. So we think that's a respectable outcome in terms of '25. To be clear, we do expect to grow capital distributions in respect to '26. That comes off the back of the increased capital generation of in excess of 200 basis points. So there's no debate about the direction that we're going in. But as you can imagine, Rob, I'm going to stop short of making any commitments about it. That will be a question for the Board at the right time. I might just pause for a moment on Basel 3.1. A couple of points to make really here. One is, as you know from our disclosures this morning, we do expect Basel 3.1 to be a positive from the company's point of view. That is to say, to reduce RWAs by the range of GBP 6 billion to GBP 8 billion. We'll see depending on the evolution of the balance sheet and indeed evolution of economics that drive some of the factors behind Basel 3.1, exactly where within that landing zone it ends up, but that's the range that we expect. Why is it that we expect that benefit? It's largely off the back of the commercial business and the fact that we are currently operating on foundation IRB, whereas other commercial businesses that we see in the market are typically on advanced ARB. And therefore, as Basel 3.1 gets implemented, there's less -- or rather maybe put it another way, there is some benefit for us because of our start point. That's where the majority of benefits come from. There is a little bit from retail as well, but that's the overall pattern of the Basel 3.1, as I say, RWA reduction. It's also worth briefly straying off Basel 3.1 for a moment on this, which is to say we have now landed our models for CRD IV. That is consistent with our GBP 2 billion RWA add-on in quarter 4, to be clear. We are now in the process of gaining PRA approval. Until we gain that PRA approval, there is obviously a little bit of risk around the PRA taking a look at it and if you like, entering into discussion with us. So let's see where that lands. We are where we are for good reason, but I just want to highlight that in the context of the Basel 3.1 benefits that we see. Finally, in terms of distributions, Rob, as said, I'm not going to comment on the quantum. I have commented already on the direction. I do think it's important to say in that context that Basel 3.1 is going to give us RWA relief. You can figure out how many basis points of capital that RWA relief equates to we certainly have done. We will look at investments in the business, to be clear. We will clearly look at maximizing long-term value of the company, and that is in the spirit of maximizing long-term capital distributions to shareholders for sure. But we will look at in the context of the overall capital position of the company, where we might deploy investments in the shareholders' best interests rather than necessarily automatically pay everything out in the minute that we get a pound in. That is not to say that we will not pay any element of that Basel 3.1 benefit out. It's not to say that. But it is to say that we will look at the round in the overall capital position of the company, and we will make the appropriate investments to ensure that the franchise stays as strong tomorrow as it is today and is capable of delivering shareholders what they want and need. Charles Nunn: The thing I might add is, William and I were really conscious as we came in today that we weren't able to give you financial guidance beyond 2026 until July. And so what we've tried to do today is do a couple of things. One, give you some confidence in the momentum in the underlying business direction and efficiency that we are delivering over this period, and that momentum will continue. The second thing was to give you some specific numbers where we felt guidance was appropriate. So the structural hedge in '27 and then some of the language William has used around that remaining supportive through the back end of this decade, even with our assumptions around how rates the yield curve will evolve. And then the RWA release we just talked about, again, you can see that we have the capacity to continue to really drive this business forward. And then obviously, the third thing is those 3 statements that we've both repeated a couple of times that we see beyond 2026, the opportunity to increase revenues, increase operating leverage and increase shareholder returns. So we'll come back in July and give you that broader view around what that really means. But you can see we were just trying to sow the seeds for you to really understand why the confidence that we have around this business in '26 and going forward is grounded. Douglas Radcliffe: Thank you. Let's return to the room. Let's take a question from Jonathan at the front. Jonathan Richard Pierce: It's Jonathan Pierce from Jefferies. I've got 2. The first one is just a modeling question really. The fair value unwind and the amortization of purchase intangibles. Consensus has those broadly holding moving forward. My suspicion though is those are going to come down quite notably, certainly by '27, '28. Can you just confirm where that number will be, those 2 items in aggregate, please, a couple of years forward? The second question, I'm sorry to come back to this point on capital generation, but it is clearly a major part of the story. And the guidance for this year for free capital generation of over 200 basis points obviously incorporates RWA growth and all these sorts of things. So we can see there's about GBP 5 billion of free capital from that. You've got another 20 basis points reduction in the equity Tier 1 to come, which is another GBP 500 million. And then you've got the day 1 Basel 3.1 of circa another GBP 1 billion 1st of Jan '27. That's GBP 6.5 billion taking into account organic investments and RWA growth at least. How should we think about the mix of buybacks and dividends moving forward? And in particular, I'm interested in the dividend payout ratio because, William, you've been keen to flag several times in the last few months that the dividend payout ratio is too low, yet again, consensus doesn't really have it moving over the next few years. So is there scope here for that dividend to start growing by somewhat more than 15% a year over the next 2 to 3 years? William Leon Chalmers: Thanks for those questions, Jonathan. I'll take both of them in the first instance. It may be that Charlie wants to expand also on the second in particular. On the fair value and amortization component, that has seen, as you know, a Q4 charge, I think, about GBP 34 million -- GBP 35 million actually. That is more or less consistent with the run rate, primarily related to businesses, many of them going back to the HBOS days and so forth, which in turn are amortizing over the last couple of years and indeed into the foreseeable future. We did see a bit of a step down during the course of the year, and we do see expectations of a bit of step down consistent with your question, actually, Jonathan, over the course of the coming years. And that is as certain instruments that are getting effectively amortized in the context of that line coming off. The HBOS debt instruments are one example of that. And so you should expect, if you like, downward pressures to come from that. The only point I'd make in addition to that is that we are -- as Charlie mentioned, we've done a couple of acquisitions this year, SPW being one, Curve being another. And so that will add to the pile of stuff, if you like, that then needs to be amortized in the future periods. So all being static, I would expect that line to gradually come down for the reasons mentioned, much of it relating to HBOS amortization. Having said that, we've added on a little bit in the context of '25 off the back of those 2 acquisitions. And therefore, we look at the net of those 2 rather than just one point in isolation. The second point I would make on that fair value unwind intangibles point is that, as you know, the bulk of it has nothing to do with capital. So while it may actually help, if you like, the overall build in RoTE over time, not by much, but it will make a positive difference. Nonetheless, don't expect that necessarily to feed into the capital generation of the company. And so just worth bearing that in mind. The second point, the capital generation, without commenting too specifically or directly on your numbers, I can see how you get to them. Maybe that's the best way of putting it. That relates to the capital generation of the company. It relates to the 13.2% down to 13%, which I said we've got a commitment to getting down to at the end of 2026. The Basel 3.1 basis points, you can tell from the GBP 6 billion to GBP 8 billion range that we've got what type of capital contribution that might make. Just as I said earlier on, though, just bear in mind that we're not completely settled on CRD IV until the PRA is signed off, just bear that in mind really. And then what does all that mean for the capital generation of the company and dividend payout ratio and so forth. One point that I'd make at the outset there is that the payout -- the dividend, if you like, needs to take into account recurring earnings streams within the company whereas the buyback is more capable of taking into account lumpy benefits. And therefore, the buyback is more attuned to dealing with things like Basel 3.1, whereas the dividend is more attuned to dealing with the ongoing earnings for the company. And that's an important start point for the way in which we look at it. When we look at the buyback versus dividend equation, we are committed not to a payout ratio within the dividend, as you know, but more to a progressive and sustainable dividend policy. And that, of course, means growth, but it means growth in a sustainable way, which for those of you who are long in the tooth like I am, will remember that is particularly important to Lloyds having the history that it has. So both growth but growth in a sustainable manner for the dividend. You've seen that over the last 2 or 3 years, that's meant 15% dividend growth, which now is 80% above where it was in 2021. And the point of emphasizing the payout ratio is not to say that we're changing our policy or that we have a payout ratio policy, but rather to say that there is a lot of room for progressive and sustainable dividend growth in the periods going forward. And what we'll end up debating with the Board, I'm sure, is do we take a step jump in one period of time for that dividend, i.e., see a sharp growth in 1 year and then, if you like, attenuate the growth in the period thereafter? Or do we keep the 15% or thereabouts growth rate going for some years into the future. And I think the good thing about where the business is right now is that based upon the guidance and expectations as to continued business growth, we have the scope to do one or other of those 2. And that's the point of, if you like, emphasizing the fact that we are on a low payout ratio. It is hard to put a finger on exactly where that changes, but we obviously pay attention to payout ratios that other banks, not just in the U.K. but beyond get to. But again, progressive and sustainable dividend policy is what it is all about. In that context, it's worth just briefly commenting on the buyback and how do we look at the buyback and what's the impact of the price and so forth on the buyback because that's an inevitable part of the equation. First of all, I'd say the buyback in respect of '25, the GBP 1.7 billion that we bought back was bought back at an average share price of 77p per share. So when we look back on it, that obviously looks like good value now. And we very much hope we'll be saying the same thing this time next year, of course. We are committed to the buyback that we have today. We also see significant value in the current share price. And so that commitment to the buyback makes sense in the context of the share price that we're at today. That's in the context of expected earnings growth, expected TNAV growth. It is also in the context of investors who basically see it the same way as we do. That is to say they have a preference for the buyback, and we obviously have to respect that as our owners. Alongside investors and owners who prefer income have it, and they have it from that 15% dividend growth, number one. They also have it because the buyback reduces the number of shares and therefore, helps us accelerate dividend growth on a per share basis, number two. We look at the buyback also with the EPS, the DPS, the TNAV per share benefits that it gives. And then in the round, therefore, we are still very much behind the buyback. We think it's a very sensible thing to do for all the reasons emphasized. That means, I think, Jonathan, looking forward that dividend progressive and sustainable growth is an expectation, certainly a core expectation of us, as I said in my comments, an attractive pace. But I think excess capital distribution, both for the reasons that I just mentioned, also to accommodate, if you like, lumpy capital benefits, Basel 3.1 being the best example, with buyback is a good way to do that. Charles Nunn: It's a pretty full answer. I think we said in the last few years, this is the problem we wanted to have that we get to a place where we have very strong capital distribution and our valuation more fully represents where we are today. And as William said, we think there's more value to come, but this is the right debate for us to be having, and we'll really value input from all of you and our shareholders as well as part of that as we go forward. Douglas Radcliffe: Excellent. Good. We run out of time, but I'll take a couple more questions. I think, Sheel, you had your hand out and Chris. So we start with you, Sheel, and then we'll finish with Chris. Sheel Shah: Sheel Shah, JPMorgan. Two questions from me, please. First, on the IP&I business. The other income has grown strong at 11%, but one area where maybe the strategic initiatives have been a little slower to show there is maybe the net flows. Net flow rate of growth has been maybe at the low single-digit percentage. How much of that is a function of the market? And what do you think is the natural growth rate of this business? And secondly, coming back to AI, the GBP 100 million that you've spoken about, there's a lot of focus on the ROI of these investments. Is that on a gross basis? Or is that including the cost of these investments that you've made? William Leon Chalmers: On the strategic investments, in particular, Sheel? Sheel Shah: Sorry, the AI. William Leon Chalmers: The AI. Charlie, shall I kick off, please? Charles Nunn: You can and I'll add on the... William Leon Chalmers: In terms of IP&I, the business, as you say, has been really successful in terms of growing some of its core activities. You'll notice that the IP&I business recently last year, maybe actually '24, it might be the tail end of, effectively focused the business on 2 or 3 core strategic areas. These include things like GI, it includes things like workplace pensions, for example. At the same time, it sold the bulk business. That was a reflection, if you like, of the strategic focus of the business and a very deliberate capital allocation decision upon those areas where we frankly felt we had a right to win and indeed a path to ensuring that we did so. So that's what's behind the positioning of the business. That's also what's behind the 11% OOI growth in respect of Insurance, Pensions and Investments in 2025, and that added to the acquisition of Schroders Personal Wealth now to be Lloyds Wealth, should add to greater growth, i.e., faster growth in OOI from IP&I going forward into 2026. That's the earnings story. You talked about book growth there. I would just distinguish in doing so between what we describe as the open book growth versus the closed book growth. And what we mean by that is that we're very interested in growing assets fast in the context of those businesses that we are strategically focused on, just as I mentioned a second ago. And if you look at open book AUA new money in 2025, it's almost GBP 8 billion. It's about GBP 4.2 billion in Q4. Of course, we would expect to see that build over the course of time. And off the back of the strategic focus and investments in the businesses that I've just mentioned, Sheel, you should expect to see that. I won't give you a precise run rate that we expect to target the business at. Safe to say that it's strategically focused and concentrated. And in addition to that, with that type of investment, with that type of background and context, we would expect those open book AUAs to grow at a faster base than necessarily or faster pace than necessarily the totality of assets under administration in the entire IP&I business might do. The second of your question, ROI, ROI always takes account of the investment. Charles Nunn: So just any other thing I'd add on the Workplace business is the benefit here of being a joined-up group is really helpful. We have all of our 1 million BCB customers and all our corporate institutional customers. And so the joined-up connectivity between the Workplace team and our Commercial teams is very strong, and you should continue to see us winning mandates, although the percentage of mandates in any 1 year is quite low. As you know, it's only about 2%. The pensions market is switching, workplace pensions, but it's a source of competitive advantage for us. And then the Lloyds Wealth acquisition, we said it both pretty quickly, I think. We see that as an opportunity, obviously, for our retail customers and especially mass affluent, but also our workplace customers and for all big workplace pensions businesses, and we're #2 today. As you know, attrition and consolidation as we get near a deaccumulation phase for people is one of the choices where people decide where they're going to consolidate their pensions. And we now have an advisory proposition we can bring to bear for our customers in the workplace business. So it helps us have another tool for supporting customers when they're making those really important choices and can help us manage attrition on that business. So we do think it's a really attractive business. Now it's at scale, good returns and does have the potential to continue to grow healthily. Douglas Radcliffe: Excellent. Chris? Christopher Cant: It's Chris Cant from Autonomous. Just trying to round things out, I guess, with regards to the commentary on AI and kind of digital leadership, the comment you made about reaching the end of this investment cycle and that being part of what's, I guess, helping control costs in '26 specifically as you look out to the next planning cycle, is it really a case of just redeploying the sort of investment spending that you've been doing over the last 3, 5 years? So changing the focus to focus more on this digital AI leadership angle or should we expect some kind of lumpiness? Like do you feel like you need to have a front load of investment in relation to this Gen AI opportunity that you see? So should we expect that progress towards operating jaws to be gradual? Or should we expect it to be, I guess, back-end loaded? Is there anything you want to say there? That would be helpful. And then just kind of reading between the lines a little bit. I get a distinct impression that you see one of the key opportunity sets within this AI revenue opportunity that you were pointing to as being the fact you have the captive insurer, you have this Workplace business. Could you comment on your inorganic appetite in that space? So you've been linked to Evelyn Partners. I'm not expecting you to comment on a specific transaction, but I'm sure you've seen the same headlines we all have -- I asked you about Schroders last summer, and you bought that. There's the Aegon U.K. workplace business potentially up for sale. I'm just curious, is -- am I right in inferring that that's the key area that you see the next leg of the strategy for OOI growth. The last few years has been a lot about the leasing business, and that's been a huge driver of the overall other income growth. As we look forward, is it more about the fact that you're this joined up group and you can cross-sell and you can deploy AI to do that? And is that where we should be directing our attention because I think we probably all under analyze your insurance business, frankly. Charles Nunn: Do you want to try the first one? We can both do both again. You want to try the first one, I have the second one and then... William Leon Chalmers: Yes, absolutely. Absolutely. Thanks for the question, Chris. In respect of the AI opportunity, it is obviously gathering pace, as Charlie has mentioned in his comments. We've seen some foundation building during the course of '25. We're seeing scaling during the course of '26, and Charlie mentioned the 4 or 5 blocks of activity that, that relates to. When we look at the impact on that in the next strategic plan, if you like, in the period beyond 2026, that opportunity is going to grow meaningfully. It will grow both across the revenue opportunity and just as you said, not just within businesses, but in terms of linking businesses up together for sure. It is also -- you asked about the nature of the operational leverage and whether that is back-end loaded or whether that is, if you like, a continuous commitment. I think it is fair to say, well, maybe make 2 comments. One is the improvement to operational leverage is intended to be about momentum. That is to say that we are delivering sub-50% cost/income ratio in '26. We expect that momentum to be sustained in the years thereafter. Now inevitably, when you make investments early on in the strategic cycle, just as we are in this one, you will see that momentum accelerating towards the end of the strategic cycle. But don't make -- if you like, don't misinterpret that as being a lack of momentum in the years '27, '28 and so forth. So that's the way I would look at it. It is sustained momentum. It will inevitably because of the nature of investments and the way in which they mature, accelerate towards the back end, but that's just the way of things, and you've seen it in the course of this cycle. The final point that I'd make on that perhaps before handing back to Charlie is that I hope that when people reflect upon this strategic cycle, people will believe that we've invested the money wisely. That is to say, we've invested GBP 3 billion over the course of 3 years, just over GBP 4 billion over the course of 5 years. That is starting to yield returns of the type that we're describing today. That is also what is behind our confidence in improved income growth, continuous operating leverage improvements in the period beyond '26 and indeed enhanced RoTEs and therefore, capital generation expectations in the period beyond '26. So when we look at the overall investments in AI, just to mention one class of investments, amongst others, you would expect us to invest wisely. And I very much hope this strategic cycle at least gives confidence in that respect. Charles Nunn: Great. You're close to getting us to talk about beyond 2026, which we are vehemently against because that will be July. Just in terms of your second question, a couple of things. And obviously, you wouldn't expect me to talk about individual companies despite the fact that you pointed out Schroders Personal Wealth last summer. Look, the first thing, again, on OOI growth, it's enhanced, not an old strategy. So we expect to see growth in all of those OOI pillars that we talked about. We're excited about the future of transport. We're excited about the future of our payments business, and we just bought Curve. We've captured market share in credit card payments, something as old-fashioned as that during the cycle, gone from less than 15% to 17.5%, one of the targets we said we would deliver. We delivered that last year, 2 years early. We're excited about the opportunity to continue to grow our commercial businesses that underpin OOI. William talked about the momentum in Lloyds Living as an example. So it's an and strategy. Yes, we are excited about the opportunity to continue to grow our Insurance, Pensions and Investments business. And so we see that as a really significant opportunity, not least because they're great stand-alone businesses themselves, but they are unique in our ability to bring them to our broader group, the connectivity into our commercial franchise, our retail franchise specifically. No one else in this market can do that. And we see there's lots of opportunity to innovate. In terms of acquisitions as a path for that, look, I think William laid out very clearly how we think about those, both our track record, yes, we will do them where they have -- they accelerate our ability to deliver distinctive capabilities strategically and scale that makes a difference for our customers and our shareholders. But we do have a high bar for those, and we'll continue to look at it in that context. I know, Chris, you'll remember back in '22 when we laid out this phase of the strategy, we laid out which businesses we aren't operating at the kind of 20-ish percent market share range. And as you know, there's still a number of these businesses. Actually, our Workplace Pensions business is pretty healthy in terms of its market share, but investments and then some of the associated areas around that, we're not operating at that level. That's also true in some parts of the payment space, in some parts of SME banking. And so we see opportunities to really grow in a number of businesses. And yes, IP&I is definitely one of them. William Leon Chalmers: Chris, just to perhaps finish off on your SPW example, it is worth saying that we acquired their full control of what is a great business that will extend our wealth proposition to the customer base, alongside GBP 18 billion of assets under management, assets under administration as well as an addition of circa GBP 180 million of earnings, and it was all for GBP 0 capital cost. Charles Nunn: And actually, just one more thought on that because we'll look and without doubling down is getting to the end, 300 great advisers, which is quite a material team that we can then apply into our broader group who are advisers we know, we love, some of them worked at Lloyds and we are confident in their conduct outcomes. So for a group like us, that's a hugely important part of making an acquisition like that. So well spotted last summer. Douglas Radcliffe: Excellent. So thank you. That concludes the questions. I don't know Charlie, whether you want to just briefly summarize and conclude the event. Charles Nunn: Well, no, just as always, first of all, thank you, Douglas. Thanks for hosting the questions, and thanks to everyone who's joined in the room. And offline, we really appreciated the questions. Thank you for bearing with us as we've got this gap between this year-end and our July new strategy and financial guidance. We're really already looking forward to July, but let's stay in the moment for a second. I know it's a busy moment. We've brought our results forward, but I think there's 9, 10 other European banks live. So thank you for prioritizing Lloyds over the rest. I don't know if you're going to be able to get the half term if you've got families, but that's hopefully a benefit from all of this. Obviously, our IR team is around for any further questions. As always, we'll be here for a few minutes ourselves. I'll look forward to seeing you in July. As I said, I'm really looking forward to that. William will do the Q1 results. As a team, we're going to be very focused on delivering 2026, and that's what we're going to be doing for the next few months until I see you again. So thank you very much for joining today, and see you very soon.
Operator: Good morning and thank you for joining the Tetra Tech Earnings Call. As a reminder, Tetra Tech, Inc. is also simulcasting this presentation with slides in the Investors section of its website at tetratech.com. This call is being recorded at the request of Tetra Tech, Inc. and this broadcast is the copyrighted property of Tetra Tech, Inc. Any rebroadcast of this information in whole or part without the prior written permission of Tetra Tech, Inc. is prohibited. With us today from management are Dan Batrack, Chairman and Chief Executive Officer, Steve Burdick, Chief Financial Officer, and Roger Argus, President and CEO designate. They will provide a brief overview of the results and will then open up the call for questions. I would like to direct your attention to the Safe Harbor statement in the presentation. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward statements due to the various risks and uncertainties, including the risks described in Tetra Tech, Inc.'s periodic reports filed with the SEC. Except as required by law, Tetra Tech, Inc. undertakes no obligation to update its forward-looking statements. In addition, since management will be presenting some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted in the Investors section of Tetra Tech, Inc.'s website. At this time, I would like to inform you that all are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack. Dan Batrack: Thank you very much, Diego, and good morning. And welcome to our fiscal year 2026 first quarter's earnings conference call. I'm glad to report this morning that we had a very strong first quarter beginning to our 2026 fiscal year. Now during this past year, we had many different points to navigate. And as last quarter, we now had a new one: the longest US government shutdown in history. But during all of these challenges, so during this last year and during the first quarter of this year, we've remained very focused on the enduring markets of water supply, water treatment, flood control, and environmental stewardship. All of which remain in very high demand. And, yes, water is not going out of style. Now as you're gonna hear this morning, even with the government shutdown, we grew our revenue 8%. We expanded our margins by 140 basis points on a GAAP basis. Deep Vertical will talk more about this in a bit. And we improved the quality of our backlog by winning more front-end work and increasing the embedded margins that we have in the new projects that we've been awarded just this last quarter. Now today, Steve Burdick, our Chief Financial Officer, will provide additional details on our financial performance on a full GAAP basis. Roger Argus, Tetra Tech, Inc.'s President and CEO designate, will provide an update on our growth markets and market outlook. And with that, I'd now like to share with you an update on our financial performance and business. As we both performed in the first quarter and as we see ourselves moving forward into the rest of 2026. I'll start with again, we began 2026 with a strong first quarter, as I just indicated. We had a net revenue of $987 million in the quarter, which is up 8% from the prior year. In the quarter, we generated $131 million in operating income, which is up 12% from the prior year. And finally, our earnings per share was up even more, up 17% in the first quarter of last year, resulting in an adjusted earnings per share of 34¢ for the quarter. And that's an adjustment down from our GAAP number. Our actual GAAP earnings per share was $0.40 in the quarter, and Steve Burdick will go through a bit more of that in the Chief Financial Officer's presentation in just a few moments. I would like to present our performance by our segment. We do have two segments, the government services segment and a commercial and international group segment. The government services group segment delivered a strong quarter with margins of 18%, up 40 basis points from last year. In the first quarter, our government services group net revenue was $382 million, which grew 5% from last year. And that was during a quarter where the US government was shut down for about six weeks of that period or about half of the entire quarter. Our commercial and international group segment also delivered a strong first quarter. The Commercial International group's revenue was up 10% to $605 million driven by growth in The United Kingdom and in Ireland with strong water programs in both geographies and with new digital automation programs in Australia. Our Commercial and International Group's margin for the first quarter was 13%, which was also up similar to GSG, up 40 basis points from the prior year. Our commercial International Group's benefited from strong performance in The United Kingdom, in Canada, and an improving business in our Australian activities. I'd now like to provide an overview of our performance by our end customers. This quarter, our federal work was up about 7% from the prior year. Primarily for work with the US Army Corps of Engineers, designing flood protection structures, upgrades to locks and dams, and design of new inland waterway navigation systems. Overall, our US federal work was about 18% of our overall business in the first quarter. In The United States, our state and local markets continue to be very strong. With a 10% growth rate driven by municipal water treatment and digital water modernization, especially in the water stress regions of Texas, Florida, California, and Colorado, which Roger Argus will speak more to here in just a few moments. Our US commercial work was actually down slightly but this is pretty much as we expected. It was driven by reductions in renewable energy work this 2026 compared to a very strong renewable energy practice that we had a year ago. This reduction in our renewable energy work was partially offset by growth in high voltage transmission and permitting and engineering work that we're doing here in The US. Our international work was 48% of our overall business or our overall revenues or net revenues, and it grew at a 13% rate during the quarter. International growth included strong increases in The United Kingdom, in Ireland, as I've mentioned earlier, primarily around the water businesses. We also saw growth in our Canadian infrastructure programs, which we see strengthening really all across Canada. And has been one of the strong lights for us. And, actually, in improving business in our Australia activities, where we've actually saw the reductions of bait during the first quarter. Now like to discuss our backlog, which held steady during a strong revenue quarter that included I've mentioned a few times, a US federal government shutdown. Overall, we see the quality of our backlog much higher than before as measured by the proportion of front-end work that we have embedded in our backlog which also brings higher embedded margins. You can imagine, we did see a slowdown in our US federal client orders in the first quarter due to the government shutdown that began on October 1 and continued for the first six weeks of the fiscal year. And even with the federal government reopening on November 12, the start-up for the government was still pretty slow because it started up in November right before Thanksgiving. And continued through the holiday season. So we never saw it fully return to a level that we would have either expected or hoped for. While new project orders from the US government were slow in the first quarter, new contract awards task orders, and project start-ups were very strong, our US state and local clients. Commercial clients, international clients, collectively resulting in an overall stable pretty flat backlog from what we saw from the first quarter of last year. As we look forward, we expect that with more clarity on US federal budgets and appropriations, the pace of US federal orders will increase beginning late in the second quarter and continuing through the second half of our fiscal year. Now I'd like to turn the presentation over to Steve Burdick, our Chief Financial Officer, to present more details on our financials for the first quarter. Steve Burdick: Yes. Thank you, Dan. I'd like to now discuss an update of our reported first quarter fiscal 2026 results. Working capital, cash flows, and capital allocation. So as Dan just provided in our management analysis, our market-leading focus on front-end consulting and design for water environmental projects are carrying higher margins across all of our end markets. As such, even as the first quarter revenue was down from last year due to the decrease in revenue from our USA customer and virtually no revenues from hurricane disasters this year compared to last year, our operating income increased significantly and EBITDA on net revenue for the quarter increased by 140 basis points to 14.2% in the 2026. Now excluding our USAID and Department of State activities in both periods, then our margin was up about 80 basis points. As a result of our ability to enhance our profit margins, we were able to increase EPS over last year. As the $0.40 reported and the $0.35 as adjusted came in better due to the outperformance in the growth of our international business. Can find a reconciliation of with the divestiture and earn out gains in the appendix of this presentation and in our Reg G reconciliation. Now regarding our working capital, cash flows generated from operations in the first quarter were $72 million which represents an improvement of $59 million over fiscal 2025. Excluding the impacts of USAA and Department of State business, our focus on working capital and cash flows has resulted in our DSO reflecting an industry-leading standard of fifty-one days. Which is the lowest this key metric has been in over ten years. Now this lower DSO metric provides significant insight into the core business as it reflects the outstanding work that our project managers lead relative to higher quality projects, and highly satisfied clients in our broad portfolio across all of our end markets, and geographies. Our net debt amounted to about $565 million and the net debt on EBITDA was at a leverage of 0.86 times, which is 20% lower as compared to our leverage one year ago. Now as we continue to execute on high-quality operating results, with increasing margins, operating cash flows in excess of net income, and lower working capital, we will continue to provide higher returns for shareholders and improve our industry-leading return on capital employed. For those following along in the presentation, I wanted to share a bit of our recent historical results relative to our net leverage and our current borrowing capacity. As I just reviewed, our strong balance sheet and healthy cash flows we've continued to bring down our leverage from a high point when our net debt stood at a over 2x back in the 2023 when we acquired our As of the '26, our net debt is less than the low end of our target range and this provides us significant room to use our balance sheet for investing in growth, and providing for higher returns to shareholders. For example, we could lever up to take on an additional $2 billion in debt capacity for larger acquisitions. With that perspective in mind, I'd like to now present our capital allocation strategy and overview. We have a very strong and healthy balance sheet, and our operating cash flow was over $500 million for the trailing twelve-month period. Our balance sheet and cash flows provide us with significant available liquidity as we have revised our capital structure in the last year to take advantage of the credit market to support our strategic growth priorities. Roger will discuss our strategic growth areas later in this presentation. But I do want to point out that we have a significant amount of liquidity available to invest in organic and acquisitive growth priorities in order to take advantage of these key business opportunities. These opportunities include technology and automation, which continue to provide us a dominant position in the market and for acquisitions of technical leaders focused on defense such as HALVIC in The US, and Providence in Australia. Now regarding our dividend program, I'm pleased to announce that our board of directors approved the quarterly cash dividend which is a 12% increase year over year to be paid in the second quarter. This is our forty-seventh consecutive quarterly dividend and the increased dividend is in line with our practice of annual double-digit increases in the amounts paid. Based on the lower net leverage, we've continued our stock buyback program this year, in the 2026, we bought back an additional $50 million. We do have $548 million available from stock buyback plans that have been approved by our board as part of our capital allocation strategy. You know, overall, I'm very pleased to share these really strong results for the start of 2026. Which has enabled us to increase shareholder returns. And since the 2023, when we completed the acquisition of RPS, We have increased our annual dividends every quarter and distributed a total of $180 million. We increased our stock buybacks and repurchased a total of $300 million. And we completed several accretive acquisitions investing a total of $400 million. And we did this all while deleveraging our balance sheet and moving our net debt on EBITDA from more than two times to less than one times. I wanna thank you all for your support, and I will now hand the call over to Roger to discuss Tetra Tech, Inc.'s future opportunities for 2026 and beyond. Roger Argus: Thank you, Steve. 85% of Tetra Tech, Inc.'s business is to provide water, environmental-related services for our government and commercial clients. Today, I'd like to highlight some of the key market drivers for our municipal water and defense business globally. In The US, our clients continue to invest in water infrastructure to meet long-term demand and to protect from droughts and contamination. Since last week, New York State announced a $3.75 billion investment in statewide water infrastructure programs. And today, Tetra Tech, Inc. is providing front-end water services in support of more than $22 billion in water and wastewater capital expenditures. Programs. Our services begin at the earliest stages of the program with planning, alternative analysis, digital automation assessment, and progress to first-of-a-kind designs to optimize water supply and wastewater treatment systems. One of the new emerging growth areas in municipal water is Colorado, where they are facing widespread concerns over water supplies. We are working with our clients in the region to investigate high-end alternatives to transform formerly unusable source water into long-term supply. Digital automation provides another avenue for increasing efficiency water delivery. In Texas, we are working with the Coastal Water Authority to optimize water systems that today deliver water to more than 2 million residents in the region. In The UK, we are seeing a continued ramp-up in water investments and contracts supporting the AMP gate cycle. As well as increased investments in Ireland and The Netherlands, In fact, Irish Water has recently doubled their projected investments to €11.8 billion. The front-end services we provide throughout the region include modernizing water supply systems, and protecting water quality. As noted on the slide, we've added new contracts with four UK water utilities to provide these services. And in The Netherlands, were awarded a contract to support The Netherlands Waxwatterstadt framework cooperative agreements in modernizing their critical water management infrastructure. We also provide our clients with software to advance their programs. In The US and internationally, our CSoft subscription software is used by water utilities to optimize water systems to protect water quality. And in The UK, our WaterNet software is widely adopted to manage water systems and reduce leakage. A high priority for watery fillers utilities under AMP eight. During our last earnings call, I highlighted the increased funding levels for defense in The US, UK, and Australia. These funding increases will be used to expand and modernize defense facilities, including strengthening coastal resiliency and flood protection, as well as expanding port facilities and infrastructure modernization. We continue to expand our contract capacity for coastal resiliency for programs in The US, UK, and Australia. We were recently selected for a $48 million single award contract as part of the Texas Coastal Protection Program to help develop what will be one of the largest surge barriers in the world. Other recent awards in The US include contracts with Army Corps Baltimore and Portland districts, which will be used to support critical coastal infrastructure design inland waterway upgrades, and port expansions. And just after the quarter, we announced the addition of Halvik. Further expanding our high-end consulting services to US defense programs. Their data analytics and AI capabilities will expand our resources to support the optimization of infrastructure facilities and resource management systems. In The UK, we are seeing increased budgets and expanding programs to address coastal protection and maritime facilities. Most recently, The UK announced a new £4 billion program to fund the modernization of ports. In Australia, our defense practice has been awarded two new programs. Both of these awards support extensive maritime upgrades and coastal zone management in Western Australia. After the first quarter, we also announced the definitive agreement to acquire Providence. A high-end advisory firm specializing in supporting Australian defense programs. Their advisory services complement our existing advisory and program management expertise. And brings us new contract capacity and new clients. In summary, we are very excited about the opportunities these major market drivers and recent acquisitions present. I would now like to provide an overview of our outlook for FY 2026 by customer. Each of our customer sectors have growth drivers directly aligned to Tetra Tech, Inc.'s strengths. International growth is forecasted to have a 5% to 10% rate. This growth is supported by the water programs in The UK and Ireland, as well as high-priority defense spending in The UK and Australia. We are also seeing expanding investment in Canadian infrastructure and some improvement in Australian markets fueled by mining and infrastructure. US commercial is forecasted to grow at a five to 10% rate, supported by water demand for data centers and advanced manufacturing. And growth in The US power-related advisory consulting and engineering services. US state and local is forecasted to grow at 10 to 15%. Supported by increasing investments by municipalities in water supplies expansion and upgrades, and new initiatives for digital water automation. US Federal was forecasted to grow at five to 10% rate driven by higher spending and priorities focused on defense and critical water infrastructure. I would now like to turn the presentation back to Dan to present our increased guidance for the second quarter and FY 2026. Dan Batrack: Thank you very much, Roger. As Roger said indicated, I'd like to present our guidance for the second quarter and our updated guidance for the entirety of fiscal year 2026. Our guidance is as follows. For the second quarter, our guidance for net revenue is for a range of $975 million to $1.025 billion. With an associated adjusted earnings per share of $0.30 to $0.33. For the entire year, our updated and increased guidance for net revenue is for a range of $4.15 billion to $4.3 billion with an associated adjusted earnings per share of $1.46 to $1.56. I will note, if you're following along on the webcast, the note on the right portion of the page. This does impute or calculate to the midpoint of the guidance range of a 9% increase in net revenue for the entirety of fiscal year 2026 and an 80 basis point expansion of EBITDA margins. For the entirety of the year. Some of the assumptions included in this guidance, both for the second quarter and for the entirety of the year, is that it does include intangible amortization of $34 million. It does include depreciation of $25 million for the year. It does include interest expense of $34 million, a tax rate of 27.5%, We do estimate at this time a 263 million average diluted shares outstanding. And as in the past, it does exclude this guidance for the second quarter and the year. It does exclude contributions from future acquisitions. And it does include Providence. That was just mentioned by Roger. We have signed a definitive agreement, and we do anticipate it will close toward the end of the second quarter. We'll update our guidance as we move forward. And I will note, and you'll see it in the reconciliation tables, referenced by our Chief Financial Officer, that this guidance does include the impact from the current disposition and less any gain on the sale. With that, I'd like to move to close our prepared remarks with stating in summary we had a really good first quarter and an excellent beginning to our 2026 fiscal year. And Tetra Tech, Inc.'s high-end consulting for water and environmental services continues to have strong demand and resilience through this rapidly changing geopolitical and economic landscape that we have today. Leading with science approach to addressing water, and environment priorities is well aligned with the long-term demand here in The United States and really all around the globe and internationally. And with our strong balance sheet, which I think Steve did a great job of presenting today, Tetra Tech, Inc. is in an excellent financial position to invest in acquisitions to further advance our strategies and to move us and to continue moving our leadership in the industries that we're competing. And with that, Diego, I'd like to open the call up for questions. Operator: Thank you. The question and answer session will begin now. Please be aware that there will be a thirty-second pause in our webcast to allow for buffering. At this time, audio participants are invited to submit their questions. Please remember to mute the audio function on your computer before you speak. If you are using a speakerphone, please pick up the handset. Before pressing any numbers. If you would like to ask a question, press star 1 on your touch-tone phone. The first question comes from Tim Mulrooney with William Blair. Please state your question. Tim Mulrooney: Dan, Roger, and Steve, good morning. Good morning. I wanted to ask about your federal business first. You know, it looks like it grew 7% excluding the Department of State work. Pretty good, I think. Considering the government shutdown and kind of right in line with what you're targeting for the year. So was curious if you could just talk a little more detail about some of the areas where you are seeing strength. That's helping drive that performance. Dan Batrack: That's a good question. I would say that was an area that we were extremely focused on coming into our first quarter. Maybe as I to describe the first quarter, maybe I'll just reflect just a little bit. Notice that in a you may have noticed in fiscal year 2025, we had an entire series of very large wins with the US Army Corps of Engineers. In fact, I think we had something in the order of one to two dozen. Very large awards that actually saw task orders come out late in 2025. So the months of August and September, and they really continued through our first quarter, which was October, November, and even December. We did see the shutdown or the likelihood of it coming into the quarter with the US federal government. It was somewhat telegraphed or indicated that that was a possibility we work very closely with our clients particularly with the Department of Defense, the US Army Corps of Engineers, to have task orders and projects put in place that would carry us through the first quarter. And we felt we that was that was successful for, I would say, a little over thirty days. We were really unimpacted for really most of our programs, but I'd say most notably, we did a good job with our clients anticipating authorizations that we carry through the first quarter. So what sustained that 7% growth? Was one, advanced planning. We have seen a shutdown time or two in the past. And two, working very closely with our clients to have critical programs that really would save the government a lot of expense without having to go through a demobilization and restart ups. So it was actually financially in the best interest of our clients. And actually supported that 7% growth for the first quarter. The primary driver was for the US Army Corps of Engineers, which has now become the company's largest client. And, of course, that shows up in US Federal, and that was really the underpinning for the 7% growth in the quarter. Tim Mulrooney: That's good extra color. Thank you, Dan. I assume many of those programs will be ongoing through throughout fiscal 2026. But I do actually just wanna pivot to your international business, which continues to accelerate. It's obviously very strong this quarter. You touched on it in your prepared remarks, but I was hoping you could walk through each of your three main geographies I just talked about where you're seeing traction I mean, how much of that growth is being driven by strength in The UK versus maybe getting more track in Canada or seeing more of a stronger recovery in Australia? Just any detail there. Thank you. Dan Batrack: Well, I'm glad you asked for the three of the three primary international markets for us because that is how we look at it here at Tetra Tech, Inc. The area that has been the strongest going back for the more than the last year, year and a half, has been The United Kingdom, And we've traditionally have said the European Union, but really it's been primarily Ireland. So I'll call it The UK and Ireland. Those programs have been very strong for us. Growth has been well into the double digits. It's what's driven the numbers in the past. In fact, I have made comments when you've seen our international growth at five, six, 7%. My comments have been The UK and Ireland are being underrepresented or unrecognized to the public with respect to their contributions because they've been well into the double digits, and they continue to be. And, of course, you've heard in my prepared remarks I think I hope I didn't say it too many times, I've driven by large water programs Roger spoke at them. I've spoke with them. It's certainly been a common theme now for many quarters. So those two are double digit. We have great visibility, good backlog, and they're really in many instances, first of the kind programs for the priority. On the asset management program or the AMP eight program in the in The UK and similar programs in Ireland. So I would say if you that's the let me just say that's the hot or that's the the biggest up. Driving it. Canada, has actually done quite well for us. There was a little bit of a and I don't wanna call it a stumble, but a little bit of a pause during the roughly a year ago During the initial tariff discussions between The US and Canada that caused, I would say, a fair amount of disruption. In Canada, we saw those growth rates come down to sort of middle to just slightly below that growth, still growing. Still quite profitable. But I'm very impressed with what Canada's done with respect to responding for alternative trading continue negotiating with The US, and investing a very large committed amount for infrastructure to commit to ports, harbors, I've seen recently, there's a significant investment coming out of the Canadian government both for their defense and civil agencies across the Arctic. Of course, Greenland being in the topic you know, over the past few months. Has taken much more discussion with respect to national security of North America and much of it's being gonna be directed toward that area. Is the entire Arctic interface on the coastal area. Where we have a very large presence, and we've actually seen some early planning work coming out of that. And so that's been, I would say, contributing well. It's sort of in the middle to upper single digits. Not quite where The UK and Ireland are, but I would say very strong. In the upper end of the range that we've established. And Australia, you've heard we're words we're using like recovery, strengthening, I will say that it's been difficult. And not just for Tetra Tech, Inc. I've I have looked at other consulting and engineering firms, and it's been you know, had the had their own challenges across the Australian and New Zealand activities. I would say a year ago, we were looking at sort of a minus 15% type number. So it was really, offsetting a lot of the strength in The UK, Ireland, and even a bit of Canada. We've seen that as predicted. It actually come back. Now I wouldn't say we're in a growth mode there yet. But going from minus 15 to zero being flat feels pretty good. Now we may not be in the sunshine yet, but we're headed there. When you go from minus 15 to zero, one, I like the trend. And set it the right way. And two, it's now actually not a headwind. And so if you take those altogether, that's what where we put for the quarter. I think we're gonna see a similar and improving performance out of Australia. I expect Canada is gonna stay where it's at and maybe improve a bit more. And we don't have an expectation that we're gonna be running I'm not gonna call it red hot, but at really high levels. Out of UK and Ireland because these much higher performance numbers will annualize, and you'll still see nice growth. But it should put us in a good position for performing well within that five to 10 growth rates that we forecasted that Roger presented just a few moments ago for international. I hope that's not too much detail, Tim. Tim Mulrooney: No, Dan. I could talk to you all day about this. I want more detail. Wanna learn more about what's happening in Canada. That sounds like a lot of exciting opportunities. I mean, I guess the in the Arctic, is that what what kind of work would you be doing there? It's is that, like, work around with the ports and harbors and export terminals? Or what what what kinda sorry. I know this is a third question. I'm only supposed to ask two, but I'm just very curious. Dan Batrack: Yeah. I'll just make a comment. I've said this before. I have to go back a few years in my career. My first year working with Tetra Tech, Inc. I worked in the Arctic. That was my first two years as an employee of Tetra Tech, Inc. I was mostly on the Alaska Arctic, but it went over to the Canadian as far as But there are no there are no ports and harbors for navigable waterways for refueling or anything across the Arctic. Tim Mulrooney: Anywhere. Dan Batrack: You can go ashore a little bit in a skiff or something, but this will actually be planning winter roads that will go up to the North Coast. By the way, the ice road truckers a television series with highlights Tetra Tech, Inc.'s Ice Road clearance work. That's the work we do on a geotech work. So if you see very closely some of those floods, you'll see Tetra Tech, Inc. or our field divisions' logos there. So this will be providing access roads up to the North and then building out ports and harbors and infrastructure facilities to allow navigational support across the Canadian and Alaskan Arctic. That's the type of work we'll be doing. And it's not just for civil. Of course, it's for trading routes. But it's also become if you listen to the news recently, concerns regarding threats in the Arctic. Regarding naval facilities. And so all of a sudden, even in the last thirty days, we've seen a Canadian put more priority on defense facilities across the Arctic. And other than the defense early warning systems, the early dew line sites, there's nothing up there, and that was all air fly in. So all of this build out, I think, is dead center for Tetra Tech, Inc. And has left me pretty bullish on Canada. Tim Mulrooney: Sounds like some very interesting opportunities. Thank you for all the detail. Operator: And your next question comes from Sabahat Khan with RBC Capital Markets. Please state your question. Sabahat Khan: Great. Thanks, and good morning. Maybe just taking that commentary you just shared on the setup across the various regions and know, how have you reflected the range of potential outcomes within your guidance? It sounds like know, at the very least, some of the markets are stabilizing, others might be accelerating. But just know, if you think about the range you've provided for full year revenue and earnings, you know, what have you reflected in the those assumptions across the range? Maybe just to bring all that together. Next. Dan Batrack: Well, I would say mid midpoint. Which I'm pleased to to say is at at the nine that you saw on the revenue growth. Would assume the roughly the midpoints of the growth rates that Roger presented in each of our key four client end markets. So and I think that's about what we see. Now what would take us to the low end? Is obviously our guidance isn't a single point, it's a range. But we've not what we it would be embedded in the low point. What could cause it to be at the low end of that? Well, I regret to say that it's still possible we'll have a shutdown here within the next few days. We still don't have a bill passed. Although I will say our guidance has contemplated it's certainly less than our range in Q2 as I speak to you today. That if there's a shutdown, it would take us to the lower end. I think the shutdown, if it does happen, will only be a partial shutdown. I'm pleased to say in the past few weeks, we've actually had appropriations signed off on a number of areas. So even though it's been impacted materially, EPA has been funded. On out through the year. A number of others have been funded out through the year. The ones that have not been funded are defense, and a few others, and we think that that if there's a shutdown, it would only be partial. And much of the partial is not even for areas that we work in. So homeland security and others are really not affected by our our client set. The areas we do do for work for defense are often considered essential services. And so even if they do shut down, we'll still remain remain at our post and at work. But, nevertheless, I would say in things that would take us to low end, could be a shutdown or any other major disruption. From this administration, whether it's a shutdown or I'd say continued significant volatility in things like tariffs or trading or things that actually are causing slowdown of decisions even on the commercial. We see little impact on our state and local with respect to these federal activities. And little on international. But still, that represents the low end. On the high end, it would be we could have some bipartisan support. Now I know that may seem like a like a trip to Mars tomorrow, but but, hey. It's it is what we're hoping for. It is what we're expecting. And any type of bipartisan support on any of these large clients would put us, I think, toward the toward the upper end. I think that would help accelerate our commercial work with respect to reshoring, I think it would help certainly with visibility that we expect coming in the year for federal government. State and local, like, expect to continue. And by the way, state and local has actually been funded from the federal government at a relatively full level I know it's been an area of speculation and discussion that federal funding to state and local would be minimized or otherwise reduced. We've not seen that. In fact, it's really come out at a at a full level. And so and that includes state revolving funding includes WIFIA or the water infrastructure funding avenue. So any of those pickups, I think, would take us to the high end. And while we're not counting on it, we do have I don't wanna use it to call it a wild card. But we do have a card in our hand that continues to see funding. And it was one of the items that drove us well over the top end of our own guidance. Which is funding on US state department work and that specifically means Ukraine. So it is possible that that could actually see more work on the power engineering side, which is what we do there. That could actually take it and drive it to the upper end or even higher. Sabahat Khan: Thanks very much for that color. And then a bit of discussion on this call in your slide deck about the balance sheet capacity, the focus on m and a. If you can maybe just talk about whether there's maybe a bit more of a enhanced focus on the inorganic opportunities? Is your sort of new role that you're transitioning to maybe a bit focused on that? Maybe just talk us through the views on M and A type and size of assets you might be interested in, you know, your potential involvement on sort of the strategic stuff, I mean, you're in the role that you're trying to to. Thanks so much. Dan Batrack: Yeah. And that's a that's a good question, Sabahat. So Steve has generated a bank account for me, the checkbook. And will say, this would be the last call that I'll be presenting as the executive officer, CEO responsible for day-to-day operations for the company. And strategy and vision and direction. I personally wanna make just a brief comment on this through my journey starting here as a as a field technician and field engineer to my role today I've never felt it as a chore or an obligation to work on the details of the project. Frankly, that's my first love. If I can go out on a project site or meet with a client, I still call and talk to individuals on a daily basis. And we'll continue to do that up until February 19, our shareholders meeting. I will say that that level of extreme detail in the day-to-day operations of the company I am transitioning to Roger. And Roger's been doing much of that for a while now. And what I'm hoping to do then is through my tenure in this role, which is now in its twenty-first year, I actually do have a lot of colleagues and friends in the industry from teaming partners and competitors even individuals that grew up in similar positions as I did, that are now CEOs and chairman of other key companies. And I hold many of them in the highest regard and I actually would like to spend more of my time on what I would consider needle needle moving I'm trying not to use the word big game hunting. It's not a predatory move, but how we can actually partner with some of our biggest peers out in the market to change the market by them joining Tetra Tech, Inc. And finding things that finding combinations that are good under strategy that will help transform this industry that will make Tetra Tech, Inc. and our partners better than ever and actually set a new high bar that nobody's envisioned yet. And that's what I'm gonna focus my time on. And Steve's establishment of by the way, the $2 billion is what we can go essentially get tomorrow with just within our revolver. The actual ceiling is substantially higher. If you begin considering access to equity and other financing means that are available to Tetra Tech, Inc. And so I wanna spend my time actually more on vision and direction in combinations with other partners out there that will help transform this industry. And I I'm excited about it. I haven't had as much time to spend in that area. As I think I could or should have. Nobody does everything perfect all the time. And I would think that acquisitions that have made a difference for Tetra Tech, Inc., like coffee and white young green, WYG, and RPS. Would hope would only be the beginning of what we can see in our future. Sabahat Khan: Great. Thanks very much for that, and best of luck. Dan Batrack: Hey. Thanks, Sabahat. Operator: Your next question comes from Sangita Jain with KeyBanc Capital Markets. Please state your question. Sangita Jain: Hi. Good morning. Thank you for taking my questions. So Dan, I have to follow-up on that M and A discussion that you just had. As Steve pointed out, you've rarely ever gone above, like, two turns even with RPS. So four seems very high, I just wanna understand what type of opportunity would take you with would make you feel comfortable going that high And are we thinking a single opportunity that's $2 billion or a sequence of such transactions that takes you up to four times? Dan Batrack: Well, I think it could be either. Although, I would say, generally speaking, I anticipate something that would take us up to the four a leverage of four would be for something that is larger and actually required more of a, you know, more capital available. I will say that if you begin thinking about two, it is interesting. Most of the opportunities that we've identified are sourced through our Tetra Tech, Inc. teaming partners, subcontractors, JV partners. And I think that we have well within the one to two the ability to continue with the bolt-ons that we've been doing. So we've targeted Steve specifically targeted in our Investor Day of May 2024, a 45% revenue contribution which we can do that through m and a and really stay at a one or even below. I think we've talked about because of the USAID removal from our portfolio, Again, not because of anything we've done, but we could take that number and move it up to essentially double that, up to six, seven, even 8%. And still be within the one to two. What I'm talking about what we're talking about is something that would be strategic and actually help change the direction and, frankly, valuation for our shareholders. And I would expect it to be accretive. And anytime we would get anywhere toward the upper end of four, I think you would see it very similar to Steve's chart. During the prepared remarks that we deleverage quite quickly. So it's not a new a new location that we would reside for very long. It is something we could do very easily with almost no time no no time expended in that. Whereas if you're talking about a lower a lower leverage, now you're talking about it seems to be pretty common in the industry, but not with Tetra Tech, Inc. We haven't diluted our shareholders. At all. We've done many, many different acquisitions, including the ones up toward a billion dollars in annual revenue and not issued any equity or diluted our shareholders. And we brought the leverage down. So I would expect the scenario that Steve had outlined as presentation is simply how we would use cash, which is the lowest cost of capital for our shareholders particularly at the interest rates that exist today. So no, it's not turning up a lot more small ones. I think the small ones will continue as you've seen. And I'm glad to I'm glad to report that since our last investor call, was don't know, just a little over sixty days ago because the last call was the end of our fiscal year. So it wasn't really that long ago. We've announced two acquisitions. And I think some have asked well, do you actually have anything in play? And said, we'll announce them when they're there. But I'm glad to announce Halvik at 600 people. You've got Providence at just over a 100 people. So those fit right in our numbers that we've talked about between a 100 and a thousand people. Expect that type of cadence to continue. But that is not what's gonna drive us up to the four. It would be something more material I'm not I don't wanna go so far as to say transformational, but I'll use the word something more material. Sangita Jain: Got it. Helpful. And then on the Havelock and Providence acquisitions, on your cash flow statement, I see that you also divested some assets. So I just kinda wanna understand what you sold if there was any revenue associated with that sale and what's the purchase price for those two transactions? Okay. Thank you. Steve Burdick: Yes. So in the in the first quarter, as as we announced back in, you know, in the fourth quarter, we held Purcell or or we had Purcell Norway operation that came to us with the RPS acquisition. And we determined that it was non-core, and really didn't fit with the rest of Tetra Tech, Inc. In any meaningful way. So we sold our Norway operation in you know, early December. And that's that's what you see in terms of what what's sitting on the cash flow statement. Dan Batrack: Yeah. Just make one comment on that, Sangita. As we see it, that was closed right before Christmas. I'll also make a note that our backlog that you saw was down 1.8% year over year, also included are taking out the backlog that was included in the, Norway operation. So it's not all apples and apples. That reduction wasn't if you actually added that in for a fair comparison from a year ago because our Norwe operation was included in it last year. So but the if you take a look at what Halvik, which came in in January, mid to late January, and you take a look at the Norwegian operations with respect to to contribute revenue, yes. And in fact, the annual numbers are pretty close. So we see that the withdraw of our Norwegian operation and the put of Halvik roughly offset each other. So don't add too much into our consensus number for Halvik because we do have the offset for Norway. Sangita Jain: Got it. Thank you. Thank you, Dan. Dan Batrack: You're welcome, Sangita. Thanks. Operator: Your next question comes from Andrew Wittmann with Baird. Please state your question. Andrew Wittmann: Okay, great. Thanks. Roger, congratulations on the promotion. And, Dan, excuse me, it's been a pleasure. I know you're not going far, but since we won't have you on this call, you will be missed. So my question, I guess, is is is a clarification kind of building off the last question. My first impression here was that your guidance on an organic basis was largely unchanged. My thought was that, you know and you, you know, you beat the quarter or it was over the you beat the revenue, the guidance, you beat the EPS guidance, and it kinda felt like you passed that through to the year, but the balance of the year kinda felt unchanged was my original assessment. I don't know if that's right or wrong, so I was hoping you could address that. I thought, you know, the the Helvec acquisition was explained most of the revenue delta beyond the the beat in the quarter, but but maybe Steve, you wanna address that one. And if if I'm wrong here, please do clarify. Any other contributors to the, or the significance of the contributor of, Ukraine would also be interesting to know, at least its impact on the quarter and how you're thinking about that. In your consideration for guidance. Steve Burdick: You got that about right, Andy. It's our revised guidance for the year, which you know, increased in terms of net revenue and EPS. Did take into account our Q1 beat and that's and that's the adjusted EPS, not not the 40¢ with the, you know, the onetime gains. The sale and and other stuff. So the, you know, the net revenue does reflect our Q1 b. And as Dan talked about, some of that came from, you know, more USA work, but also from more from our international business. And then on a go forward basis, we did account for a little bit of that increase from public a little bit, but as Dan also discussed, you know, we we had a disposition that that took our net revenue down a little bit from the sale of our Norway operation. So know, I think what you see in terms of our guidance for net revenue and EPS is higher than what we originally came out with. And but within that range, pretty much encompasses a lot of the things that Dan was talking about. Earlier and and then this q and a with some of the different puts and takes that were still need to consider for the rest of this year. Andrew Wittmann: Okay. Great. Then just for my follow-up, I wanted to ask about the opportunities in really three submarkets. So, one question, three parts. But these are all topical areas that I think the investment community is a lot about today. So the the the things that I was hoping you could address Dan, would be nuclear permitting. We saw that there was a a press release that you announced, that came out for, helping permit nukes along with Westinghouse, kind of a terms of agreement there. Just wondering kind of time frame, opportunity set there. Been lots of talk you guys have been a a very good provider for the FAA over the years. And, obviously, with the modernization that's going on out there, I was just wondering if if Tetra Tech, Inc. can you think that Tetra Tech, Inc. has a credible chance at a at a role as a subcontractor now that the prime has been announced there. And then also, I think people are wondering about the the Shield contract. That went out there and and what kind of scope and role are contract, please. Dan Batrack: Well, fortunately, Andy, I'm quite familiar with all three of those contracts. So, yeah, the first one, let me just clarify clarify. Now that was a press release sent, not out by us, but by by by Westinghouse. That was not Tetra Tech, Inc. press release at all. Now we're very flattered that they included us prominently in this. This has worked for Canada. It's a memorandum of an MOU between us and Westinghouse. Like, there's a couple other parties also part of this. And this is for really a continuation, including new build for, nuclear power generation as part of clean energy in Canada. And it's in Ontario. We've we've had a great relationship with the actual power generation owners, like the the the Bruce and OPG and others up there. And I think this is gonna continue what we've been doing because we do do the engineering, not just the permitting, but we actually do the engineering portions for some of the cooling systems and other items with respect to water handling, pumps, valves, and other other items associated with the water movement systems up there. And so this is new activities with respect to new build, and I think it will just continue what we've been doing up there with an incremental upside. So that's what that is. So I would say yes. Don't take a look for don't look for a huge step function. No. We're not gonna go from it's not going to materially change our outlook in 2026. It's going to continue to support our outlook in 2026 and we'll see how it grows even more in '27. FAA, the integrator contract, we were never a prime. We do a lot of work on the communication system. We're very close in the meetings with the integrator. And, of course, where we sit as a technical adviser to the FAA on this type of work. They have committed funds for radar and other hardware and systems that have now been deployed or put in place by the FAA through the integrator contract. It does take time to produce those. We are we would be a great choice to actually assist in the implementation and deployment of those. I know we won't be driving the trucks that haul them out to the locations but we will actually be helping with respect to how are they gonna be integrated, how are they gonna be plugged in, so so to speak. How are they going to have power to them? How are you going to have security access to all these facilities? Because we're at all these locations. And in fact, we did some of the rollout of some of the space-based telecommunications systems in Alaska going back about a year ago that were put out as sort of a first trial. That's an example where FAA came directly to us. So it seems to us we're a great choice. We're there. But I think you're not gonna do that until such time as the hardware's available for deployment. And while I'm not we're not familiar with the exact time schedule of that, think that's not a 2026. At least our fiscal year '26 item. We do think it's a good opportunity for 2027. I have been asked, don't you get started today in 2026? And do all of the front-end work so it can be ready to go when it shows up. In '27. We've had those discussions, and you're not gonna do it the way FAA does it, if it's going to be a new day with the reintegrator contract, to somebody who's new to the process. A lot of it becomes just in time planning so that you can be very efficient with respect to your spending. So it's not let's start now nine months in advance or a year in advance. Let's do it as it gets closer to delivery. So I expect that opportunity to be more material for us. Potentially material in numbers too, dollars. But I think it's a 2027 fiscal year item. And finally, the shield. Know, we issued a press release three weeks ago. On the Shield contract. It's a $151 billion I'll call it down payment on what might be a a Golden Dome. There are let me put this in context. The US government has issued these contracts to individuals and companies that could possibly support this activity in any and all areas. And the number of contracts that people hold, the number ranges in excess of two thousand. First of all, is the Tetra Tech, Inc. one of one? No. Are we one of 10? No. We're one of 2,000, and I think it's close to 21 or 2,200. Now the work we would do, and we've done this for the Department of Defense and the government in the past, we frankly are the upfront planners in the environmental permitters. And I would call it overall the environmental stewards of of any plan that might be put in place. Whether or not something's deployed or not, time will tell. But the first thing that would have to be done is if you're going to have remote sensing or remote monitoring or remote locations, It starts with a planning document and where would it be, and is it gonna go across a wetland? Is it gonna go across national park? Does it even have access to it? How would you get there? All of those have environmental impacts both to local communities, state, and federal. And frankly, in some instances with this, even international implications because of these stretch of covering much of North America, there's issues that you would need to have big presence in places like Canada and the North. Sounds like you're talking about Tetra Tech, Inc. So we would do a lot of work, and in fact, I was commenting to somebody here at Tetra Tech, Inc. Our chief engineer here at Tetra Tech, Inc., you can see him on our website, Doctor Bill Brownlee, PhD, Caltech, world-famous civil engineer. He was our program manager back in the nineteen eighties when he led that program. He's still here. I actually did some work on it on a mobile realm garrison program. It was Tetra Tech, Inc.'s biggest contract by far. And it's where we did the environmental assessment, monitoring potential environmental impacts, Nothing ever got deployed. It was enormous contract. And there's a lot of aspects of this program that could be similar. Long before it ever gets deployed. So I think it is something that has to get out of contemplation. But if it moves forward, I think Tetra Tech, Inc. could be from an environmental stewardship perspective, one of the first to participate in the program. Andrew Wittmann: Thank you very much. Dan Batrack: And offline, a few I can get a lot more detail on all three. I don't know. I think I probably went too long on those three already. So but thank you, Andy. Operator: Thank you. And your next question comes from Michael Dudas with Vertical Research Partners. Please state your question. Michael Dudas: Good morning, gentlemen. And, Dan, what a historic run you've forth. Congratulations. Dan Batrack: Thank you very much, Michael. Thank you. Michael Dudas: And plus, this is your last call, Dan. You can pretty talk for as much as you'd like. I mean, who's gonna who's gonna what to do. Right? Dan Batrack: Our CFO's gonna pull the plug on me. Michael Dudas: Oh, he's that kind of guy right now. Thank you. Yeah. Just quickly, mate, mate, just to follow-up on your discussion on M and A and capital allocation moving forward. You know, talking about all this capacity and all the opportunities, the pipeline seems, you know, pretty full, and there's a lot of chances. As you think about your business mix of revenues with 45% international and the mix you have in the other three customer bases, And and also in your exposure in the water and water-related areas, as you evolve the next few years, are those gonna change dramatically? Do you feel like you need less or more international exposure? Does it are you agnostic towards it? And and also on on your exposure with the growing global TAM of water, Are there other areas you wanna be more and less involved in? Just wanna get a sense of that as we monitor your your actions over the next several quarters. Dan Batrack: Yeah. That's a that's a great question. Will first of all start with the word agnostic. I am not overly partial to US over The UK, over Canada, over Us. Australia, over Ireland or New Zealand. We really wanna follow our clients where their priorities are and where we can make a difference, and we can provide them solutions that nobody else can. And for some of us, the legitimately, there's been so much volatility with the US federal government. Why don't you just go international and get away from the you know, the volatility and the uncertainty that seems to to to have been present including the government shutdown this last quarter, And my comment is it's still the largest client in the world by far. Not not by a little bit by far. So I don't expect and we've been a support. We are agnostic with respect to geographies and, frankly, political parties. We're here to solve the problems for our clients where we're an expert. And our job is to actually further their successes in areas associated with clean water, flood control, clean environment, sustainable infrastructure, and I would add the word resilient. So that it doesn't get knocked down the next fire, flood, tornado, ice storm. That it's unimpacted. And much of the work and and I would tell you our resume when we go there, it's not just our price. Our resume is the Inner Harbor navigational channel that we designed, the largest sea barrier flood barrier The United States has ever constructed and in fact, one of the largest in the world has now withstood a dozen storms including those approaching or equal to the size of Katrina. And protected New Orleans. Our resume is our work product. And that supports everyone in any any of those locations. So if they have it a priority as a government, we wanna work for them. The 45% I know we were 48% this last quarter. International That seems to feel about right. I don't necessarily seeing it going 50%. If in fact, if more funds are put toward that type of work in places like I will call it at this time, the the very large English speaking Commonwealth countries. So Australia, Canada, The UK, Ireland, I know, CU. I will be there to support them. And, frankly, for better outcomes for them, including The United States. So extremely agnostic. We wanna follow our clients who put these as a priority for them. Have funding that will have better outcomes for their communities and their countries. I do think we're gonna stay water. My comment on water's not going out of style. I really believe that. I really, really believe that. You've heard me going back to our investor day 2024 in May, and I talked about these being trends or macro trends that are measured in decades not years. And so any volatility that we would see here we're going to navigate as we have this last year. And but I'll tell you, in the long term, I believe the supply of water, the protection of our coastlines, and the environmental landscape, both for our current citizens and for the children, are gonna be of higher demand than ever before. And for those I would say, I see this administration or I see this given geopolitical decision as deemphasizing it? My comment is just means there's more to clean up and more to provide for tomorrow. So I've had this item on coastal protection all the way back in Katrina when I was in this role. Was can pay me now or you can pay me later. And I prefer that we do the work now to protect our citizens and our communities. But if you don't wanna do it, I'll tell you what. It's still gonna have to be done later. And I'll tell you, well, I'll I don't see a substitute for that at all. So I think we're in the right spot. It builds on a legacy of sixty years now. And one thing for sure about and I am talking too long. But people you're gonna talk to after me are better, brighter, smarter, more energetic, and more forward-looking than I. So the best years of Tetra Tech, Inc. for sure are to come. Michael Dudas: Well said, Dan. Thank you very much. Dan Batrack: Thank you, Michael. Operator: Thank you. This will conclude the Q and A session. I will now turn the conference back over to Dan Batrack, to conclude. Dan Batrack: Well, thank you very much, Diego, and thank you all for attending the call today. Both those that asked questions and that just attended to listen in. Thank you very much for each of the questions from our analysts. You know, they're great questions, and thank you for allowing me to answer them for you today. While I won't be leading this call, you may hear me back on this call in the future. But I am not going anywhere. I'm staying here at Tetra Tech, Inc. as executive chairman. And doing my absolute best to contribute to the success of the future. Of the company. And I'll tell you, could not be in better hands on the day-to-day operations with the exceptional talents that we have in the company including Roger Argus and so frankly, and 25,000 others that are just the best in the industry. And with that, I know we all here at Tetra Tech, Inc. look forward to talking to you again next quarter. And thank you very much. Bye. Operator: Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. All parties may disconnect now.
Operator: Good morning, and welcome to the Parker-Hannifin Corporation's Fiscal 2026 Second Quarter Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the call over to Todd Leombruno, Chief Financial Officer. Please go ahead. Todd Leombruno: Thank you, Katie. Good morning, everyone, and thank you for joining Parker's fiscal year 2026 second quarter earnings release webcast. As Katie said, this is Todd Leombruno, Chief Financial Officer speaking. And with me today is Jenny Parmentier, our Chairman and Chief Executive Officer. We both appreciate your interest in Parker as well as your time today. Before we begin the call, I'd like to call your attention to our disclosures on forward-looking projections and non-GAAP financial measures, that is on Slide 2. Items listed here could cause actual results to vary from our forecast, our press release, this presentation and reconciliations for all non-GAAP measures were released this morning and are available under the Investors section on parker.com. The agenda for the call today has Jenny starting with an overview of our record FY '26 second quarter performance. She then will reiterate the strength of our interconnected technologies. In this quarter, she's going to highlight the distinct value we bring to one of our market verticals. That is the off-highway market. Jenny will also make a few comments on the recently announced agreement to acquire Filtration Group Corporation, and then I'll follow with some details on our strong second quarter financial results. We will both provide some details on increase to our guidance that we released this morning. And then we'll move on to Q&A, and we'll try to address as many questions as possible within an hour. We know it's a busy day to everyone, so we will stick to the 1-hour time slot. Now I call your attention to Slide #3. And Jenny, I'll hand it over to you. Jennifer Parmentier: Thank you, Todd, and thank you to everyone for attending the call today. Q2 was another great quarter where our team and our strategy demonstrated our ability to compound performance. We achieved top quartile safety performance with an 8% reduction in our recordable incident rate. This performance is aligned with our goal to be the safest industrial company in the world. Our team delivered record Q2 sales of $5.2 billion, organic growth of 6.6% and 150 basis points of margin expansion, resulting in 27.1% adjusted segment operating margin. Adjusted earnings per share grew 17%, and cash flow from operations was $1.6 billion. And in the quarter, we announced the acquisition of Filtration Group Corporation. Moving to Slide 4. Many of you on the call today have seen this slide before. Why we win? The Win Strategy is our business system. We have innovative products that solve customer problems. Our application engineers provide the technical expertise that creates a competitive advantage and our distribution network serves global aftermarket and small to mid-sized OEMs. Today, I would like to highlight the interconnected technologies that provide efficient solutions for our customers across all of our market verticals. I'm on Slide 5 now. We have the #1 position in the $145 billion motion and control industry, a growing space where we continue to gain share. These six market verticals represent greater than 90% of the company's revenue. We have a focused portfolio, creating distinct value for our customers. Our powerhouse of interconnected solutions cuts across these market verticals and gives us a clear competitive advantage. 2/3 of our revenue comes from customers who buy four or more technologies, and our growth is focused on faster growing, longer cycle markets and secular trends. Moving to Slide 6. On this slide, I would like to highlight how our interconnect technologies come to life in the off-highway market vertical. Parker is a market-leading provider of highly engineered solutions for equipment used in construction, agriculture and mining applications. Our comprehensive offering of interconnected technologies, deep application expertise and embedded engineering relationships with OEMs are key to our success. We win with innovative and differentiated product technology, subsystems and full system capabilities designed to increase the capability and productivity of our customers. Our global footprint allows for in-region delivery and expertise for OEMs, and our extensive distribution network provides aftermarket support for end users. I'm now on Slide 7. We are making continued progress on the Filtration Group acquisition. Integration planning is underway using our proven integration playbook. We expect to close in 6 to 12 months from our November announcement date. This is a great company with a great culture, and we really look forward to welcoming everyone to the Parker team. The acquisition of Filtration Group adds complementary and proprietary technologies for critical applications, while expanding our presence in life sciences, HVAC and refrigeration and implant industrial market verticals. The combination of Parker Filtration and Filtration group creates one of the largest global industrial filtration businesses and increases Parker Filtration aftermarket sales by 500 basis points. We will leverage our business system, the Win Strategy to achieve approximately $220 million in cost synergies, and we expect this deal to meet our disciplined acquisition criteria of being accretive to organic growth, synergized EBITDA margin, adjusted EPS and cash flow. This strategic transaction continues our investment in high-quality businesses that continue to transform our portfolio, accelerate sales growth, improve profitability and drive shareholder value. Moving to Slide 8. CLARCOR, LORD, Exotic, and Meggitt have been a big part of our transformation. Curtis is still early days, and as I just mentioned, we are very excited about Filtration Group. Over the time period you see on this slide, we have compounded EPS at 16%, and approximately 60% of this has come from the wind strategy and our legacy businesses, while approximately 40% has come from the acquisitions. The acquisition of Filtration Group will continue our track record of accretive acquisitions. I'll turn it back to Todd to review the second quarter highlights. Todd Leombruno: Thank you, Jenny. This was another strong quarter of record performance. I'm on Slide 10, and we'll start with just a summary of the Q2 results. We are proud to have once again set new records for sales, adjusted segment operating margin, EBITDA, net income and EPS. Sales were up 9% versus prior. Organic growth was positive at nearly 7%. Currency was favorable 2%. Acquisitions were favorable by 1.5%, and divestitures were a 1% headwind. Just to note, it's been now 12 months since we've completed those divestitures. This was the last quarter, then we will have a divestiture adjustment going forward. Moving on to margin. Segment operating margin was 27.1%, that is up 150 basis points from prior year. Adjusted EBITDA margin was 27.7%. That's an increase of 90 basis points from prior year. And net income was $980 million. That's 18.9% return on sales, just fantastic ROS performance. And lastly, adjusted earnings per share were $7.65. That's up 17% versus prior year. When you look at the quarter, this was just another quarter in which our team delivered high single-digit sales growth, solid margin expansion. And all of that resulted in mid-teens EPS growth. We do remain confident that we're going to be able to deliver another record fiscal year in 2026. If we move to Slide 11, this just displays the walk on adjusted EPS. You can see it was a clean quarter that delivered that 17% increase in adjusted EPS. Segment operating margin continues to be the main driver of our EPS growth. Dollars increased by $190 million or 16% that added $1.15 of our EPS growth. Share count was $0.16 favorable. That was really driven by the discretionary share repurchases that we completed over the last four quarters. And corporate G&A and income tax were favorable by just $0.1. Other was unfavorable by $0.18, that's really primarily due to foreign currency exchange that happened in the prior year period that did not happen this year. That was a prior period item. And interest is just slightly unfavorable by $0.03, and that is driven by just slightly higher average debt balance that was offset slightly by lower interest rates. The adjusted EPS of $7.65 is a record, and it's really driven by strong growth and great margin expansion. I really commend our team members around the world for just stellar operating performance across the company, and it's a pleasure to be able to share these results. If we go to Slide 12, let's take a look at the segments, starting with orders for the company and very strong. Orders were plus 9% versus prior year. And a positive note is order rates were positive in all of our reported businesses. Backlog increased to a record $11.7 billion. This was another quarter of strong incrementals for the company that created the record margins across the board and that 150 basis points of margin expansion, really nice to see. If we look at North America, sales were approximately $2 billion. Organic growth was positive of 2.5%. That was slightly better than our expectations. The slightly better was driven by strength in off-highway and the aerospace verticals in the North American businesses. Adjusted operating margins reached a record 25.4%. That is up 80 basis points from prior year with incrementals of 52%. And orders in North America took a big jump and increase to plus 7% compared to the prior year. And a notable driver there were a few multiyear aerospace and defense orders within those North American businesses. Nice quarter for the North American businesses. International sales were up to a record $1.5 billion. That's up 12% versus prior year. Organic growth for the quarter was 4.6% in the international businesses. In Asia Pac, organic growth was the strongest at plus 9%. And Europe turned positive in the quarter to plus 2%. We were really glad to see Europe turn positive. And Latin America is just down slightly 3% versus prior year. It was really a positive and see Europe turn to positive organic growth. We were glad for that team to see that finally make the turn. When you look at margins, our record was achieved 26% margins in the international businesses. That's up 190 basis points from prior year. And that margin expansion came from great improvements in productivity and just solid operational execution across all of those businesses. Orders improved in the international businesses plus 6 with positive orders both in Europe and Asia Pac. Nice quarter for the international team. And lastly, Aerospace continues to perform exceptionally well. Sales for the quarter were a record $1.7 billion, that's up 14.5% versus prior year. Organic growth was $13.5 million. That was driven by great strength in the commercial markets, both OEM and aftermarket. Margins are up significantly. Adjusted segment operating margin increased by 200 basis points and reached 30.2% for the Aerospace Systems segment. Again, great productivity. The higher volumes actually helped productivity. In that business. This was another strong quarter of commercial spares and repairs volume, and all of that translated to a fantastic performance on the margin line. Order rates remain impressive in Aerospace at plus 14%. Backlog also increased plus 14% and reached a record $8 billion for Aerospace for the first time in the history of the company. Aerospace and Defense remains robust, and that's really led by the commercial markets. Great performance across all of our businesses, glad to see these results. If we move to Slide 13, you can see our year-to-date cash flow performance, cash flow from operations, $1.6 billion, that's 16% of sales. Free cash flow came in at $1.5 billion, that's 14.2% of sales. Just to note here, in the first half, there's a slight drag from working capital and the timing of some tax payments. We expect that to be a first half only issue. I think everyone knows this, but as a reminder, our free cash flow is second half weighted. We remain committed to free cash flow conversion of greater than 100% for the year, and we'll talk a little bit more in guidance, we are increasing our guidance on cash flow for the year. Okay. That's the details on Q2. And Jenny, I will turn it back over to you on Slide 15 to talk about our increase to guidance. Jennifer Parmentier: Thanks, Todd. This slide shows our updated fiscal year '26 organic sales growth forecast by market vertical. So in Aerospace, we are increasing our forecast from 9.5% to 11% organic growth. We continue to see strength in commercial OEM and aftermarket. Implant Industrial remains the same at positive low single-digit organic growth. Recovery continues while customer CapEx spending does still remain selective. Distributor inventories are stable and our distributors are ordering to their demand. In transportation, our forecast stays the same at mid-single-digit organic decline. Demand challenges persist in both truck and auto which is partially offset with some strength in aftermarket. We are raising our outlook in off-highway from neutral to positive low single digits. This is based on construction and mining growth, while ag remains under pressure. We are maintaining energy at positive low single-digit growth with robust power gen activity offset by upstream oil and gas, which remains soft. And we are maintaining HVAC and refrigeration at positive mid-single-digit growth. We see strength in commercial HVAC, refrigeration, filtration and aftermarket. As a result of these changes, we are increasing our organic sales growth guidance from 4% to 5% at the midpoint. Back to Todd for some more guidance. Todd Leombruno: Okay. Thanks, Jenny. If you turn to Slide 16, you'll see some of the details that we're talking about based on what we've done in the first half, strong orders. We are raising our full year guidance really across the board here. Reported sales are going up to the range of 5.5% to 7.5%, more 6.5% at the midpoint. We expect currency to be a favorable 1.5%. That is based on December 31's spot rates. Previously completed acquisitions and divestitures basically offset each other at 1%. Jenny just mentioned this, but we are increasing organic growth to the range of 4% to 6%. That is 5% at the midpoint. If you look at the businesses, aerospace is being increased to organic growth of 11%. In the Diversified Industrial segment in the North America businesses, we are increasing organic growth to 2.5%. And finally, we are increasing international organic growth to plus 2%. Adjusted segment operating margins, we're raising guidance there by 20 basis points to 27.2% for the full year. That will now be a forecasted increase of 110 basis points versus prior year. And the forecast for incrementals for the full year is 40%, full year incremental. A few other items just to note, corporate G&A remains unchanged at $200 million. Interest expense slightly tweaked down by $5 million. We're now expecting that to be $45 million for the year and other expenses down slightly to $85 million. On tax rate, the guide for the second half is forecasted to be 22.5%. The full year tax rate is expected to be 22.1%. That's with a second half of $22.5 million. And finally, when we look at EPS, we're raising EPS to $30.70 at the midpoint. That's an increase of 12.3% versus prior, and the range on that adjusted EPS is plus or minus $0.30. I mentioned it earlier, but we are raising our full year free cash flow guide to a range of $3.2 billion to $3.6 billion. That is about $3.5 billion at the midpoint, with conversion greater than 100%. Looking specifically at Q3, reported sales are expected to be nearly $5.4 billion. That is approximately 8.5% up. Organic sales growth, we are expecting 5%. Segment operating margins, we are expecting 27% and adjusted EPS for the quarter is expected to be 7.75%. Each one of those is an increase to our prior guide. As usual, additional details can be found in the appendix here, and that is a wrap on our guidance. Jenny, I'll hand it back to you for Slide 17. Jennifer Parmentier: Thanks, Todd. Just a reminder on what drives Parker, safety, engagement and ownership are the foundation of our culture. It's our people and living up to our purpose that drives top quartile performance that allows us to be great generators and deployers of cash. Todd Leombruno: Okay. Katie, we are ready for the Q&A portion of the call, and we'll take first one in queue. Operator: [Operator Instructions] Our first question will come from Jamie Cook with Truist Securities. Jamie Cook: Congratulations on a nice quarter. I guess two questions, Jenny. First, when I look at your technology platforms, if we look at the technology platforms within diversified industrial motion systems, flow processing control and filtration and engineering materials I think it's the first quarter since June of 2023, where you saw positive organic growth across all three technology platforms. So just wondering, do you think that's something specific to Parker-Hannifin, -- do you think it's more a function of the cycle? Just very encouraging signs there. And then I guess my second follow-on question to that is it's the first quarter to that filtration has seen positive growth. Just wondering how you're thinking about that relative to the acquisition that's coming on filtration group signs that you bought that at a bottom? Or is there any reason why they wouldn't be seeing understanding the more aftermarket and a little different end market mix, why they wouldn't be seeing positive momentum there as well. Jennifer Parmentier: Yes. Well, thanks, Jamie. Thanks for the question. So yes, so first of all, we do think that, obviously, you're right, those businesses did see positive organic growth, and it's great to see the teams have worked very hard for that, and they're performing well. I would say that it's a combination of what we're seeing in some of our short-cycle businesses that we've pointed out. While all of them are not returning to positive growth, we did see some nice improvement in off-highway. And then I would say the aerospace business that sits inside of these industrial businesses is performing very well. So to that point, what you said, some of this is specific to Parker and some of it is seeing some of the short-cycle business return. Our distribution did have low single-digit organic growth in the quarter. So we're encouraged by what we see, encouraged by the orders. So I think that's part of it. Your filtration group question was a long one. So I'm going to ask you to repeat that for me. Jamie Cook: No. Sorry, my comment was just that interesting timing may be a complement that it's the first quarter we've seen positive growth in your filtration group business. Wondering that -- what that implies for the acquisition of the Filtration Group, implying that potentially you bought that business at a cyclical bottom, understanding there's different in mix because they're aftermarket. I'm just wondering there's differences between the business, but wouldn't -- could their sales also be improving organically just like we're seeing within your Filtration Group business? Jennifer Parmentier: Yes, we do believe that, that will be the case. Now historically, Filtration Group's organic growth from pre-COVID to now has been mid-single-digit CAGR. So this is higher than Parker's Filtration Group. But many of the areas where we have the complementary technologies in the same markets with some of the same customers that we play, we do see that their growth will be increasing just as it is with ours. So again, we think that this is just a great fit for Parker because of the complementary and proprietary technologies that it adds and because they play in the markets that we know, where we expect to see growth. And again, they have this decentralized structure that's very, very similar to Parker. So we see upside here. Operator: Our next question will come from Andy Kaplowitz with Citigroup. Adam Farley: Jenny, could you give us a little more color on what you're seeing by region? I think Todd's comments around Europe were very interesting. Do you see that sort of turn as durable? And then your partners continue to do very well in APAC. Do you see still a good outlook for that in '26 and beyond? Jennifer Parmentier: Yes. So just let me give you just kind of an overview of some of the market verticals by region. So -- as Todd mentioned, in North America, we're increasing our full year organic growth to 2.5% versus the prior guide of 2%. So again, industrial, aerospace and defense growth is very strong. Gradual in-plant industrial recovery, positive sentiment from our distribution channel, continued quoting activity. As I mentioned, CapEx remained selective. It seems like a lot of -- their customers are prioritizing productivity and automation projects versus large capacity expansion. So we see that increased infrastructure spending will increase in-plant industrial equipment demand in the future. I mentioned transportation is most challenged in auto and truck. Truck OEM recovery, not expected this fiscal year, but we'll benefit from some aftermarket. And again, strength in construction, off-highway construction, while [ ag ] still remains slow. Energy, power gen, very robust. Oil and gas is weak with upstream, but midstream is benefiting from some capital spending. HVAC is coming off of a strong fiscal year '25. Residential is down, but is more than offset with commercial HVAC and refrigeration. So this is what we see for North America. So international, we are increasing full year organic growth to 2%, and that was previously 1%. So they did have a fantastic Q2. This was primarily from some large project shipments that went out, which really helped them. But we are increasing full year FY '26 organic growth for EMEA to low single digits it was flat in our prior guide. Again, we see gradual improvement in transportation there, primarily on the truck side. We see continued strength in mining and energy, both oil and gas and power gen. And then we do see where the proposed stimulus and future defense spending is a long-term positive, but not seeing the impact of that this fiscal year. In Asia Pacific, we're increasing our full year organic growth to positive mid-single digit versus positive low single digit in the prior guide. We're seeing continued strength with electronics and semicon demand. implant orders and shipments. There's some progress there, but it still remains a little bit mixed. We're seeing some mining improvements in China. And I would say that there's still some continued uncertainty from tariffs across these markets. So that's really a kind of a recap of what we're seeing in the region. Adam Farley: Very helpful, Jenny. And then Todd, you've continued to generate over 40% incremental margin. I know you've said you're still sort of guiding at 30% to 35%. But as you look forward, how long before after this good performance, do you say to yourself like you can do over 40%. And when you talk about price versus cost, is it better pricing? Is it execution? What's sort of driving this performance? Todd Leombruno: Andy, thanks for noticing that. I'll tell you, it's not easy. It's a lot of hard work from our team members every day, every week, every month, every quarter. We are really proud to see what they've been able to put up there. We are guiding the second half at 35%. Incrementals are really across the company, that puts the full company to 40% for the full year. We still think that, that's best-in-class when you look at what's going on across the environment. We're really happy to see the industrial businesses pivot to positive organic growth. Those numbers are a little bit muted still. So I think our guide is unchanged when it comes to what we think is best-in-class on incrementals. If you look at these margins, these margins are all-time highs across every business. It is great to see that work, and that's generating these results. Jennifer Parmentier: Yes. Strong operational execution. Todd Leombruno: Yes. It's a line things. I could even give you like a list of the top three because it varies by business, and it depends on what opportunities exist across each and every business. Operator: Our next question will come from Andrew Obin with Bank of America. Andrew Obin: Just a question on international growth, I think you may have answered it, but I think if you sort of do the math, it just seems that sequentially the growth is going to slow down to 2% the midpoint in the third quarter. And then I think the guide sort of implies it stays there in the fourth quarter. And I think you sort of alluded to large projects. just thinking that the comp is similar from second quarter to third quarter, even easier in a 2-year stack, we're being conservative, or is there sort of specific dynamics taking place in international in 3Q or 4Q. Jennifer Parmentier: Yes, Andrew, it was really they did benefit in Q2 from the timing of some large project shipments. And that was primarily power gen and commercial HVAC filtration and that was in EMEA. And that it kind of aligns with some of the choppiness of the orders from the prior year. So those aren't going to repeat in Q3. So we do forecast 2% and that's based on a continued gradual industrial recovery. Todd Leombruno: Andrew, we basically doubled the guide there. We were one, we're now basically two. You look at that from what we thought would happen at the beginning of the year. we're pretty happy with what's going on there. The orders are also very impressive. But like we've kept saying is there are a number of longer cycle businesses that just don't necessarily need to ship in the second half of our fiscal year. We'll see those in the out months. Andrew Obin: And also maybe sort of nitpicking here, but if you sort of back into growth by end market, you had a race for off-highway and aerospace and defense. But then the other segment sort of implies a big jump in the midpoint of the guys just to make the math work. Can you just comment with sort of thinking from plus 10 to sort of [indiscernible] 140. Can you comment on that? What's in the other segment, if I'm doing the math right? Todd Leombruno: Yes. I don't know if I'm following your math there. Andrew, Jenny went through the logic behind the increases that we've seen by market vertical. Obviously, aerospace continues to be stellar. We have a significant amount of aerospace in the industrial businesses. That was a driver, and we bumped up off-highway a bit. Jennifer Parmentier: And one other thing to add, some of what sits in the other, obviously, is electronics, and what you see in there is some data center, which is still less than 1% of our sales, but it's been very strong. It's been some nice growth for us. So that may be part of what you're not seeing in our numbers. Operator: Our next question will come from Joe Ritchie with Goldman Sachs. Joseph Ritchie: So Jenny, great color is always on the end markets. I guess just a broader question. With reshoring and all the investment that's already occurred here in the U.S., like what's your -- I know it's hard to have a crystal ball, but like what's your take on what's happening with implant equipment in the U.S.? And then we'll get the going, what are you guys looking at specifically as kind of leading indicators for the like short-cycle inflection? Jennifer Parmentier: Yes. So we get a lot of intel from distribution. And we continue to say that this is gradual. But the sentiment is still positive. And I've been saying that for quite some time because the distributors do talk a lot about all of the quoting activity. But I would say in the recent conversations, the CapEx remains selective. And the customers are prioritizing productivity and automation projects versus large-scale capacity expansion. And you see that in pockets, and that's why we consider it gradual because you'll see some in different markets. And I think we're going to continue to see this gradual recovery, and we're going to continue to see better numbers in some of these markets that we've talked about. But I don't know that there's just one catalyst to get this short cycle going. It's really, I think, a matter of taking out some of the noise that really doesn't have anything to do with the business, some of the geopolitical noise, tariffs and maybe possibly interest rates as well. Joseph Ritchie: Yes, that makes sense. And then I guess maybe just for Todd, just a quick question. Like the Aero business has been doing great. Margins were above 30% in the first half the guidance implies as a step down in the second half? Just anything we need to be aware of from a mix standpoint, and why they would step down in 2H? Todd Leombruno: No. We called out high spares and repairs in Q2. Those are great. The business is high. It's hard to predict that going forward. So we've not put that into our forward guide there. But I would tell you, the activity is robust. The team is doing a great job converting serving our customers and you look at those margins that we're forecasting. It's still showing 60 basis points improvement from prior year, and it's high 29%, mid- 29.5% type range. So we feel pretty good about giving you a guide with those numbers. Operator: Our next question will come from Scott Davis with Melius Research. Scott Davis: Jenny and Todd, Jeff, congrats the great start to the fiscal calendar year here, a couple of quarters in a row I know you guys don't love to talk about price, but given inflation, like recent commodity prices and some of your input costs, I'm sure even in things that may be derived from things like natural gas and obviously metals. But is it an increasing -- are you able to drive price kind of in time? I know with -- in some of your products, it runs through distribution, that's less of a challenge sometimes, but perhaps for a lot of the product goes through OE, it could be a little bit more of a challenge. Is there some risk mitigation there that's going on at present? Are we being a little too paranoid, or are you guys -- add any color there that would be helpful. Jennifer Parmentier: Yes. With some of these commodity prices, Scott, we're handling this like we have any other inflation or issues that come about. That pricing muscle is strong. And we've had a long history here of being able to handle these things. But it's ongoing, and I would say that it's nonstop, right? We have to respond to these things and make sure that they don't impact our our EPS, and they have it, and they won't. Todd Leombruno: Yes, Scott, I would just -- you obviously are a following of our margins. You can see our margins. Every one of the businesses posted a record margin number for the quarter. And I would tell you, the eyes on cost and the ion price, that's a muscle that never goes out of style here at Parker. So we're all over it. Scott Davis: Fair enough. And then just a quick follow-up. The time line you give to close Filtration Group kind of 6 to 12 months so you could drive a bus for that. But what are the major gating factors just kind of standard antitrust issues that could get pushed or pulled one direction or another, or are there other hurdles? Jennifer Parmentier: Yes. No. just the standard regulatory filings and the process that we have to go through. Operator: Our next question will come from Steve Tusa with JPMorgan. Our next will come from Amit Mehrotra with UBS. Amit Mehrotra: But I guess I just wanted to ask, I joined a little bit late, so forgive me if I -- this is [indiscernible] ask, but if I -- I want to talk about the 2Q performance, which obviously was better and then how that corresponds to the full year guidance increase. It doesn't seem like you assume much of the 2Q goodness into the second half. And then also, I'm sure you addressed this, so I apologize, again, but talk about the North American margin decline a little bit for the full year and what the reason for that is? Jennifer Parmentier: I'll answer that question for you, and then Todd will follow up. So there's nothing about the North American margin other than Q2 mix was not as favorable as Q1. That's all that's there. Listen, Q2 is a record for us, 80 basis points of margin expansion, 52% incrementals. The team is performing very well. And for we increased the margin to 26%. So we took that up. And for the second half, we're not reducing the North America margin. Todd Leombruno: Yes. If you look at the second half, as Jenny said, we're basically 26.5% in the second half for North America. That would be an all-time record for North America, and that will put the full year up by 80 basis points. So I just reiterate what Jenny said. Q1 was exceptional. Q2 was a record, right? Amit Mehrotra: Yes. Fair. Okay. Totally get it. And then just maybe 1 other kind of bigger picture question, Jenny, related to that, the pricing commentary, I think, to Scott's question. If I just look at Parker's organic growth over the last decade, it's basically averaged a couple of percent per year for the entire company. In fact, North American Industrial has been 1.5 points. And when you incorporate price, it's just the implied volumes are actually down over the last decade. I guess my first question is, do you agree with that observation? Is that a fair observation? And then second, maybe what explains that lack of volume? And maybe we've been in an industrial recession for a decade. I don't know -- but at some point, price and margin get incrementally harder and we just need to see some through cycle volume growth. I would love to get your perspective on that. Todd Leombruno: This is Todd. I'll jump in and Jenny, you could add any color, if you like. When we look at what we are doing in North America, first of all, it's hard to look at the company over the last decade because the portfolio has changed tremendously. When you look at the three acquisitions where you look at where our growth has been way more engineered materials, way more filtration and a heck of a lot more aerospace and defense within those industrial businesses, both in North America and international. The company has never been more focused on organic growth. We have a long-term target of 4% to 6%. We are guiding 4% to 6% this year. So we were right at our target. It has been 2-plus years of choppiness in the industrial markets. So I would tell you the company has never been more aligned on organic growth. And I'm really proud that we're able to generate these record margins in a not-so-great organic growth environment. So I don't think there's too much to read in there. When you look at what we are doing from a margin and a conversion standpoint, the team is really much driving great performance here. Operator: Our next question will be from Steve Tusa with JPMorgan. Unknown Analyst: Can you hear me now? . Todd Leombruno: We've got you, Steve. Jennifer Parmentier: I can. Unknown Analyst: A lot of questions have been answered, and there's a lot of good detail in the materials. Just curious on the construction side, you guys are like a little more positive than others. Is that just like the data center stuff? Or is there -- are there other things you guys are seeing out there? Jennifer Parmentier: I would say that's a small part of it, but we're actually seeing an increase in the construction equipment. Unknown Analyst: Okay. And then just lastly, on the fourth quarter, being a bit below consensus. And anything to call out there mechanically as to why the fourth quarter is, I guess, just a little bit weaker than what we would have thought. Todd Leombruno: No, I don't think there's anything -- Steve, this is Todd. I don't think there's anything specific that we called out there. When I look at what we have laid out here for the fourth quarter, every single number is an all-time record. The fourth quarter is normally our strongest quarter of the year. We are forecasting fourth quarter to be the strongest quarter of the year again and in Q3 in makire we deliver our commitments for Q3, but there's nothing that has us concerned about Q4. Jennifer Parmentier: No, no concern. Operator: [Operator Instructions] Our next question will come from Julian Mitchell with Barclays. Julian Mitchell: Maybe just to focus on some of the end market trends. So looking at Slide 15, just wanted to understand, perhaps when we look at the far right-hand side column of the full year growth rates. When we look at Q4, sort of which of those growth rates as you see it are most different from the full year numbers? Just trying to understand kind of inflections or changes or if it's easier to explain any color on how the first half trended for those respective markets beyond A&D. Jennifer Parmentier: Well, when you look at -- let's just look at off-highway, for example, we started off with negative low single digit on our initial guidance back in August. And then we looked at to neutral in Q1. And then we moved it -- just moved it now to positive low single digits. So that's just keeps going up. So that's one that I would highlight. And when you look at -- obviously, you pointed out aerospace, we're continuing to increase that. But when you look at the rest of the markets, the industrial markets, they remain the same. We've seen too bright spots within them that we've pointed out. But implant and industrial still saying at positive low single digits. When you look at transportation, negative mixed single digits, like we said, we're not seeing anything right now that would change our mind about that through this fiscal year. And then the same for energy and HVAC and refrigeration, we're maintaining those from initial guidance. Julian Mitchell: Got it. Maybe within A&D, if you could just refresh us perhaps on the end market outlooks for the various pieces for fiscal '26, another company talks about sort of normalization of outsized commercial aero aftermarket growth, but I feel people have been guiding for that for sort of three years running now. So just any thoughts around the market pieces of A&D? Jennifer Parmentier: You bet. So we expect commercial OEM to be around 20% growth. We previously had that at mid-teens. We expect commercial aftermarket to be at low double-digit growth. So we previously had that at high single digit. So we just -- and in Q1, that was 13%. So we still see strong commercial aftermarket. We expect defense OEM to be around mid-single-digit growth, which is the same as last quarter. And defense aftermarket is at low single-digit growth. That was previously at mid-single-digit growth, but still in a good spot, just a small change there. Operator: Our next question will come from Jeff Sprague with Vertical Research Partners. Jeffrey Sprague: One Jenny. Just wanted to come back to just kind of orders and sales. Obviously, kind of in the industrial businesses, we've got more long cycle, and we've talked about that a lot, including on the call here today. But I'm also just observing that orders have outpaced sales now for 8 quarters, which I've never seen that long of a run. So maybe you could just speak to, is it reasonable to think that those do reconnect at some point in time where there's just that much more long-cycle stuff in the backlog, and obviously, at some point, things will cycle and they'll cross over. But in terms of kind of them coming together during an up cycle, do you think we continue to see kind of a persistent gap there. Jennifer Parmentier: Yes. Jeff, it's a good question. I mean, we're clearly a longer-cycle business today than we have been in the past. But it is hard to put a figure on conversion timing as it really is determined by the customer delivery schedule. We, obviously, with higher aerospace and defense in the Aerospace segment as well as in our industrial businesses, we do have a lot of multiyear orders that fall into those buckets. So that definitely has an impact. And what we see from a short cycle standpoint, as I've mentioned a couple of times, it's a gradual short cycle recovery, some markets sooner than others. Implant in our distribution business, we think they're going to benefit from both CapEx and OpEx. So again, I pointed out we saw low single-digit positive growth in the quarter. And those long cycle and secular trend businesses HVAC, energy, they're continuing to really be strong. So record backlog, orders are in a good position, but hard to connect the dots there. Todd Leombruno: Jeff, on the good side, it is giving us better visibility. It is allowing us to level load our operations. It is part of what's driving the consistency in our performance across all of the operating businesses. And again, I think not as much credit as given to the transformation of the portfolio and like I said, we are a different company than we were 2, 3, 5, 10 years ago. So it's still an important metric. We watch it every day, as a matter of fact. And we're really happy that orders have turned positive across every business, and it's a positive outlook for the future. Jeffrey Sprague: Yes. And we don't have the industrial backlog. I don't think you could share it, that would be interesting. But yes, Industrial backlog was down in Q1, right? But it looks to me if it was even flat sequentially here in Q2, then we're starting to get to backlog in Industrial also inflecting higher. Is that sort of what you see in the business? Todd Leombruno: Yes. I believe that's exactly what we're seeing here in the... Jennifer Parmentier: Industrial backlog has gone up in Q2. Yes, Industrial backlog went up. It remains in the mid-20s, and it grew from Q1 to Q2. Jeffrey Sprague: Okay. Yes, which means that it's nicely up versus last year, which reflects the order versus sales gap. Great. Now I appreciate that color. Operator: Our next question will come from Joe O'Dea with Wells Fargo. Joseph O'Dea: I wanted to circle back to the implant comments and just customer kind of prioritization of spend around productivity and automation over some of the capacity expansion. I think we've been in that kind of environment for for some time at this point. Maybe just spend a little bit of time on what that means for their spend, like the wallet that goes to Parker. And when we think about it on the productivity and automation side versus the capacity expansion side. And if we were to see a pivot toward capacity expansion, what that would mean for you? Jennifer Parmentier: Well, the good news is, is we participate in both scenarios, right? I mean when there's any type of retooling done or upgrading done or retrofitting done, our distribution channel and sometimes many of our divisions participate in that directly. And then some of the examples we've given in the past is when there is capacity expansion that is actually new factory, new building, we're participating from the time that they start clearing the land. And all the way through the putting the walls up, putting the infrastructure in. So Parker gets a nice share of the wallet in both situations. It is just still a grand recovery, though, in our distributors, again, positive sentiment, working with a lot of those small and midsized OEMs, they're participating in these things. They're ready. They're ready to participate at a higher level. But right now, what we have for them is we see for industrial growth is about 2% to 2.5%. Joseph O'Dea: Got it. And then just on your own CapEx plans. You've raised the guide a little bit last quarter, maintained it this quarter. It's up about $100 million year-over-year. So some nice growth there. Maybe just elaborate on that and whether there's anything on the capacity expansion side? Is any of that targeted around as you're starting to highlight off-highway a little bit and then some of the activity you're seeing there. Just to understand where that higher spend is going? Jennifer Parmentier: Yes. We are definitely investing in our businesses. We have investment around automation and productivity. And we do have capacity expansion on both sides of the business. So it's important to us to be able to keep up the level of service and world-class manufacturing. And as our team use Kaizen tools to improve the processes that we have. We're always looking to make those processes better. So a lot of investment in our factories. Operator: Our next question will come from Chris Snyder with Morgan Stanley. Christopher Snyder: So I want to follow up on some of the earlier conversation around cycle trends. You guys have as broad exposure as anybody, both on an end market, but also a geographic basis. So just kind of maybe simply, when you look across all this exposure, is there anything that you think will be worse a year from now where you're seeing signs that there is pointing to next 12-month deterioration? Jennifer Parmentier: I don't see anything now. I'm not hearing anything or I don't see any indicators that would cause us to think the the forecast we have out there now for these market verticals is going to get worse. I don't see anything. Todd Leombruno: Yes, Chris, we called out backlog in total. Backlog is a record. Orders have been positive for some time now. Historically, that has been a positive sign for future growth for Parker-Hannifin. Christopher Snyder: I was just wondering if there was anything that wasn't like stable to improving. And then I guess maybe just following up on that. It seems like at least a good chunk of the North America order pickup with some of the long-cycle businesses. But did the shorter cycle businesses also see positive rate of change on orders? And any color on the specific end marks, I would imagine construction and some of them we're seeing momentum. Jennifer Parmentier: Yes. Yes, we definitely saw some positive orders in implants and off-highway and energy. So definitely, it wasn't all aerospace and defense, but there were some multiyear aerospace and defense orders that hit our industrial businesses that really caused that jump from 3% to 7%. But positive orders and implant off-highway and energy. Todd Leombruno: Hi, Katie, this is Todd. I think we have time for maybe one more question before we wrap it up at 12:00. Operator: Our last question will come from Brett Linzey with Mizuho. Brett Linzey: Wanted to follow up on Filtration Group. I imagine the teams are already getting a running start on some of the integration and preplanning. Any early observations on confidence around cost synergies? And then as you've been mapping the combination, any early view on the sales synergy side? Jennifer Parmentier: Thanks for the question, Brett. We're as I said, we're just really excited about the filtration group. So we are very confident in our ability to deliver that $220 million in synergies by the end of year 3. And part of our diligence process was several plant visits, and that's what gives us that confidence. We are working with the team. We we don't own them yet. So we're building relationships. We're getting that integration playbook going. We have the integration team assembled here on the Parker side and we'll shortly with the filtration group side, but really feel very confident about the synergies. We didn't model any revenue synergies, but we feel that there's opportunities to utilize the customer relationships that we both have to deliver value to customers. So we think that, that is going to give us some upside. And then we'll look at the distribution networks and see what makes sense and learn and be focused on our organic growth with this acquisition, just like we have in the last. Brett Linzey: That's great. And then just a quick follow-up. So just close the loop on tariffs, so calendar '25 in the books. Can you update us on what the annualized tariff expense that you absorbed. And as you progress through the mitigation measures, is it fair to think that as you get into the second half of calendar '26 that you do have the potential to drive better than normal incrementals as you're lapping some of that expense paying? Todd Leombruno: Brett, this is Todd. The tariffs obviously have been pretty volatile. I don't want to make any predictions on what's going to happen with tariffs, or what has happened with tariff. I would just tell you, rest assured that we haven't covered. You have not heard us call out any negative impact from tariffs. You look at these margins, these margins are all-time records. We're really positive now that the majority of the company has returned to positive organic growth. And we're going to manage whatever happens as it happens and just be as clear as transparent with our customers as we possibly can be. So that's the way we're running it. Jennifer Parmentier: That's right. Brett Linzey: Congrats on the quarter. Todd Leombruno: Thanks. Jennifer Parmentier: Thank you. Todd Leombruno: All right, Katie, I think this wraps up our time here. This concludes our FY '26 Q2 earnings release webcast. We do appreciate everyone's time and attention. We thank you for joining us today. If there are any needs for follow ups, our team will be available as usual, Jeff Miller and [indiscernible] will be available for any kind of follow-up that's needed. Thank you, everyone, and have a wonderful day. Operator: Thank you. This concludes today's call. We appreciate your time and participation. You may now disconnect.
Operator: Good morning, and welcome to the Alerus Financial Corporation earnings conference call. All participants will be in listen-only mode. Today's call will reference slides that can be found on Alerus Investor Relations' website. You can also view the presentation slides directly within the webcast platform. After today's presentation, there will be an opportunity to ask questions for analysts and institutional investors. To ask a question during a session, you will need to press 11 on your telephone. You will then hear an automated message saying your hand is raised. To withdraw your question, please press 11 again. Please note this event is being recorded. This call may include forward-looking statements, and the company's actual results may differ materially from those indicated in any forward-looking statements. Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements are listed in the earnings release in the company's SEC filings. I will now turn the conference over to Alerus Financial Corporation President and CEO, Katie Lorenson. Please go ahead. Katie Lorenson: Thank you, and good morning, everyone. Thank you for joining us. I appreciate this opportunity to share reflections on the year and offer some perspective on the strategic position and momentum of our company as we enter into 2026. Joining me today is Alerus CFO, Alan Villalon; COO, Karin Taylor; Chief Banking Revenue Officer, Jim Collins; and Alerus Chief Retirement Services Officer, Forrest Wilson. 2025 was a milestone year for Alerus in which we demonstrated not only strong core financial performance but significant execution of major strategic initiatives that position the company for sustainable organic growth and a return to top-tier profitability and performance. I'm incredibly proud of what our team accomplished, not just for the financial results, including posting a core ROA of 1.62% this quarter, but for the collaborative efforts to accomplish these initiatives during the year. It is evident through our ability to set goals, hold each other accountable, and exceed expectations that the leadership team and the talent throughout this company are exceptionally strong and deep. One of the most notable accomplishments of 2025 was delivering results well above our committed targets, both financial and non-financial, in our first full year of operating as a combined organization with Home Federal. We delivered an adjusted ROA of 1.35% and an adjusted efficiency ratio of 64.45%. In addition to a net retention rate of deposits close to 95%, we achieved critical retention of key talent throughout the organization. These results solidify our integration capabilities of aligning people, systems, resources, and culture quickly and effectively. Our focus in 2025 was to continue to enhance our commercial bank and to sustainably improve returns while focusing on our long-term strategy. In the back half of the year, we executed a purposeful deleveraging plan, actively managing loan paydowns and pruning marginal credits to strengthen our balance sheet and improve our flexibility. As we saw success in these initiatives, we took disciplined steps to sell our legacy low-yielding available-for-sale securities portfolio. This balance sheet repositioning improved our earnings power going forward, reduced our AOCI volatility, enhanced capital generation capacity, and gave us greater flexibility for lending in our markets. The deliberate steps we took position Alerus for stronger performance and tangible book value growth in 2026 and beyond, demonstrating our commitment to creating long-term sustainable value for our clients, our communities, and our shareholders. On the banking side, we saw a steady build of momentum throughout 2025, especially in the second half of the year. Excluding the purposeful reductions in CRE, the targeted loan sales, and our selective managing of renewals, organic loan growth for the year would have been closer to mid-single digits. Of note, our strategic entry into the mid-market C&I space gained real traction as we moved through the year, and we enter 2026 with a strong pipeline. Organic core deposit growth also picked up momentum in the back half of the year, with the focus shifting from retention as the team members worked through the deposit system conversion. We're seeing some nice large opportunities for mid-market and government not-for-profit treasury management in early 2026, which should enhance our deposit growth through the year. From a margin perspective, strong pricing discipline on both sides of the balance sheet throughout the organization drove the core NIM higher. Nonperforming loans ticked up higher with the migration of an acquired purchase participation that was previously identified as a problem loan. This is a multifamily property in the Twin Cities with a 15% reserve, and it should resolve relatively quickly. Our largest non-performing exposure continues to be a large multifamily loan in the Twin Cities, with a book balance of approximately $32 million. This property now has multiple offers and is currently 74% leased. We are reserved at about 17% and continue to expect resolution by midyear. Leading credit indicators showed meaningful improvement over 2025, including a 30% reduction in criticized asset levels. While we had another quarter of net recoveries and a slight reserve release, the allowance for loan losses remained robust at 1.53% of total loans. In addition, capital accretion boosted the TCE ratio to 8.72%, putting the balance sheet in a strong position for organic loan growth. Moving on to our ultimate differentiator, our fee income businesses, where we grew core revenues 7% year over year. Although our most recent acquisitions have been strategic bank additions in key markets like Rochester, Minnesota, and Phoenix, Arizona, we have maintained fee income at over 40% of total revenues, almost three times the average of most financial institutions. Notably, we ended the year with assets in our retirement and wealth divisions at nearly $50 billion, or 10 times the assets in our banking division. Our retirement division delivered strong results, including robust sales, continued better-than-industry client retention, and growth in plans and participants. We ended 2025 with the strongest revenue momentum this division has seen. Momentum, we believe, will continue into 2026 and beyond. The retirement business remains integral to our overall success, providing over a quarter of the company's funding and serving as a powerful internal source of wealth management opportunities. In 2025, we continued to expand our national presence through partnerships, anchored in our distinguished reputation for outstanding client service. As the twenty-fifth largest provider in the country and with a new leadership team in place, we will continue to invest in technology and AI to enhance scalability and improve margins. During the year, we successfully converted our entire wealth business onto a new system, achieving 100% client retention, thanks to excellent execution by our support team and the high-touch service delivered by our wealth advisors. This reinvestment strengthens our foundation and positions us to advance our strategic plan to double the number of advisors across the Alerus franchise, with the aspirational goal of growing our wealth assets at the same pace as our banking assets. Earlier this month, we finalized the first step in building our next-generation team with the selection of our new wealth management leader, an experienced professional with deep expertise in wealth, trust, and institutional advisory, and a proven ability to recruit talent and drive key strategic initiatives. On a core and reported basis, we saw strong operating leverage even as we modernized our systems, implemented new core platforms, and strengthened our digital capabilities. While we produced record levels of sales throughout many of our business lines, we did this all while managing our headcount down over 6% from its peak in October 2024. These upgrades allow us to move faster, create more consistency in client experience, and operate with greater scalability. They also ensure we are building a future-ready organization, one that is ready to embed AI and automation where it improves quality, efficiency, and client insights. CET1 capital levels ended the year at 10.28%, up from 9.91% a year ago, giving us ample flexibility to support growth, sustain our dividend, and selectively pursue opportunities. Our primary focus remains on organic growth and strategic hiring as we continue to see meaningful talent and market share opportunities stemming from recent M&A disruption in the Twin Cities. As the second-largest locally led financial institution in the market, with $55 billion in banking, wealth, and retirement assets, nearly $300 million in adjusted revenue, and over $600 million in market cap, Alerus is well-positioned to capture this momentum. Over the past several years, we have successfully lifted out high-performing teams and professionals, leveraging our deep expertise in C&I, private banking, and wealth management. Strong synergies across these business lines, combined with our expanding physical and brand presence in the Twin Cities, position us to continue attracting top talent, growing C&I relationships, and serving more high-net-worth clients. As we enter 2026, we do so from a position of strength and are set for continued momentum. We have a unified and clearly defined strategy, a modernized operating environment, a de-risked future-ready balance sheet, durable diversified revenue engines across banking, wealth, and retirement, strong capital and liquidity, a deep leadership team built for the next chapter, and a culture centered on accountability to each other, our shareholders, our clients, and our communities. We expect to continue generating positive core operating leverage, expanding tangible book value, and delivering top-tier long-term returns. The work we did in 2025 integrating, modernizing, de-risking, and aligning creates the conditions for stronger and more consistent performance in the years ahead. And with that, I will hand it over to Alan Villalon. Alan Villalon: Thanks, Katie. Before I start, let's recap at a high level 2025, as you can see on page eight of our investor deck that is posted on the Investor Relations part of our website. We just posted record adjusted earnings and over 21% adjusted return on tangible equity after the biggest acquisition in company history. Also, we continued our strategic balance sheet repositioning to ensure continued success in driving shareholder value creation. Over the past several years, the company's risk and return profile has dramatically improved for the better. Change takes time, and change will continue as the environment changes. I'll now jump to Page 11 of our investor deck to go over our financials in more detail. On a reported basis, net interest income increased 4.7% over the prior quarter, while adjusted non-interest income increased 8.3%, which excludes the loss in securities and other one-time items. Net interest income grew due to a decrease in our cost of funds. Fee income grew as revenues grew both in our retirement and wealth segments. Overall, fee income, excluding the loss in securities, continued to remain over 40% of revenues and over double the industry average. Let's dive into drivers of net interest income on the next slide. Turning to Page 12, in the fourth quarter, net interest income continued to reach new heights at $45.2 million. Our reported net interest margin increased to 3.69%. Total cost of funds decreased 16 basis points to 2.18%. We also had 52 basis points related to purchase accounting accretion and non-recurring items in the quarter. Excluding these 52 basis points, core interest margin was 3.17%, a 12 basis point improvement from the third quarter. We continue to remain disciplined in pricing on both loans and deposits. In the fourth quarter, we saw new loan spreads of 258 basis points over Fed funds, while deposit costs were coming in at 116 basis points below Fed funds. These spreads make up what we call a new business margin of 374 basis points. This is a very strong margin, and we continue to expect to build core net interest income to replace purchase accounting accretion. Let's turn to Page 13 to talk about our earning assets. At the end of the fourth quarter, loans decreased 1.3% over the previous quarter. The decrease in loans was driven by strategic downsizing of the loan portfolio to help improve our overall risk profile. As previously mentioned, we pushed out credit risk from non-core loans and did not renew certain relationships. Overall, our loan mix remains around 50% fixed and 50% floating. On investments, we sold $360 million of available-for-sale securities, which represented over 68% of total AFS securities. The securities sold had an average weighted yield of 1.7% and a weighted average duration of 5.1 years. Proceeds from the securities sale were reinvested into new investment securities with a weighted average yield of 4.7% and a weighted average duration of just over three years. Excluding balance sheet derivatives, we remain slightly liability sensitive. Any 25 basis point cut in Fed funds should help improve our net interest margin around five basis points. Turning to page 14, on a period-ending basis, deposits declined 5%, mainly due to the calling in of over $165 million in brokered deposits and the running off of another $45 million in other wholesale funding to optimize our cost of funds. Excluding the intentional optimizations, deposits declined approximately only $10 million or 0.2% from the prior quarter. Despite the overall decline in deposits, our loan-to-deposit ratio was 96.6%. Lastly, since the close of the acquisition of Home Federal, the deposit retention rate remains close to 95%. Turning to page 15, I will now talk about our banking segment, which also includes our mortgage business. I'll focus on the fee income components now since net interest income was previously discussed. Mortgage saw only a 4.2% decrease in originations during the quarter. We usually see a bigger seasonal slowdown in mortgage, but we saw refi activity pick up in the fourth quarter. Currently, we are seeing the usual slowdown in originations, as January is off to a slower start. Lastly, we saw approximately $1 million in swap fee income this quarter. A reminder, swap fee income tends to be lumpy from quarter to quarter. On Page 16, I'll provide some highlights on our retirement business. Total revenue from the business increased to $17.3 million, a 4.6% increase over the prior quarter. Most of the increase was driven by growth in both asset and transaction-based fees. Assets under administration and management increased 2.1% due to market performance and net positive asset flows into our retirement business during the quarter. Synergistic deposits within our retirement segment grew 5.6% over the prior quarter. HSA deposits grew over the prior quarter to over $203 million. HSA deposits continue to remain a strong source of funding for us as these deposits only carry a cost of 10 basis points. These deposits are a valuable source of funding for the bank, which are not reflected in the margin information in the slide. Turning to Page 17, you can see highlights for our Wealth Management business. On a linked quarter basis, revenues increased 13.4% to $7.4 million, while end-of-quarter assets under management increased 0.8%, mainly due to market performance. Revenue increased due to an increase in asset-based fees. Page 18 provides an overview of our noninterest expense. During the quarter, noninterest expense increased 2.7%. The increase was partially driven by an increase related to the opening of a new facility in Fargo, North Dakota. We also saw an increase in technology expenses driven by new core systems such as our wealth and online banking platforms. Professional fees increased related to the balance sheet restructuring that occurred at the end of 2025. Turn to page 19, you can see our credit metrics. During the quarter, we had net recoveries of three basis points. The quarter-over-quarter decrease was primarily driven by a $1.9 million recovery in 2025 related to a loan that had previously been charged off. Nonperforming assets were 1.27%, an increase of 14 basis points from the prior quarter, driven by a slight increase in nonperforming assets and a decrease in overall assets. I'll discuss our capital liquidity on page 20. The tangible common equity ratio improved to 8.72% versus 8.24% in the prior quarter. We continue to have close to $2.8 billion of liquidity to help support loan growth and any liquidity events. We remain committed to driving tangible book value growth with excess capital being used to support organic loan growth, our dividend payout, and share repurchases. Now turning to page 21, I'll update you on our guidance for 2026. We expect the following: For 2026, we expect loans to continue to grow at a mid-single-digit growth rate. We expect to grow deposits in the low single digits. As previously mentioned, we have ample liquidity to meet any loan growth in excess of deposit growth. For 2026, we're expecting our net interest margin to be around 3.5% to 3.6%, which will include about 16 basis points or just over $8 million of purchase accounting accretion and no early payoffs. This is close to a 60% reduction of purchase accounting accretion from 2025. You'll continue to see improvement in core net interest margin replacing purchase accounting accretion from 2026. As a reminder, improvement is not linear. With the aforementioned guidance, net interest income is projected to grow in the low to mid-single digits for 2026. We expect our adjusted noninterest income to grow in the mid-single digits driven by continued core growth in our wealth and retirement businesses. No swap fee income is included in this guidance as it tends to be difficult to estimate and is dependent on client demand. Overall, net revenue is poised to grow in the mid-single digits. Noninterest expense is expected to grow in the low single digits, which shows our commitment to driving positive operating leverage. For 2026, we expect our ROA to exceed 1.2% for the year. We do not have any further Fed cuts in our expectations for 2026. And, again, for every 25 basis points cut in rates, we expect NIM to improve by about five basis points. While we showed the underlying potential of this better and bigger company in 2025, 2026 is about continued improvement. Our core businesses will drive returns higher. So get on the bus and buy some Alerus. Operator: With that, we will open up for Q&A. The first question comes from Brendan Nosal of Piper Sandler. Your line is now open. Brendan Nosal: Hey. Good morning, everybody. Hope you're doing well. Maybe just starting off here on kind of balance sheet dynamics for '26 with the mid-single-digit loan guide and then the deposit guide for low single. You know, totally get that you had the liquidity to fund the loan growth that you're seeing coming through. Maybe just speak to your comfort bringing up the loan-to-deposit ratio from current levels and is there any kind of internal ceiling that you want to manage around from here? Alan Villalon: Brendan, I think this is Al. We try to manage around a 95% loan-to-deposit ratio, but we also acknowledge that we typically see that tick up as we see some outflows from our public funds, especially in the second and third quarter of every year, but we look to usually have around a 95 to 96% loan-to-deposit ratio. Brendan Nosal: Okay. Thanks. Maybe turning to expenses. Just kind of curious, with what you have underlying that outlook in terms of tech investments or room for team adds across the year? Kind of baked into that outlook? Alan Villalon: So in terms of team adds, I'll let Jim talk about that, but we do have adds incorporated into that guidance. Also, from a tech standpoint too, we've incorporated our contract that has some variable costs going up over the year and also the new platforms we just implemented. Jim Collins: Yeah. We have adds for specifically in the wealth areas embedded in the expenses in '26. And a number of adds in commercial banking embedded in the expenses for '26. Brendan Nosal: Okay. Fantastic. Thanks for the color and taking my questions. Alan Villalon: Thanks, Brendan. Operator: Thank you. One moment for our next question. Our next question comes from the line of Jeff Rulis of D.A. Davidson. Your line is now open. Jeff Rulis: Thanks. Good morning. Question on the loan growth expectations and even the fourth quarter runoff. I want to get a read on a portion of which was credit trimming, maybe in the ticket fourth quarter first, and any idea of kind of the portion of that runoff that was maybe driven by you or credit trimming? Jim Collins: I'll take that. This is Jim. A fair amount of it was designed. Right? We certainly wanted to run out some of the marginal credits or the credits that were credit-related, but we also wanted to drive out orphan credits or non-full relationship credits and pare down our CRE concentrations and really build up our C&I. So as we look at our portfolio and know that the profitability of C&I is a lot higher than our CRE and changing our mix, pairing down our CRE, we're building up C&I. We don't want orphan relationships. We want full relationships. And we want to push out any marginal credits that we think might end up in the credit box. And we will continue that philosophy in '26. That's why we're looking at a mid-percentage of loan growth in '26. Jeff Rulis: And, Jim, if I were to look at kind of year over year, low single digit in '25, mid in '26, and understand the mix focus there. But would you fair to say the sort of targeted or designed runoff in '26, that's less of a headwind than you saw in '25? Jim Collins: Yes. I would. Jeff Rulis: Okay. Great. And somewhat related on the Katie, I think you touched on the linked quarter nonaccrual lift. Again, what was that in terms of type and segment? Karin Taylor: Sure, Jeff. This is Karin. I can take that. The increase was related to a multifamily loan that we acquired. It is here in the Twin Cities. We've got a 15% reserve on it. There are already offers on the property, and so we expect that that will resolve certainly in the first half of this year. Jeff Rulis: That's great. And last one for me on the margin. Al, the trajectory of that through the year, it's a 10 basis point range, three fifty to three sixty. But you know and again, does not assume rate cuts. I appreciate the language there. But through the course of the year, is it kind of steady state, three fifty five, or kind of do you see it building throughout the year? Any color on the pace of the margin over the year? Alan Villalon: Yeah. Thanks for the question, Jeff. It's going to be gradual, and the way I determine it is going to be really dependent on how our deposit flows ebb and flow, especially, you know, as we see those summer months come in and the public funds go out. So I would expect some gradual improvement in there, but that's why I made the comment it's not really linear. Jeff Rulis: Okay. I appreciate it. Thank you. Operator: Thank you. One moment for our next question. Our next question comes from the line of Nathan Race of Piper Sandler. Your line is now open. Nathan Race: Yes. Hi, everyone. Good morning. Thanks for taking the questions. Just going back to the margin discussion, Al, wondering if you had the dollar amount of accretion in the quarter. And maybe what's a good starting point for the core margin ex accretion just given the full benefit of the securities portfolio reposition that you'll have in the first quarter? Alan Villalon: Yep. So last year, we had approximately about $20 million of purchase accounting accretion from 2025. This year, we're looking for about eight. And I would say that that eight is pretty evenly spread out. So I'd say a little bit over $2 million in the first quarter and kind of scaling down to just right at $2 million in the fourth quarter. And then I think a good exit rate right now is looking at $3.17 we had in the fourth quarter and growing it from that. Nathan Race: Okay. Great. Really helpful. And then, Katie, your comments around kind of trying to double the wealth management advisors across the franchise going forward. I was wondering if you could just speak to kind of the timeline and kind of where you're at in terms of, you know, that headcount and then kind of where you're looking to add, you know, additional depth to the wealth management team going forward? Jim Collins: This is Jim. I'll take that one. We have 26 advisors now in all the markets. We certainly want to add more advisors in our larger markets, the Twin Cities, Phoenix, and Wisconsin. We've already added one this year who will start here in a couple of weeks. We've had slated for another six or seven the rest of this year spread out throughout the markets. We will take the opportunity to add talent where we find it. So I'm not exactly sure at this point where we're going to find it, but we plan to actively recruit. We are actively recruiting in all markets. So it depends on where we find it. But we are actively recruiting in all markets. We plan to add those throughout the year, but, again, it's all dependent on when we find the right talent at the right time. Nathan Race: Okay. Perfect. That's helpful. Thanks, Jim. And then would just be curious to get an update. You know, you guys still even with the balance sheet repositioning in the quarter, still have a nice excess capital position and that continues to build just given the profitability improvement that was alluded to in the guidance. Maybe just curious to get an update from Katie in terms of if you're feeling more optimism these days in terms of the opportunity set out there to perhaps augment the retirement platform via acquisition. Katie Lorenson: Sure. Thanks, Nate. I would say on the capital front, priorities remain consistent with what they've been over the course of the past several quarters and years. So organic growth, number one. Team lift-outs, market share opportunities, dividends, buybacks, and obviously on the M&A front, and that retirement and HSA space continues to be a priority for us. We continue to expand and deepen the conversations that we're in with potential partners. And those, again, that's agnostic to location in the country. We will remain selective and disciplined and make sure that they're good matches. But I would say, overall, yeah, we continue to build our pipeline of potential partners in that space. Nathan Race: Okay. Great. Very helpful. I'm sorry. If I could just sneak one last one in for Al. On the expense side. Alan Villalon: Yeah. Go for it, Nate. Sorry. Nathan Race: Yeah. Sorry. On the occupancy expenses, I appreciate that that included the cost with the location in Fargo. Does the increase from 3Q to 4Q, does that kind of come out starting the first quarter? Alan Villalon: Oh, there is something in the fourth quarter, but then we had actually some real there's going to be a tick up in occupancy because we did have the opening of a new facility as well. Nathan Race: Okay. So any thoughts on just a better run rate for that number going forward? Alan Villalon: Well, I mean, we're still looking at, you know, again, low single digits for expenses over the year. I mean, we exited, you know, the quarter roughly around $51 million. I mean, I would just grow it from that. Nathan Race: Okay. Fair enough. I appreciate all the color. Congrats on a great quarter. Thanks, everyone. Alan Villalon: Thank you. Appreciate that, Nate. Operator: Thank you. One moment for our next question. Our next question comes from the line of Damon Del Monte of KBW. Your line is now open. Damon Del Monte: Hey. Good afternoon, everyone. Hope you're all doing well. First question is it relates to the loan growth. How much of your view on the growth is being driven just by continued strong underlying economic trends versus opportunities that are being created through market disruption from M&A? Jim Collins: I would say, what I see going into '26, it's probably for us, it's probably mostly market disruption and market share from the talent that we've acquired over the last three years. So if I was to guess, it's probably going to be seventy thirty. 70 from the talent and the relationships that they know at other banks and market disruption. And 30% of just economic growth. That's my best guess rolling into '26 at this point. But talking to business owners, it feels like '26 is going to be a good year for a lot of businesses. Damon Del Monte: Great. Appreciate that color. And then with respect to credit and trying to think about provision, Al, any thoughts on kind of how you see the provision playing out over the upcoming quarters? Karin Taylor: Yeah. Damon, this is Karin. I'll take that. You know, I think the provision in '26 is going to be driven by loan growth and macroeconomic factors. We feel that we're adequately reserved on those non-performing deals. And with improving credit metrics, we think the primary growth in reserve will be able to grow. Damon Del Monte: Great. And I may have missed this earlier, but are you guys anticipating any of those non-performers moving off here in the upcoming quarters to kind of lower some of those ratios? Karin Taylor: Yeah. We've got several in that bucket where we expect resolution in the first half of the year. Damon Del Monte: Okay. Great. And then just last question on the tax rate. What's a good tax rate we should think about here for 2026? Alan Villalon: 24%, Damon. Damon Del Monte: Perfect. Okay. That's all that I had. Thanks so much. Operator: Thank you. One moment for our next question. Our next question comes from the line of David Long of RJ. Your line is now open. David Long: Good morning, everyone. Jim Collins: Hey, Dave. David Long: Hey. On the deposit side, just curious what you're seeing on competition, both from your retail deposits and the HSA deposits. Does it differ across the different platforms? And is the pricing that you're seeing, do you feel like it's rational? Jim Collins: This is Jim. I think it's very competitive. I think in all markets, it's competitive. It's competitive on the retail side. It's on the commercial side. I think we have a fairly good strategy in place for 2026, but it will be, again, very competitive across the boards. Is it rational? Generally speaking, yes. I think in pockets, you'll find some banks that are being aggressive. You can say that's a little irrational sometimes, but generally speaking, I think I would just put it as very competitive. So '26 will be very competitive for deposits. That's, you know, Al's comment earlier. That will be the kind of the part of the NIM that will be how will be affected throughout the year on where that kind of levels out throughout the year. So we're going to work extremely hard on that piece throughout the entire year, but it's going to be very competitive. David Long: Great. And then just a follow-up to that. As you're thinking about the loan growth in the next year, how will the mix look differently with your guide at the end of '26 versus what we're looking at here at the end of '25? Jim Collins: As I commented earlier, we're really focused on full C&I relationships. So the portfolio in '26 is really gearing up like we've trended towards the end of '25 is really full C&I relationships. So we're trying to change the mix to more full C&I and less CRE. So the goal at the end of '26 is to change that mix to more C&I, more mid-market C&I. Hopefully, that answers your question. David Long: Yeah. No. That's definitely helpful. And looking at the deposit side too, how do you see the concentration on the deposit side changing? Alan Villalon: Hey, David. Before I answer that question, first, just going to congratulate you and your Indiana Hoosiers on winning a national title. I hope to feel that euphoria someday with Notre Dame. But to answer your deposit question, I mean, we are seeing some we're continuing to see some erosion on the non-interest-bearing side because the environment is still very competitive. We're still seeing, you know, our non-maturity deposit rates around the two to 3% level in terms of, you know, new rates for new accounts coming in. So we're still going to see some shift from non-interest-bearing to interest-bearing. David Long: Great. Thanks, Al. And, unfortunately, I did not take up your advice in purchasing the options for tickets using the CFP website, but I was able to attend the game in Atlanta at the Peach Bowl. So it was a ton of fun. Thanks. Alan Villalon: Congrats. Operator: Again, as a reminder to ask a question, you'll need to press 11 on your telephone. And I'm showing no further questions. Katie Lorenson: This concludes our question and answer session. I would now like to turn the conference back over to Katie Lorenson for any closing remarks. Katie Lorenson: Thank you, and thank you, everyone, for your time today. Thank you to all of our team members across this great company. The progress we've made together reflects the team's hard work, the strength of our strategy, and the resilience of our diversified business model. I also want to thank our shareholders, our clients, and our communities for their trust and partnership. We're excited about our outlook as we enter 2026 with confidence, momentum, and a clear vision for the future. Thank you, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Suhasini Chandramouli: Good afternoon and welcome to the Apple Q1 fiscal year 2026 earnings conference call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. Speaking first today is Apple CEO, Timothy D. Cook. And he'll be followed by CFO, Kevan Parekh. Operator: After that, we'll open the call to questions from analysts. Suhasini Chandramouli: Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast, including risks related to the potential impact to the company's business and results of operations from macroeconomic conditions, tariffs, and other measures, and legal and regulatory proceedings. For more information, please refer to the risk factors discussed in Apple's most recently filed reports on Form 10-Q and Form 10-K and the Form 8-K filed with the SEC today along with the associated press release. Additional information will also be in our report on Form 10-Q for the quarter ended December 27, 2025, to be filed tomorrow and in other reports and filings we make with the SEC. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks. Timothy D. Cook: Thank you, Suhasini. Good afternoon, everyone. And thanks for joining the call. I am proud to say that we just had a quarter for the record books. We are reporting our best-ever quarter with $143.8 billion in revenue, up 16% from a year ago and exceeding our expectations. The demand for iPhone was simply staggering, with revenue growing 23% year over year and all-time records across every geographic segment. Services set an all-time revenue record as well, up 14% from a year ago, and EPS reached an all-time record of $2.84, growing a robust 19% year over year. We set all-time revenue records in The Americas, Europe, Japan, and the rest of Asia Pacific and grew in the vast majority of markets we track. We continue to gain momentum in emerging markets, which includes India, where we saw strong double-digit revenue growth. Greater China also grew 38% year over year, driven by iPhone, which had record upgraders and double-digit growth on switchers. Apple's December results underscore our relentless commitment to innovation, to our customers, and to our mission to build the best products and services in the world. Now I'd like to take a closer look at results from across our lineup, beginning with iPhone. As I mentioned earlier, it was a fantastic quarter for iPhone with an all-time revenue record of $85.3 billion, up 23% year over year. This is the strongest iPhone lineup we've ever had and by far the most popular. Throughout the quarter, customer enthusiasm for iPhone was simply extraordinary. Users were incredibly excited about everything it enables them to do. iPhone 17 Pro and 17 Pro Max deliver the ultimate iPhone experience. They feature the best-ever performance and battery life on an iPhone, the most advanced camera system, and a striking design. iPhone Air, our slimmest and lightest smartphone yet, packs powerful capabilities into an ultra-slim and sleek design. And iPhone 17 is a truly fantastic upgrade and an incredible value. Turning to Mac, revenue was $8.4 billion for December. We were pleased to see the Mac installed base reach another all-time high, with nearly half of customers who purchased a Mac being new to the product. The M5-powered 14-inch MacBook Pro takes a huge leap in AI performance thanks to the next-generation GPU architecture and a faster neural engine. From the world's most popular laptop for consumers and businesses in MacBook Air to the small and spectacular Mac mini, every Mac in our lineup has something special to offer users. And with the recently released Apple Creator Studio, available across Mac, iPad, and iPhone, creators have more tools at their fingertips to make incredible music or turn their devices into a video production studio. Meanwhile, iPad saw December revenue of $8.6 billion, up 6% from a year ago, with an all-time record for upgraders. We are proud to have our strongest lineup ever, from iPad powered by A16, which is proving to be incredibly popular, to iPad Air with its amazing versatility, to the unbelievably powerful M5 iPad Pro with its remarkably thin and light design. It's no wonder that iPad continued to be the most popular tablet in the world. Across wearables, home, and accessories, revenue was $11.5 billion. With Apple Watch Ultra 3 and Apple Watch Series 11, users are tapping into a comprehensive set of health and wellness features to help them meet their health goals. In a recent survey, we see an increasing number of users telling us they're wearing their watch to sleep, which allows them to check their sleep scores each morning and find ways to improve their sleep quality. And Apple Watch alerts are enabling important conversations between users and their doctors regarding potential signs of hypertension. These are just some of the many ways that WATCH is helping people live healthier lives. The response to AirPods Pro 3 has been amazing. Customers are raving about the rich, immersive sound quality, the unmatched level of active noise cancellation, and the noticeably improved comfort that makes them effortless to wear. Features like live translation are also changing the way people can communicate by helping users connect across languages in real-time and making everyday conversations feel more natural and accessible. Together, these innovations create an experience that feels both powerful and personal, and the enthusiasm we are seeing reflects just how strongly AirPods Pro 3 are resonating with customers. Across our product categories, we are seeing very high levels of customer satisfaction, and we are proud to report that we have a new record for our installed base with more than 2.5 billion active devices. During the quarter, we were excited to see that the majority of users on enabled iPhones are actively leveraging the power of Apple Intelligence. Since the launch of Apple Intelligence, we've introduced dozens of features, including writing tools and cleanup, and made it available in 15 languages. These AI experiences are personal, private, integrated across our platforms, and relevant to what our users do every day. We are bringing intelligence to more of what people already love about our products so we can make every experience even more capable and effortless. One of our most popular features is visual intelligence, which helps users learn and do more than ever with the content on their iPhone screen, making it faster to search, take action, and answer questions across their apps. And as I touched on earlier, we are hearing powerful stories of people using live translation to communicate seamlessly across languages. And these are just some of the many powerful AI features that are enabling our users to do remarkable things with our products, which are far and away the best platforms in the world for AI. That's in no small part because of the extraordinary power and performance of Apple Silicon. Building on our efforts in the AI space, we are also collaborating with Google to develop the next generation of Apple foundation models. This will help power future Apple intelligence features, including a more personalized Siri coming this year. We're incredibly excited for what's to come with so many new experiences to unlock. Turning to services, we achieved an all-time revenue record of $30 billion, 14% higher from a year ago. Services also set all-time revenue records in both developed and emerging markets. Apple TV has seen fantastic momentum, with December seeing a 36% increase in viewership over the previous year. It's no wonder with shows like Pluribus, which are creating landmark cultural moments that audiences are loving. Anticipation is building for upcoming new productions like Cape Fear from Steven Spielberg and Martin Scorsese. And we are thrilled to announce that Ted Lasso will be returning for a fourth season this summer. Six years since launch, we're excited by the growing enthusiasm viewers have for Apple TV, and we are grateful for the accolades that have followed, most recently at the Critics' Choice and Golden Globe Awards. To date, Apple TV productions have earned more than 650 wins and more than 3,200 nominations, including a recently announced Oscar nomination for Best Picture for F1, the movie. And speaking of F1, we're also approaching the start of a new Formula One season. And for F1 fans in The US, Apple TV will be the place to watch every practice, qualifying, sprint, and Grand Prix. MLS fans will also be able to watch every regular and postseason game with their Apple TV subscription this year, and we're looking forward to kickoff in the coming weeks. Looking back, 2025 was a fantastic year for services as we rolled out amazing new features and broke records. Apple Music climbed to all-time highs in both listenership and new subscriber growth. Apple Pay eliminated more than $1 billion in fraud for our partners last year, and we've made it available in more markets than ever before. And last year, we welcomed more than 850 million users every week on average to the App Store, the world's safest and most innovative app marketplace. Developers have now earned more than $550 billion on our platform since 2008. In retail, we continue to bring a magical experience to our customers all around the world, and we were thrilled to have our best-ever results in retail during the quarter. We were excited to open our fifth store in India in December and have plans to open another store in Mumbai soon. Wherever we are, we see ourselves as part of a larger whole. That's why we show up with our values in everything we do. That means working with partners in places like Vietnam to bring more clean water to rural areas. It means celebrating graduations of new classes of innovators from our developer academies in places such as Brazil, Indonesia, and South Korea. It means 3D printing titanium cases for Apple Watch using so that they're better for the planet without compromising quality. And so much more. We're especially proud of the work we're doing to support American innovation. Last year, we committed to invest $600 billion over four years in vital industries like advanced manufacturing, silicon engineering, and artificial intelligence. As we're building on our long-standing investments in America, we're supporting nearly half a million jobs with thousands of suppliers across all 50 states. In the year since we made our initial commitment, we're making great progress. Today, we're shipping servers to power Apple Intelligence from our new manufacturing facility in Houston. Through our advanced manufacturing program, we're working with Corning in Kentucky to make 100% of cover glass for iPhone and Apple Watch. We're working with Micron, which broke ground on a new advanced chip packaging and test facility, and we continue to advance the development of an end-to-end silicon supply chain across the country, sourcing 20 billion US chips in 2025. Through our Apple Manufacturing Academy in Detroit, we're already training American innovators on the latest smart manufacturing and artificial intelligence techniques. Six months since opening, the academy is already making an enormously positive impact for businesses working alongside Apple engineers to drive productivity, efficiency, and quality in their supply chains. As I said at the beginning of my remarks, this was in so many ways a remarkable quarter for Apple. And we're excited for all the opportunities we'll have in the year ahead to deliver innovations that have never been seen before and enrich the lives of users every step of the way. With so much to look forward to in the weeks and months ahead, I have every confidence that our best work is yet to come. With that, I'll turn it over to Kevin. Kevan Parekh: Thanks, Tim, and good afternoon, everyone. Our revenue of $143.8 billion was up 16% year over year, our best quarter ever. Across the world, we set all-time revenue records in both developed and emerging markets. And we saw double-digit growth year over year across the majority of the markets we track, including The US, Latin America, Western Europe, Greater China, India, and South Asia. Products revenue was $113.7 billion, up 16% year over year, driven by double-digit growth in iPhone, setting a new all-time record. And as Tim mentioned, thanks to our strong levels of customer loyalty and satisfaction, our installed base of active devices has now surpassed 2.5 billion, reaching another all-time high across all product categories and geographic segments. Services revenue was $30 billion, up 14% year over year. This performance continues to be broad-based, with double-digit growth in almost every market we track. We also reached all-time revenue records for advertising, cloud services, music, and payment services, with December quarter records on the App Store and video. Company gross margin was at 48.2%, above the high end of our guidance range and up 100 basis points sequentially, driven by favorable mix and leverage. Products gross margin was 40.7%, up 450 basis points sequentially, driven by favorable mix and leverage. Services gross margin was 76.5%, up 120 basis points sequentially, driven by mix. Operating expenses landed at $18.4 billion, up 19% year over year. This was within the range we provided and driven by increased investment in R&D. Net income was $42.1 billion, and diluted earnings per share was $2.84, up 19% year over year. Both net income and diluted EPS were all-time records. These incredibly strong business results drove an all-time record for operating cash flow, coming in at $53.9 billion. Now I'm going to provide some more details on each of our revenue categories. iPhone revenue was $85.3 billion, up 23% year over year, driven by the iPhone 17 family. iPhone saw strength around the world, reaching all-time revenue records in many of the markets we track, including The US, Greater China, Latin America, Western Europe, The Middle East, Australia, and South Asia, as well as a December record in India. The iPhone active installed base grew to an all-time high and set a new all-time record for upgraders in aggregate and across many countries, including The US, China Mainland, Japan, and India. According to a recent survey from World Panel, iPhone was the top-selling model in The US, urban China, The UK, Australia, and Japan. Customers are loving the latest iPhone lineup. The latest customer satisfaction for the iPhone 17 family in The US was measured at 99% by 451 Research. Mac revenue was $8.4 billion, down 7% year over year. As we described in the last call, we faced a very difficult compare against an M4 MacBook Pro, Mac Mini, and iMac launches in the year-ago quarter. Despite this difficult compare, we continued to see growth in several emerging markets, including Brazil, India, Malaysia, Vietnam, and more. And as Tim mentioned earlier, the Mac install base reached another all-time high, with nearly half of the customers who purchased a Mac being new to the product. And in The US, customer satisfaction for Mac was measured at 97%. iPad revenue was $8.6 billion, up 6% year over year, driven by the M5-powered iPad Pro and the A16-powered iPad. We continue to add new users to the iPad. In fact, over half the customers who purchased the iPad during the quarter were new to the product. This helped the iPad install base to reach an all-time high, and we also reached an all-time high for upgraders. Based on the latest reports from 451 Research, customer satisfaction was 98% in The US. Wearables, home, and accessories revenue was $11.5 billion, down 2% year over year. During the quarter, we experienced constraints on the AirPods Pro 3, and we believe the overall category would have grown had it not been for these constraints. The wearables installed base reached a new all-time high, with over half of customers purchasing an Apple Watch during the quarter being new to the product. And in The US, customer satisfaction was recently reported at 96%. Our services revenue reached an all-time high of $30 billion, up 14% year over year. As we said earlier, we had all-time revenue records on advertising, music, payment services, and cloud services, where we saw double-digit growth on paid subscribers. We continue to be optimistic about the future of our services business. With our installed base of over 2.5 billion active devices, we have an incredibly strong foundation for new growth opportunities. We saw increased customer engagement across our service offerings, with both transacting and paid accounts reaching all-time highs in the quarter. And we continue to improve the quality and expand the breadth of our services offerings. From new wallet features like digital ID, which provides a way for users to create an ID in Wallet using information from their US passport, to additional ads coming to search in the App Store, which provides advertisers more ways to drive downloads from search. Turning now to enterprise, organizations are continuing to expand their fleet of Apple devices to drive productivity while remaining secure. Snowflake has deployed over 9,000 Mac devices company-wide, establishing Mac as a primary laptop across all business units, resulting in increased performance and a reduction in support tickets. AstraZeneca is rolling out over 5,000 M5-powered iPad Pros to its pharmaceutical sales team to take advantage of AI capabilities, including Apple Intelligence, while meeting with clinicians daily. And in Mexico, Copel, the country's largest domestic retailer, recently added MacBook Air in addition to a growing fleet of over 10,000 iPad devices. Let's turn to our cash position and capital return program. We ended the quarter with $145 billion in cash and marketable securities. We had $2.2 billion of debt maturities and decreased commercial paper by $6 billion, resulting in $91 billion in total debt. Therefore, at the end of the quarter, net cash was $54 billion. During the quarter, we returned nearly $32 billion to shareholders. This included $3.9 billion in dividends and equivalents, and $25 billion through open market repurchases of 93 million Apple shares. As we move ahead into March, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to. Importantly, the color we're providing assumes that global tariff rates, policies, and their application remain in effect as of this call, and the global macroeconomic outlook does not worsen from today. We expect our March total company revenue to grow by 13% to 16% year over year, which comprehends our best estimates of constrained iPhone supply during the quarter. We expect services revenue to grow at a year-over-year rate similar to what we reported in December. We expect gross margin to be between 48-49%. We expect operating expenses to be between $18.4 billion and $18.7 billion, which is at a similar level to what we reported in December and driven by higher R&D on a year-over-year basis. We expect OI&E to be around $100 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 17.5%. Finally, today our Board of Directors has declared a cash dividend of $0.26 per share of common stock payable on 02/12/2026, to shareholders of record as of 02/09/2026. With that, let's open the call to questions. Suhasini Chandramouli: Thank you, Kevin. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator: Certainly. Amit Daryanani: We'll go ahead and take our first question from Amit Daryanani of Evercore. Yes. I have two. Maybe to start with, you know, there's a lot of focus on the impact of memory to host the companies and love to kind of get your perspective when you're first guiding gross margins up into March. Talk about, a, your comfort in securing the bit that you need for shipment and b, how do we think about memory inflation flowing through Apple's model over time? Timothy D. Cook: Yeah. Amit, hi. It's Tim. Let me back up a bit and talk about the constraints that Kevin referred to in his remarks and memory. And try to get both of these out at once. First of all, we were thrilled with the customer response on the latest iPhone lineup. It exceeded our expectations, to say the least. And, you know, iPhone grew 23%. What the result of that was was that we exited December with very lean channel inventory due to that staggering level of demand. And based on that, we're in a supply chase mode to meet the very high levels of customer demand. We are currently constrained and at this point, it's difficult to predict when supply and demand will balance. The constraints that we have are driven by the availability of the advanced nodes that our SoCs are produced on. And at this time, we're seeing less flexibility in the supply chain than normal. Partly because of our increased demand that I just spoke about. From a memory point of view, to answer your question, memory had a minimal impact on Q1. So the December gross margin. We do expect it to be a bit more of an impact to the Q2 gross margin and that was comprehended in the outlook of 48 to 49% that Kevin gave earlier. You know, we don't obviously provide outlooks beyond the current quarter. Beyond Q2, but we do continue to see market pricing for memory increasing significantly. As always, we'll look at a range of options to deal with that. So, hopefully, that gives you the full view. Amit Daryanani: No. Thank you. I appreciate all the clarity on that, Tim. You know, maybe the other second question I have for you is maybe just touch on the China strength you folks had. I think this is very close to all-time high revenues you've had in China. What's driving the strength over here? And just sort of the durability of the growth rate we saw in December would be helpful to understand. Thank you. Timothy D. Cook: Sure. Greater China was up 38% year on year. It was driven by iPhone, where we set an all-time revenue record. So it was the best iPhone quarter in history in Greater China. It's driven by the customer enthusiasm for the iPhone 17 lineup. And I would tell you that during the quarter, traffic in our stores in China grew by strong double digits year over year. It was a terrific quarter. Our installed base reached an all-time high in both Greater China and Mainland China. And we set an all-time record for the upgraders and we saw strong double-digit growth on switchers. And according to a survey from World Panel, iPhones were the top three smartphones in urban China during the quarter. So it was and it's really driven primarily by the product strength. And the customer response to the product strength. We do see on non-iPhone products, that the majority of customers that are buying a Mac, a watch are still new to that product. So that's a very good sign for us. And if you look at iPad, on that same survey, iPad was the top tablet model in urban China. And according to Counterpoint, the MacBook Air was the top-selling laptop model and Mac Mini was the top-selling desktop model in December. So overall, great quarter in China. We could not be more happy with it. Suhasini Chandramouli: Awesome. Thank you, Amit. Operator, could we get the next question, please? Operator: Our next question is from Erik Woodring of Morgan Stanley. Please go ahead. Erik Woodring: Great, guys. Thank you for taking my questions. Tim, congrats on announcing the partnership with Google, and we're all excited to see what you bring to market later this year. When I think about your AI initiatives, you know, it's clear there are added costs associated with that. We're obviously seeing that flow through in OpEx. Can you help us understand maybe what the revenue upside potential that exists with AI? Many of your competitors have already integrated AI into their devices. And it's just not clear yet what incremental monetization they're seeing because of AI, but you're always disciplined with investing. You obviously have a differentiated product. So how do you monetize AI? And what's the timeline to realizing that ROI? Then a quick follow-up. Thank you. Timothy D. Cook: Well, let me just say that we're bringing intelligence to more of what people love, and we're integrating it across the operating system in a personal and private way. And I think that by doing so, it creates great value, and that opens up a range of opportunities across our products and services. And we're very happy with the collaboration with Google as well. I should add. Erik Woodring: Okay. Thank you, Tim. And then maybe just a follow-up. Now that you have kind of more time and data to evaluate this cycle, can you maybe help us understand what the primary factors are driving strength in the iPhone? Sure there's a number of factors, but if you had to point to one or two, just what would they be and how sustainable do you think those are? Timothy D. Cook: I think it's different for different cohorts of where people are coming from in the device that they have. But it's a combination of things always that make the product sing. It's the display. It's the camera. It's the performance. It's the new selfie camera. It's the design. The design is beloved. And so it's all of these things that come together at once and are producing a very strong product cycle as witnessed by our December results. Erik Woodring: Great. Thank you, Tim. Best of luck. Suhasini Chandramouli: Awesome. Thank you, Erik. Operator, could we get the next question, please? Operator: We'll now go to Michael Ng of Goldman Sachs. Please go ahead. Michael Ng: Wonderful. Good afternoon. Thank you for the questions. I have two as well, if I could. First, it was encouraging to hear about the revenue growth outlook of 13% to 16% for March. I was just wondering if you could talk about any comps that we should be particularly aware of as we kind of think about each of the product categories? I know last year you guys had, you know, MacBook Air with M4, the iPhone 16E, the iPad A16, and the iPad Air with M3. So just wanted to, you know, ask if those things would create tough comps or is it just less of an issue just given the new product outlook? Thank you. Kevan Parekh: Yeah, Mike. It's Kevin. How are you? Thanks for the question. Yeah. I wouldn't say there's any particular comp issue that we'd note. As you recall, last quarter, we talked about the difficult comparison we had at Mac. But there's nothing that rises to that kind of color that we'd outlined, you know, in the Outlook. And so I think it's, you know, continuation of the strong cycle we're seeing subject to constraints that I had mentioned in prepared remarks that Tim, you know, alluded to a little earlier as well. Michael Ng: Great. Wonderful. And then just on services, advertising, strong in the quarter. I wanted to ask about some of the new growth opportunities in advertising. I know you guys are doing the new ad slots in the App Store. Maybe you could just talk a little bit about that. And then any plans to do more in advertising across other products like maps or TV? Thank you. Kevan Parekh: Yeah. Sure. Like, what I would say, if I step back in general, I think as we outlined, we saw really good broad-based performance in our crossword services business. So ranging from, you know, all-time records in advertising, music, payment services, and cloud services. So I think we see really good opportunities across a lot of our service categories. And we continue to, you know, add new service offerings. We talked about, you know, what we added to the wallet, like digital ID, and you can reference the additional, kind of additional ads coming in the search in the App Store. Which we are excited about. It provides, you know, advertisers more ways to be discovered. So I think we'll continue to look for ways to expand opportunities to add value to users, and also, you know, create opportunities for Apple. I think as we talked about, we created, you know, across a really significant milestone of two and a half billion, you know, active devices. So we really feel excited about the opportunity that provides for our services business as well. Michael Ng: Wonderful. Thanks for the thoughts, Kevin. Suhasini Chandramouli: Thank you, Mike. Operator, could we get the next question, please? Operator: The next question will be coming from Ben Reitzes of Melius. Please go ahead. Ben Reitzes: Yeah. Hey, guys. How are you? Operator: Hi, Ben. Ben Reitzes: Hey, Tim. First question is on Google partnership again. I wanted to understand how you came to that decision with regard to the AI and Siri in particular. And if there's an opportunity for you guys to share in revenue too with that partnership like you do in search? Thanks. Timothy D. Cook: Yeah. We basically determined that Google's AI technology would provide the most capable foundation for Apple Foundation Models. And we believe that we can unlock a lot of experiences and innovate in a key way due to the collaboration. We'll continue to run on the device and run-in private cloud compute. And maintain our industry-leading standards in doing so. In terms of the arrangement with Google, we're not releasing the details of that. Ben Reitzes: Bummer. Okay. Well, I tried. Timothy D. Cook: You did. Ben Reitzes: So yeah, you knew it would be me. So the next question is on gross margin. I'm pretty shocked I gotta hand it to you, Tim. I'm, you know, that you're able to do 48 to 49. What's really going on there? How are you doing that with this memory, the NAND prices? Is it due to mix that there's a good less hardware and more services? Services and services margins are going up. How are you doing it to keep it at 48 to 49? Kevan Parekh: Yeah, Ben. This is Kevin. How are you doing? Let me start maybe by just reflecting on the Q1 gross margin. I think we talked about the fact that we landed at 48.2%, so just above the high end of the range we provided, you know, on the last call. I think if you look at that performance, you know, we were up 100 basis points sequentially. We talked about the fact that we had favorable mix. I mean, as you know, when we have a good product cycle, strong price cycle we're seeing for iPhone, that does lend itself to a bit more favorable opportunity on the and leverage side. So we're having a strong iPhone cycle as Tim outlined. And so that also translates itself. So we talked about products sequentially went up by 450 basis points. So I think, in general, I think we're just seeing, you know, favorable mix dynamics as well. You know, service continues to contribute as well. That business is growing, you know, double digits so that also is a contributor. And I think that, you know, if you looked at our guidance, you know, we're providing a similar range to where we reported in December. There's gonna be a few puts and takes. You know, we do expect to see favorable mix in the services. As you know, when we move from Q1 to Q2, that tends to be the case, and that's partly offset by a seasonal loss leverage. So there'll be puts and takes, but again, we feel pretty good about the guide of 48 to 49%. Which is similar to the range we reported in December. Ben Reitzes: Wow. Okay. Great. Thank you. Suhasini Chandramouli: Alright. Thanks, Ben. Operator, could we get the next question, please? Operator: The next question will be coming from David Locke of UBS. David Locke: Great. Thanks, guys, for taking my question. Maybe Tim or Kevin, if we could pull out a little bit, can you help us understand how you're thinking about the overall kind of smartphone market demand, particularly given where memory prices are headed? And we've heard some conversations with some other OEMs as well as component providers that are worried about either availability of components, potential market weakness in terms of demand destruction, and some of the actions to offset or higher prices? I know you don't give outlooks for the full year, but how are you thinking about all of those different vectors and what that might mean for the overall smartphone market? Then ultimately what that might mean for demand for iPhones as we move through the rest of this calendar year. Timothy D. Cook: Yeah. On the supply side, I had made comments earlier about the constraint that we are seeing in Q2. You know, we and that's reflected in the revenue guidance that Kevin gave earlier. The constraint, as I'd mentioned, is due to the advanced node capacity. And it's really a result of growing so well in Q1 with the 23%. And having less flexibility partly due to that in the process to increase it as much as we would like to increase it. Beyond Q2, I don't really want to comment on supply. You know, supply is a function of a lot of things in the industry that move around a lot. So I wouldn't want to comment on that. I commented before on the memory pricing. And so I hopefully, that answers your question. Oh, and in terms of this Maybe I'll In terms of smartphone demand, you know, we believe that based on the information that we've got is we gained share in December. Obviously, the market wasn't growing at 23%. So we feel good about doing that. But I wouldn't want to predict how the market reacts in the future. It's very difficult to do that. David Locke: Got it. At the risk of not getting this answered, I'm gonna follow-up with. Can you maybe help us understand, you mentioned there's a range of options that you're looking at. How do how should we think about kind of like LTAs in the marketplace? I mean, is that an option as we move through the year? Or is it more spot-based? From a perspective, particularly around memory? Just want to get a better sense for how we should think about kind of the dynamics in the marketplace. Timothy D. Cook: It's a range, and so I don't want to get more specific than that. I mean, there are different levers that we can push, and who knows how successful they'll be, but there's just a range of options. David Locke: Great. Thanks, guys. Suhasini Chandramouli: Great. Thank you, David. Operator, could we get the next question, please? Operator: We'll now be taking a question from Wamsi Mohan of Bank of America. Sorry for the pronunciation. Wamsi Mohan: That's fine. Thank you. Tim, on services, you grew a pretty impressive 14%. And I know you said that the App Store was a record for December. But third-party data is showing a notable deceleration in App Store growth, maybe 7% in December relative to your 14% growth. Was hoping if you could maybe confirm that. And secondarily, if it's correct, what might be some of the drivers of that and what could be things that you could do to reverse that in future quarters? And I have a follow-up. Kevan Parekh: Hey, Wamsi. It's Kevin here. Look, I think I think we want to reiterate the fact that during the summer quarter, you know, we had a quarterly record on the App Store. As you know, we don't provide, you know, specific color on how the individual services categories have done. But, again, if we step back, I think we saw, you know, again, broad-based growth across all the different categories, also across, you know, various geographies. We had, you know, all-time records in both developed and emerging markets as well. So and double-digit growth in both of those too. And so I think in general, you know, we don't provide, you know, the color at the detailed, you know, services level. Wamsi Mohan: Okay. Thanks, Kevin. I guess back to the memory price. I appreciate you have a range of options to address that. Historically, Apple has not used a pricing lever unless, you know, FX markets got maybe very dislocated to grow an arbitrage or issues like that. But given some of these unprecedented moves in memory, would pricing be a lever that you would be willing to pull or push outside of every other thing that you know, outside of everything else that you can do? Timothy D. Cook: Yeah. I wouldn't want to speculate on that one. Wamsi Mohan: Okay. Thanks, Tim. Suhasini Chandramouli: Thanks, Wamsi. Operator, could we have the next question, please? Operator: We'll now go to Samik Chatterjee of JPMorgan. Please go ahead. Your line is open. Samik Chatterjee: Yes. Hi. Thanks for taking my questions. Maybe for the first one, I'm just looking at your capital investment in the first quarter, which did moderate from the last one. And wondering if the partnership with Google on Gemini and sort of help collaboration to develop the next generation of Apple foundational models, does that have any near-term sort of impact on your intent to use Apple private cloud? I know you emphasized sort of the role Apple private cloud plays in the long term, but are there any changes on that front through this collaboration? Any thoughts around that? And I have a quick follow-up. Thank you. Kevan Parekh: Yeah. Sure. I think this is Kevin here. I think in general, you know, as Tim outlined, we weren't gonna provide any details on our arrangement in collaboration with Google. Just speaking of CapEx in general, you know, as you know, we have a hybrid, you know, model for CapEx. And so I think that, you know, what happens is our CapEx can be volatile, independent of kind of the volume performance of our business. And as you know, our CapEx is made of several different line items that include tooling, our facilities, retail investments, investments in our retail store, data centers. And on tooling and data centers, we leverage this hybrid model that I mentioned before, which we leverage a combination of first and third-party capacity. So in general, it's hard to read into the CapEx and, you know, draw any conclusions. And so I think I would just say there's gonna be some ebbs and flows in CapEx. Last year, you'll remember we did build out our private cloud compute environment, and so we did have CapEx spending related to that in our results in December. Samik Chatterjee: Got it. Got it. And my follow-up probably is for you, again. You did mention product gross margin and the sort of drivers there for the product gross margin improvement. When you sort of highlighted mix as a driver, can you just sort of talk through what are the big differences and mix you're seeing for iPhone 17 versus 16? And did tariffs and tariffs coming in more favorable play a role at all? What you're expecting for tariffs for the next quarter? Kevan Parekh: Yeah. So there's a few things to unpack there. So on the overall margin on the product side, I think I mentioned that we had favorable mix of products and leverage. I think given the strong iPhone cycle we're seeing, that was I would say, probably a higher favorability than you might have seen in maybe other cycles. And as well, as you know, in Q1, typically, we do see the impact of the cost structure of our new products that we launch. And in this case, we are seeing a more favorable offset from mix of products and leverage. On the tariff piece, we had outlined a versus historical, you know, sequential changes from Q4 to Q1. amount of $1.4 billion for December. And we landed roughly in that range, you know, at that level. Samik Chatterjee: Thank you. Suhasini Chandramouli: Awesome. Thank you, Samik. Operator, could we have the next question, please? Operator: We'll now go to Krish Sankar of TD Cowen. Please go ahead. Krish Sankar: Hi, thanks for taking my question. The first one I have for us is for Tim. I think you touched upon this earlier on the Gemini integration. Apple foundational model. How to think about kind of like the, you know, the difference between Apple foundational model functionality and third-party models. Like, you know, does the Apple Foundation model evolve to a different layer in the AI software stack? How to think about it as you partner with third-party frontier models? I had a follow-up. Timothy D. Cook: Yeah. Krish, you should think of it as a collaboration. Not and we'll obviously, continue to do some of our own stuff but you should think of what is going to power the personalized version of Siri as a collaboration with Google. Krish Sankar: Got it. Got it. So Malin, a quick follow-up for maybe Kevin or Tim. Just a lot of discussion on memory pricing. Given that the memory constraint or commodities scarcities both the smartphone and the PC markets, and Apple arguably having more purchasing power, do you think this is a chance for you to increase your share both in iPhone and Mac at the expense of competition who might have more constraints in getting access to memory? Timothy D. Cook: Yeah. I don't really want to talk about kind of what has happened, and we do believe, as I had shared, that iPhone gained share in December. And if you look at Mac for the full year of full calendar year of '25, we also believe we gained share. And so we feel very good about our position. Krish Sankar: Thanks, Tim. Suhasini Chandramouli: Thank you, Krish. Operator, could we have the next question, please? Operator: We'll now go to Atif Malik calling from Citi. Please go ahead. Atif Malik: Hi, thank you for taking my question. The first one for Tim. Tim, some of the industry pundits are comparing the iPhone 17 upgrade cycle to the 2020-2021 year as some of the iPhone 12, 30 users upgrade. Curious if you agree with that view also if you can layer on the impact from Apple Intelligence to the refresh rate. Timothy D. Cook: I think each iPhone cycle has its own unique. And so I wouldn't compare it to a specific one. I think iPhone 17, the family of 17, is a unique product that brings several very compelling features in one product, and it has done extremely well. And so we feel, you know, quite good about it. Kevan Parekh: You know, Atif, I'll just add to Tim's comment that we talked about the fact we have a large and diverse installed base of customers. So this product has really resonated with multiple cohorts, whether you're on older devices or newer iPhones as well. We've seen a really strong reaction to the product lineup. Atif Malik: Great. As my follow-up, there was a lot of discussion on supply constraints, and I'm surprised that you guys are constrained on advanced packaging as you generally get your share at the big foundry. How long will these supply impact your ability to ship to true demand? Timothy D. Cook: It's difficult to estimate demand when you haven't met the demand. And so we've obviously, we have internal estimates on that, but I don't want to share those. But it's very difficult. And just to be clear, it's the advanced nodes that we, like three nanometer to be specific, where our SOCs are the latest SOCs are produced on is what is gating the Q2 supply. And it's a direct result of the 23% growth and, you know, that far outstripping what we had internally estimated. And having more limited flexibility in the supply chain for some period of time. But I don't want to estimate when supply and demand will balance at this point. Atif Malik: Very helpful. Thanks. Suhasini Chandramouli: Alright. Yep. Thank you, Atif. Operator, could we have the next question, please? Operator: The next question will be coming from Aaron Rakers calling from Wells Fargo. Please go ahead. Aaron Rakers: Yes. Thanks for taking the question. I have two as well. I'll try and stay away from the memory question. I'm curious, and obviously, a lot of on the China demand, but I'm curious, you also called out India. And so can you maybe unpack some of the things that you're seeing in the Indian market as far as iPhone traction? Any kind of color on, you know, what is the very large installed base in India that seems to be a good growth opportunity for Apple still? Timothy D. Cook: Yeah. Thanks for the question. We did set a quarterly revenue record during December. And to go a little further down, we set quarterly revenue records on iPhone and Mac and iPad. And an all-time revenue record on services. So it was a terrific quarter in India. We really like what we see there. It's the second-largest smartphone market in the world. And the fourth-largest PC market. So and we still have, despite a very nice growth history, we have modest share there. And so we think there's a huge opportunity for us there. And we could not be more excited about it. If you look at the other thing that I would point out is that the majority of customers that are buying iPhones and Mac and iPad and Watch are all new to that product. And so it speaks very well to the opportunity there. Kevan Parekh: Yeah. Aaron, had you mentioned the installed base, we're seeing strong double-digit growth in the installed base in India as well, which is really encouraging. Aaron Rakers: Yep. And then as a quick follow-up, you know, kind of tied to memory, maybe not so much, but part of this current generation iPhone cycle is you clearly deepened some of your own internal silicon capabilities on the device. I'm curious if that if we should think about that as a lever and maybe a supportive factor to gross margin that might be underappreciated and any thoughts on where we go from here as far as continual opportunities of internalizing your own silicon? Thank you. Timothy D. Cook: Yeah. I'll let Kevin talk about the gross margin. But in terms of the product, which is at the heart of what we think about in the user, Apple silicon has just been an incredible game-changer for us. Starting with iPhone and then on iPad and, of course, the Mac as of a few years ago. And so we believe it's a game-changer and a major advantage. Kevan Parekh: Yeah. And as far as impact on gross margin, yeah, we have been, as you know, investing in core technologies like our own silicon and our own modem. And certainly, while those do provide opportunities for cost savings and can be plugged in margins, they also importantly provide, you know, the differentiation that's really important for our products as well and us more control of our roadmap. So I think there's a lot of strategic value to it, but also we are seeing, you know, investments in our core technologies impacting, you know, gross margin in a positive way. Suhasini Chandramouli: Awesome. Thank you, Aaron. Operator, could we have our last question, please? Operator: Most certainly. Our last question will be coming from Richard Kramer calling from Arete Research. Please go ahead. Richard Kramer: Thanks very much. I have two questions. Tim, when you think about how Apple might manage AI, do you see that evolving towards more edge AI or on-device services versus cloud-based AI? And are you confident you've reserved sufficient data center capacity to support the widespread Siri adoption, especially given that you're not following the other hyperscalers and sharply increasing CapEx? Timothy D. Cook: The answer is that we see both being important, the on-device and the private cloud compute. So we don't see it as an either-or. We see it as both. And, you know, and we believe it's a differentiator because of our privacy approach. In terms of do we have enough capacity, it's hard to estimate with precision what the demand will be, but we've done the sort of the best job that we can do, and I've and either have or are putting capacity in for it. Richard Kramer: Okay. And you also mentioned the 2.5 billion active device number, but Apple intelligence features have only been available since the 15 Pro. So can you speak at all to roughly what portion of your iPhone or overall active device install base is now AI capable? Has this been a factor in maybe a more gradual pace of launching wider AI services? Kevan Parekh: Yeah, Richard. This is Kevin. You know, we don't provide that specific number, but it is a growing number as you can imagine in our installed base. So we're encouraged by the number of devices now that are capable. But we're not gonna provide a specific figure on that today. Richard Kramer: Okay. Well, had to try. Thank you. Suhasini Chandramouli: Alright. Thank you, Richard. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor, and via telephone. The number for the telephone replay is (866) 583-1035. Please enter confirmation code 8902968 followed by the pound sign. These replays will be available by approximately 5 PM Pacific time tonight. Members of the press with additional questions can contact Josh Rosenstock at (408) 862-1142. And financial analysts can contact me, Suhasini Chandramouli, with additional questions at (408) 974-3123. Thanks again for joining us today. Operator: Once again, this does conclude today's conference. We do appreciate your participation.