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Operator: Good afternoon, everyone, and thank you for standing by. My name is Kevin, and I will be your conference operator today. Today's call is being recorded. I would like to welcome everyone to Nextpower's Third Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] At this time, for opening remarks, I would like to pass the call over to Ms. Sarah Lee, Head of Investor Relations. Sarah, you may begin. Sarah Lee: Thank you, and good afternoon, everyone. Welcome to Nextpower's Third Quarter Fiscal Year 2026 Earnings Call. I'm Sarah Lee, Nextpower's Head of Investor Relations, and I'm joined by Dan Shugar, our CEO and Founder; Howard Wenger, our President; and Chuck Boynton, our CFO. As a reminder, there will be a replay of this call posted on the IR website, along with the earnings press release and shareholder letter. Today's call contains statements regarding our business, financial performance and operations, including our business and our industry that may be considered forward-looking statements, and such statements involve risks and uncertainties that may cause actual results to differ materially from our expectations. Those statements are based on our current beliefs, assumptions and expectations and speak only as of the current date. For more information on those risks and uncertainties please review our earnings press release, shareholder letter and our SEC filings, including our most recently filed quarterly report Form 10-Q and annual report on Form 10-K, which are available on our IR web page at investors.nextpower.com. This information is subject to change, and we undertake no obligation to update any forward-looking statements as a result of new information, future events or changes in our expectations. Please note, we will provide GAAP and non-GAAP measures on today's call. The full non-GAAP to GAAP reconciliations can be found in the appendix to the press release and the shareholder letter as well as the financial section of the IR web page. And now I will turn the call over to our CEO and Founder. Dan? Daniel Shugar: Good afternoon, and thank you for joining us. Nextpower delivered another strong quarter characterized by solid operational discipline and execution, increased backlog and continuing focus on customers and innovation. This call represents an important milestone for the company being the first quarterly earnings report under our new Nextpower brand. At our Capital Markets Day last November, we outlined our strategic evolution. It started several years ago from a pure-play tracking system supplier to an end-to-end solar technology platform. We followed that with a Technology and Market Symposium, where we engaged directly with customers to showcase our expanding portfolio of value-enhancing products and services that we are building around our core tracker business, including our road map to incorporate power conversion solutions for utility-scale solar and battery energy storage. Customer response to the strategy has been very positive. And Howard will share more detail on how this is translating into customer adoption. We recently completed the formation of Nextpower Arabia, our joint venture with Abunayyan Holding in the Middle East. The JV is already off to a strong start and will supply 2.25 gigawatts of advanced tracking systems to one of the world's largest utility-scale solar projects. With the launch of Nextpower Arabia, we're focused on building local operations, manufacturing capability, and long-term partnerships that support the Kingdom's energy ambitions. Together with Abunayyan Holding, we are advancing the localization of renewable energy technologies, strengthening supply chains and creating the foundation to locally manufacture and support up to 12 gigawatts of solar capacity annually with the potential to create thousands of jobs over time. Saudi Arabia and the surrounding GCC sit at the center of one of the most dynamic energy transitions in the world. Rapid growth in electricity demand driven by economic transformation, mega projects and the expansion of AI and digital infrastructure calls for solutions that can scale quickly, reliably and efficiently. Solar energy is uniquely positioned to meet that demand. As the lowest cost and most scalable power generation technology available today, solar is playing a central role in the energy future of Saudi Arabia and the broader MENA region. Let's turn to our financial performance. We delivered robust financial results across all key metrics. Q3 revenue grew 34% year-on-year to $909 million, and adjusted EBITDA increased 15% to $214 million. Fiscal year-to-date revenue increased 32% year-over-year to $2.68 billion. We generated solid cash flow and further strengthened our balance sheet. We also became the first pure-play solar product company to achieve a formal investment-grade rating, reinforcing confidence that Nextpower can stand behind projects for decades, supporting financing, warranties, service and asset performance over the full life cycle of the solar generation infrastructure projects. Discerning power plant owners greatly value Nextpower's financial strength. Based on our performance and the visibility we have across our business, we are raising our fiscal 2026 financial outlook, which Chuck will discuss in more detail. Finally, I would like to thank our customers for their continued trust and partnership and our employees for their commitment to innovation and execution. We remain focused on scaling our technology platform and creating long-term value for shareholders. I'll now turn the call over to Howard to provide more color on the quarter. Howard Wenger: Thank you, Dan. During the quarter, we saw continued strong customer bookings, which drove further backlog growth. We also continue to innovate and release important hardware and software to the market, and we had another strong quarter of financial performance enabled by our global operations team. We manage our business on an annual and multiyear basis, which is consistent with the nature of the utility-scale solar power industry with large-scale projects spanning multiple quarters in multiple geographies. We are increasing our outlook for the remainder of the year based on the strength and diversity of our backlog, a continued flight to quality that favors Nextpower and the deep capability and commitment of our global team. Turning now to regional demand. In the U.S., bookings were up and revenue increased 63% year-over-year, reflecting Nextpower's technology and customer experience advantage for what we call a flight to quality. There also continues to be an increasing demand shift for domestically manufactured systems, which we are able to meet with our robust domestic supply chain and favorable lead times. U.S. project and demand creation continues with developers generally reporting their ability to move projects forward through to final permitting and financing and they are doing so across multiple years of completion, providing extended visibility. Encouragingly, several customer projects cited on federal lands that have been on hold have begun to move forward as well. Demand for our core tracker technology remains strong as reflected in sustained customer adoption of the NX Horizon Hail Pro tracker. During calendar year 2025, our systems executed 2,170 hail stows worldwide with our customers reporting a less than 0.007% module breakage rate. This is very good news and supports our innovation thesis. Our expanding technology platform is now gaining traction for both tracker and non-tracker offerings with an increasing and more diverse mix in our order book. For example, this quarter, we booked a 552-megawatt order incorporating a technology bundle on a single project including our NX Horizon Hail Pro tracker, eBOS manufactured in the U.S., our NX Earth Truss foundation system and our TrueCapture control system. Moving to the international market. Europe again stood out with record quarterly bookings and expansion into 2 new countries. We are also excited about the formation of our new JV company NextPower Arabia to serve growing demand across the MENA region. Saudi Arabia alone has ambitions to install 130 gigawatts of renewable energy by 2030. We also introduced our NX Earth Truss foundation solution overseas, marking a positive step in the international expansion of our technology platform. As Dan noted, we announced plans at our Capital Markets Day to extend our platform to include power conversion solutions. This project remains on track with customer pilots planned for calendar year 2026. Turning now to project timing and pricing. Project timing remains stable and manageable on a portfolio basis, consistent with previous quarters, with some projects accelerating and others pushing out. On balance, Q3 saw a modest net pull in. Pricing continues to track the broader solar cost curve, and we continue to invest in R&D and scalable infrastructure to reduce cost while improving system performance. Our culture is to relentlessly serve our customers and deliver maximum value at competitive cost and pricing. In summary, our business fundamentals remain strong. Demand is healthy. Our backlog is large and growing. Project timing and execution visibility is solid, and we continue to strengthen our competitive position through innovation, customer focus and operational excellence. With that, I'll turn the call over to Chuck. Charles Boynton: Thank you, Howard. Good afternoon, everyone. Overall, Q3 was another quarter of strong execution with results that reflected both healthy end market demand and continued discipline across the business. For our fiscal 2026 third quarter, revenue was $909 million and adjusted EBITDA was $214 million, representing an adjusted EBITDA margin of 23%. On a year-to-date basis, adjusted EBITDA increased 22% year-over-year, demonstrating the durability of our margin profile even as we navigate tariffs and invest in growth initiatives. We generated GAAP net income of $435 million year-to-date, underscoring the high-quality earnings power of the business. 81% of Q3 revenue came from the U.S. with 19% from rest of world markets. Year-to-date, our revenue mix was 75% U.S. and 25% rest of world. This geographic balance gives us both scale and diversification while allowing us to maximize investment returns and prioritize disciplined execution. Turning now to cash flow. We generated $123 million of operating cash flow in the quarter and $391 million year-to-date. Capital expenditures remain modest, resulting in adjusted free cash flow of $119 million in Q3 and $360 million year-to-date. This level of cash generation reflects strong underlying profitability, disciplined working capital management and the capital efficient nature of our business. Importantly, it gives us significant flexibility to invest in growth while maintaining robust liquidity. Our balance sheet remains a core competitive advantage. We exited the quarter with $953 million of cash and cash equivalents and no debt. We also recently achieved a formal investment-grade credit rating, which we view as a meaningful external validation of our cash predictability, disciplined financial management and the durable business model. This milestone is important to our customers and suppliers, while also enhancing our financial flexibility. Our capital allocation priorities remain unchanged. First, we continue to prioritize organic investment in new products and services; second, disciplined M&A that strengthens our technology platform and creates customer value; third, return of capital to shareholders. Today, we are announcing that the Board authorized a share repurchase program of up to $500 million over 3 years. This program reflects our confidence and the long-term outlook of the business and our ability to generate durable cash flows while maintaining flexibility to invest for growth. Investments in organic growth and M&A continue to be our top priorities followed by share repurchases. Moving on to tariffs. As expected, tariffs continued to have an impact on margins, particularly on a year-over-year basis. This quarter, the tariff impact was $44 million, up from $33 million last quarter. This increase was due to the partial impact in Q2 given the effective date of the new tariffs was August 15. Our diversified and increasingly localized supply chain, combined with pricing discipline and operational execution has allowed us to manage these impacts efficiently. We currently work with over 25 U.S. partner manufacturing facilities, and Nextpower was the first to deliver 100% domestic content trackers under U.S. treasury guidelines and we're seeing increased customer adoption of these solutions to mitigate tariff exposure. We also continue to work very closely with our customers to manage tariff-related impacts across multiple projects. Looking ahead, we expect tariff-related margin pressure to remain manageable and largely consistent with our prior expectations. Finally, based on our performance through the first 3 quarters, the strength and the quality of our backlog and continued demand across our core markets, we are increasing our financial outlook for fiscal year 2026. We now expect revenue between $3.425 billion and $3.5 billion, adjusted EBITDA between $810 million and $830 million and adjusted diluted EPS in the range of $4.26 to $4.36. We continue to expect gross margins to be in the low 30s and operating margins in the low 20s. The current outlook for next year indicates another year of solid growth. Our outlook assumes the current U.S. policy environment remains intact and permitting processes and time lines will remain consistent with historical levels. Overall, we feel confident in our ability to deliver sustained growth and profitability while continuing to invest in innovation and long-term value creation. We continue to execute at a high level while maintaining strong margins and cash flows. We believe our strategy, team and platform uniquely position us to deliver long-term shareholder value. Thank you. And with that, we'll take your questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of Philip Shen with ROTH. Philip Shen: Great job on the quarter. I wanted to check in with you on bookings in the quarter and book-to-bill specifically. I know you guys talked about record backlog and backlog being greater than $5 billion. But I wanted to understand if your bookings cleared $1 billion in Q3. And then if you can share some color on the revenue for Q3 what was the mix for the U.S. business of tracker versus non-tracker, and then how might you expect that to trend in the coming quarters or years? Howard Wenger: Phil, this is Howard Wenger. Thanks for your questions. So yes, we're really pleased with the quarter with everything that we executed, the name change, the Capital Markets Day, coming -- being prepared for that and the Customer Day and we announced our JV. So with all of that, we continued to execute the business really well. Bookings were strong, revenue, the financials. As far as bookings, to your question, we did have growth in our backlog. It is a new record. We're not giving specific numbers. But suffice it to say that it was one of our stronger quarters that we've had in some time, and we're really pleased with that. It was a little bit weighted to the United States, just to give you some color. And as far as tracker and non-tracker on the revenue mix, the non-tracker business is starting to have an impact. And what we're seeing is a little more mix on the U.S. from that because we're rolling out the non-tracker part of our platform first in the United States, and I'm talking about foundations, eBOS, robotic inspection and other -- and software and services are more focused on the U.S. market first, and that is having some impact on bookings and revenue and the mix weighting there towards the U.S. Thanks for your question. Philip Shen: Howard, very quickly, just can you clarify, you said 1 of the stronger quarters that you've had in some time. Does that mean for bookings specifically that this quarter was one of the stronger bookings quarters in a long time? Or does that mean just your quarter overall? Howard Wenger: I was speaking particularly to bookings when you look at contribution to our backlog, Phil. Philip Shen: Great. So that would suggest that it was at least $1 billion. Is that fair? Howard Wenger: Really appreciate the question, Phil, and your persistence. We'll leave it right there. Thank you so much. Operator: And your next question comes from the line of Praneeth Satish with Wells Fargo. Praneeth Satish: Congrats on the quarter. Maybe if you could just provide a little bit more detail on the permit freeze. You mentioned that some of the projects on federal lands are still moving forward. I guess are you seeing any slowdown at the front of the funnel for projects that would be targeting 2028 in service days that require permits this year? Or are you saying that so far, developers have been able to kind of manage around some of these constraints. Just any clarity there would be helpful. Daniel Shugar: Praneeth, it's Dan Shugar here. We were speaking specifically about several projects that are on federal lands that are now moving forward. While in total number, those are a small percentage of the projects that we're working on, it was great to see that those move forward. And so Howard, do you want to take the second part of that question? Howard Wenger: Sure. So we're in close touch with developer owners and EPC partners, both. But on the developer owner side, what we're seeing and hearing is their project portfolios are moving forward. Now some are completely not on public lands -- public and federal lands. In fact, a number of many developers that way, they have very little exposure to public lands. And consequently, they're less impacted. But what we're reporting on is both favorable velocity of projects through to the permit phase, both on the public lands and on private lands. And that includes areas where there are a federal nexus. And just generally speaking, in the U.S., we're very pleased with the broadening pipeline that we have and growing pipeline of opportunities. And so developers are navigating. They are very safe harbored. They have a lot of visibility into the future. And it's really quite positive. Operator: And your next question comes from Dimple Gosai of Bank of America. Dimple Gosai: Well done on a very nice quarter. This quarter you noted record bookings and rising bundled attach. So could you give us a sense of what the attach rate is for TrueCapture, eBOS, Earth Truss, robotics? Any sense and color there would be helpful. And then also give us a sense of just the growth gross margin uplift for a typical bundle versus tracker only, especially given that you're seeing some more traction on that side. Howard Wenger: Sure. So this is Howard. I'll take the first part. And Chuck, if you want to talk about gross margin, I can also do that. But on the attached side, first of all, we have both an inorganic and organic approach to innovation and filling out our platform. So we're developing new tech internally but we're also making acquisitions, as you know. Some of those acquisitions are fairly recent, for example, the eBOS acquisition we made, which is significant occurred in May of '25. So it's been, what is that like, 8 months. So using eBOS as an example, what we're seeing is, by far, the pipeline is expanding exponentially in terms of opportunities because of our sales platform. And we're beginning to see more and more bookings and sales and revenue come through that particular channel. We're not giving specific attach numbers at this time. But suffice it to say, we're seeing some very significant projects. The one we highlighted as an example, is a 552-megawatt project, where we have our trackers, foundations, eBOS and TrueCapture all bundled together. So we'll be talking more and more about that as our pipeline matures for these other products and services that are what we call non-tracker but fill out the platform and complement the tracker. As to financials and margin, do you want to weigh in on that, Chuck? Charles Boynton: Certainly. Thanks, Dimple. We don't break out in detail the non-tracker or tracker revenue splits. Really, today, it's all about scaling the technology and the go-to-market. In general, they're roughly at the corporate average. Of course, some are higher software, as you know, Dimple, is quite a bit higher and other wins are kind of around the corporate average. But I would just think of it from a modeling standpoint, it's roughly consistent with the guidance and the outlook that we provided. Operator: Your next question comes from Brian Lee of Goldman Sachs. Brian Lee: Kudos on the solid execution. The first question I had was given the higher base of revenue and profit here for fiscal '26, is there any update on the view for fiscal '27 that you provided at the Analyst Day last November, maybe just how should we think about flow-through into next year given the stronger results here? And then a follow-up would just be on some of the accounting here with the IRA credits, they're down despite higher U.S. mix. Curious -- I mean that does mean ex IRA gross margins are higher here than the past couple of quarters. But is that timing related? Or is there something with respect to sharing of credits and pricing that's impacting that dynamic of U.S. sales higher, but IRA credits down? Charles Boynton: Yes. The IRA credits are roughly in line with the prior quarter, Brian. What you're seeing effectively is the blending of the tariff impact, and as I mentioned in the prepared remarks, the tariff impact went from $33 million last quarter to $44 million this quarter, and that's really just because you have a full quarter impact of the overall tariffs. As it relates to our outlook for next year, we just provided our outlook just a couple of months ago at our Capital Markets Day. So we're not updating or changing that. But I'll just say with the strength of the business, we feel really good going into next year, and we're set up for a strong Q4 and feel really good about going into next year with a great backlog. Operator: And your next question comes from Mark Strouse of JPMorgan. Mark W. Strouse: Great to see the 2.25 gig Nextracker Arabia order. I know we've talked about in the past kind of the longer-term targets from KSA and whatnot. But just kind of curious, just looking out over the next, whatever, 12, 18, 24 months, kind of what a reasonable expectation might be, can we expect to see similar gigawatt-scale orders coming through from that JV. Then I have a quick follow-up. Daniel Shugar: Mark. It's Dan Shugar here. We just came back from spending a lot of time in Abu Dhabi and Dubai and Saudi Arabia. And that market is really strong in terms of the amount of solar that's happening there. The -- I mean, not just in those countries but the region, very strong. We're seeing very strong double-digit gigawatt growth happening, very ambitious targets that are being set and executed upon with multiple public solicitations from some of the largest energy participants in the region. There's national targets and there's targets at utilities. Really big stuff happening. For example, in UAE, the -- so the largest market is Saudi Arabia. And UAE is also a very strong market. There, there's a project called the Round-The-Clock project, very interesting, 5 gigawatt of solar single project with a tremendous amount of battery. It's either 19 or 29 gigawatt hours, I can't remember at this instant. But that enables 24/7 renewable power -- solar power to be served to the region. That's really quite an interesting project. And we're seeing -- but exemplifies the ambitious scale of what's happening there. And I think it also provides a little bit of context for how cost-effective solar is because, obviously, there's a tremendous amount of oil and gas there. Solar is lowest cost way to generate power even though all those natural resources are there. And so we're excited to be a participant in the region. We were the first -- we did the first utility-scale power plant in the region, the 400-megawatt Sakaka project in Saudi Arabia 7 years ago, which has performed with exemplary reliability. And there's a strong flight to quality performance there. We personally visited one of our projects that was in the field that was outperforming. It was operating at about 105% of expectation, the whole system. And so the customers are really pleased with that. So yes, we're very excited about being there. Thank you. Mark W. Strouse: If I can ask you a quick follow-up to Chuck, I think I know the answer to this, but since it's the first time that you guys are issuing a buyback authorization, I just want to check, just how you're planning to approach that? Is there a base level of buyback activity you're looking to do each quarter? Or is it just completely random, completely opportunistic? Charles Boynton: Yes. No, it will be a structured program, Mark. But again, since we're kind of first time in the market, we're going to kind of go slow and cautious out of the gates because again, what's new to us. And so we'll develop our program more formally. But the goal would be for it to be a more of a formalized program versus just opportunistic. Operator: Your next question comes from Julien Dumoulin-Smith Smith of Jefferies. Dushyant Ailani: This is Dushyant here for Julien. I just had a quick few questions on the Saudi JV. Maybe if you could share a little bit more about the timing of it and how does the margin cadence look like? Just how can we think about it kind of flowing through over time, the 2.25 gigawatts? Howard Wenger: I'll start with the with the timing. And then, Chuck, if you want to weigh in on the second part. So the JV has been launched, and we closed it a few weeks ago. It's operational. The 2.25 gigawatt project that we announced we're already delivering on that project this quarter materially. And we had an existing factory in Riyadh that's continued to produce. We have a new factory under construction in Jeddah. We visited that factory last week. It looks fantastic. It's quite large scale. Additionally, we're continuing to work with some of our legacy supply partners and we're extremely pleased to be partnered with Abunayyan Holdings, fantastic organization, and we're set up and operating. Chuck, second -- part 2. Charles Boynton: Yes. So the way I think about this is, as Dan mentioned, Abunayyan is a blue-chip company. It's the kind of company that -- a great Silicon Valley company we want to partner with. And so we're really proud to partner with them. As we mentioned in the past, it's structured as roughly a 50-50 JV. It's not quite -- we will not consolidate and that is on purpose because effectively, it fits well with our high-ROIC capital-light model. And so what you'll see is when the JV sells projects, we effectively will generate revenue by selling some technology into the JV. There will be a revenue -- a royalty and then, of course, our share of the JV's profits. So we'll provide a little more color next quarter as we do our kind of 2028 outlook or guidance -- or 2027 outlook and guidance. So I'd say stay tuned, but we're really excited about this opportunity, and we think Abunayyan is going to be a great partner. Dushyant Ailani: Awesome. And then just one quick follow-up. When you talk about the power conversion, could you just talk a little bit about how that -- how your conversations with customers are evolving there? What does it look like? Are they more focused on [indiscernible] versus solar? And how does the competitive landscape look like for power conversion? Daniel Shugar: I'll speak to that. Howard and I've been in this business since the 1980s. And power conversion has been the opportunity for greatest operational performance of solar and batteries over that -- for that whole time, okay? And why are we launching this category? Well, it's because it's not easy. Let's start with that, and we take it very seriously. We're doing it because there's opportunity to deliver higher efficiency, higher reliability and availability, safer and better service of that product category. We have a lot of experience here at the company with our technical team and our leadership team in this area. And we're factoring in user requirements to be able to achieve higher plant availability. The #1 item on a Pareto to improve the operating fleets around the world is to have better reliability and performance in this particular category. So that's why we're doing it. And we're approaching it where we're not cutting corners, but yet developing a product that's competitive and has local manufacturing attributes. We're starting in the United States. We have operating alpha units. We showed our skid of these -- this particular solution in the field at our Capital Markets Day, we're looking forward to fulfilling some initial beta projects with customers this year and then scaling the business responsibly after that. Operator: Your next question comes from Vikram Bagri of Citi. Vikram Bagri: I wanted to ask a housekeeping question first, and then I have a follow-up. You mentioned the non-tracker margins are comparable to corporate average. At the Analyst Day, the margins for non-tracker were indicated to be about 6%. So are you saying those margins are tracking higher the EBITDA margin expected to the Analyst Day? And what changed between Analyst Day and now? Charles Boynton: Yes. Nothing has changed. I was talking gross margins, not EBITDA margins. And effectively, because it's a fairly small base, it doesn't really change the overall profile. But I'd point out, a big part of the non-tracker revenue is software, and that's way, way above the corporate average. The other ones are smaller and therefore, the way to think about it in the short term, is kind of blending with the corporate average. It's not going to change a whole lot. Over time, what we outlined at our Capital Markets Day is still intact. Thank you. Vikram Bagri: And as a follow-up, you mentioned in your prepared comments, IG rating is important for customers. Can you highlight in which regions is it important? Does it play an important role in Saudi? And if there is a way to quantify how many customers consider is important, like how much of an edge does it provide to you relative to your competition? Charles Boynton: Yes. So investment-grade rating is important to all customers and suppliers, some different. Internationally, it makes a big difference. If you're working with a large developer or owner, they care deeply about the credit profile of their counterparty, whether it's a customer or a supplier. And so while it may not matter as much to you, financial community, it matters a lot to our customers. It's really a testament to how well the company is managed and the disciplined approach that we take to operating our business. Dan, do you want to add anything? Daniel Shugar: Yes. What I would add is that if you look at a number of markets, let's just talk about the United States. If you went back 5 or 10 years ago, there were a lot of developers that were then flipping projects. Today, some of that occurs but most of those type of organizations have evolved into also operators, owners of systems, independent power producers. Also, we've seen a huge growth in utility ownership of solar. And folks are really concerned about the long-term operation really optimizing the risk-adjusted levelized cost of energy, and that's really important. We were in the Middle East, I mentioned, a few weeks ago. There's a huge system there, not with Nextpower that's being completely dismantled and rebuilt due to, let's just say, performance issues. And we -- folks want to be not be penny wise and pound foolish. So we're really seeing long-term ability to support the development, finance, supply, operation, spare parts, warranty reserve over life of the project, really be a much more important attribute as the industry has matured and go on to long-term risk-adjusted levelized cost of energy optimization. Operator: And your next question comes from Ben Kallo of Baird. Ben Kallo: Congrats on the results. Two questions, maybe bigger picture. Number one, with all the emphasis on bring your own power, has that showed up in your discussions or in orders? And maybe just talk to that? And then the second question energy storage volumes are very large to say the least. Any way that you guys are thinking about addressing that market or working with that market? Howard Wenger: Ben, this is Howard. So I'll start and then Dan will finish. So on the bring your own power, there's absolutely an amazing dynamic that's happening in not only the United States but around the world with respect to AI, electrification, which includes electric vehicles, the data centers that powers everything that we do, robotics. The energy requirement for chips is just going up and up. So what's happening, what you're seeing in this country, which spills over to other countries is some of the larger hyperscalers are getting more and more involved. You've seen some announcements directly in making sure that the power is there for their expansion and their requirements. So there's no question that the bring your own power is part of the equation. There's no question that we're seeing that in our opportunity base. And with respect to storage, I'll just start and Dan will finish. There's this great symbiotic relationship between solar and storage. And it's the fastest thing that can be deployed to market. We've seen that in the United States alone, over 80% of the new electrical capacity this year -- well, from January of 2025 to November of 2025, over 80% was solar and storage. And companies are reporting, large developer owners are reporting that they span both fossil and renewables and over 80% of their portfolios are solar and storage. So it's a logical extension for Nextpower to offer the solar power platform that extends into storage. And our power conversion system is something that can be used for -- in the storage category. Dan? Daniel Shugar: Yes. Thanks, Ben. When we've heard this bring your own power, it can mean there can be 2 definitions of that, okay? Definition #1 can be install electric generating capacity at some point in the grid that has been contractually generating a certain amount of gigawatt hours that flow through the grid to an end use. Definition #2 could be on-site power where the power is right there at the load, which reduces or potentially eliminates the need to be connected to the grid, okay? Almost all of what's happened and happening and discussed is the first definition. There are some cases of the second thing. So let's just speak to the first thing for a minute. That's been happening for more than 5 years. A huge amount of our projects are -- with our customers are for serving those applications, hyperscalers, data centers that are buying the energy to support through the wires to support their operations. So people have been bringing their own power that's increasing but it's not necessarily co-located at the actual facility. We have seen some projects co-located at the actual facility on the customer side of the meter. I do think we'll see some more of that, but customers generally want the grid, and they can supply their own energy through the grid. The grid is a very reliable thing. It's kind of a battery, if you will. And then what happens on the customer side of the meter is backup power and uninterruptible power supply. So I'd say it's been happening for quite a while, and we're going to see increased pull as large concentrated loads with data centers increases. With respect to Nextpower serving battery storage as well as solar, our inverter platform, power conditioning system, the fundamental architectures can definitely support both. It was conceived that way. We're continuing to evolve it. There are some differences as it goes to final productization for how -- in software and some of the applications for how those systems interface. But the fundamental platform can apply to both, and that's how we introduced at the Capital Markets Day and showed folks in the field. Operator: And your next question comes from Jon Windham with UBS. Jonathan Windham: Perfect. Perfect timing to bring me on. I guess I have a follow-up question. So Dan, you've been in the industry a long time, you've been a leader of it. I'd love to get your thoughts on the potential impact from greater availability of storage in the United States. Obviously, Ford had a very big announcement converting some of the what was supposed to be EV batteries into stationary storage. Stellantis and GM could potentially do the same thing. Just your thoughts on the potential impact to solar demand if we sort of go to a market that's a wash in batteries. Daniel Shugar: We think it's fabulous to build capacity of making battery cells, packs, containers in the United States and other major markets fantastic development. There's been a lot of tailwind to stationary storage that's come from electric vehicle demand and manufacturing scale up and then in the case of a few of the companies you mentioned, repurposing some of that capacity to stationary storage. We think it's awesome. And we think, as Howard mentioned solar and storage go together. Kind of like bass guitar and drums go together. And so what they do is they're quite complementary. And the other thing has just been amazing to see over the last 5 years, solar -- or excuse me, storage 5 years ago was predominantly 1-hour storage. Then you saw a 2-hour store. Now we're seeing 4-hour storage. We have some customers with projects that are 6 or 8 hours storage. I mentioned the project in the United Arab Emirates that's 24-hour storage. I mean it's my mind-boggling. So what we've seen happen in storage is the same thing that happened in photovoltaic cells where there was this cost reduction from the production learning curve effect, where every time the cumulative production doubled, cost dropped about 20%. And with this exponential growth in storage, you're seeing a commensurate reduction in the cost. That allows more hours and allows solar to be more and more ubiquitous as it gets -- as the deployments continue. So we're very excited about the manufacturing build-out and we think that will be a very good thing for the industry. Operator: And your next question comes from Dylan Nassano of Wolfe. Dylan Nassano: I think earlier in the call, you mentioned there was a little bit of pull forward in the quarter. And then obviously, you raised the guidance for the year. So I guess I just wanted to check on that kind of within the context of the preliminary fiscal 2027 guidance that you gave on the Capital Markets Day? Charles Boynton: Yes. So like we mentioned before, we're not updating or changing our fiscal '27 outlook from Capital Markets Day. It was just a couple of months ago. And as it relates to Q3, it was an incredibly strong quarter. When our customers would like us to accelerate schedules, we can. It's overall, a very, very strong quarter. We raised the year in Q3 was incredibly strong on the heels of customers wanting more product earlier. Howard, do you want to add anything else? Howard Wenger: No, you -- well, I'll just say that we're in very close contact with our customers. Some want acceleration. Some want to slow down because of a particular situation of site or timing. And we are just really working to meet the schedules of our customers and have exceptional on-time delivery, which we do have. In this particular quarter, there was a net acceleration. We have a portfolio of projects we manage on an annual basis, as we've said. And so you can see revenue going from one quarter to the next. But the year looks really good. The next quarter, we've talked about Q4, you got that. Q1 FY '27 looks very strong and up into the right. So yes, we're very pleased with our backlog and it really gives us visibility to manage the company on an annual basis. Thank you so much. Daniel Shugar: Okay. We really appreciate everyone dialing in. Thank you for those that participated in our Capital Markets Day, and this concludes this quarter's earnings call. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning and good evening. Thank you all for joining the conference call for the LG Display earnings results. This conference will start with a presentation followed by a Q&A session. [Operator Instructions] Now we will begin the presentation on LG Display's Fourth Quarter of Fiscal Year 2025 Earnings results. Suk Heo: Good afternoon. This is This is Heo Suk, Leader of the LG Display IR team. Thank you for joining our fourth quarter 2025 earnings conference call. Joining us today are CFO, Kim Sung-Hyun; Vice President, Choi Hyun-Chul, in charge of Business Control and Management; Vice President, Kim Kyu Dong, in charge of Finance and Risk Management; Lee Ki-Yong, in charge of Business Intelligence; Vice President, Kim Yong Duck, in charge of Large Display Planning and Management; and Ahn Yoo-shin, in charge of Medium Display Planning and Management, Park Sang-woo, in charge of Small Display Planning and Management and Son Ki Hwan, Head of Auto Marketing. Today's conference call will be conducted in both Korean and English. For detailed performance-related materials, please refer to our disclosure or the Investor Relations section in the company website. Please refer to the disclaimer before we begin the presentation. Please be informed that the financial figures presented in today's earnings release are consolidated figures prepared in accordance with International Financial Reporting Standards. These figures have not yet been audited by an external auditor and are provided for the convenience of our investors. I will now report on the company's business performance in Q4 2025. Shipment of panels for TVs and notebook PCs in Q4 remained solid, but there were some changes to the mix in some small and medium OLED products that lessen the usual seasonality. As a result, revenue rose slightly Q-o-Q to KRW 7.2008 trillion. Operating profit declined Q-o-Q to KRW 168.5 billion. It is owed to lower shipments of certain small and medium OLED models Q-o-Q together with one-off costs related to strengthening the company's profit structure and future competitiveness. As noted in last quarter's earnings call, for the purpose of raising the efficiency of manpower structure, costs associated with voluntary retirement program for domestic and overseas employees exceeded KRW 90 billion. In addition, fourth quarter included incentive payments as rewards to employees for achieving the company's first annual turnaround in 4 years and as motivation to further bolster the company's competitiveness. Cost for activities such as reducing low-margin products and inventory rationalization were also included in Q4 results, which were part of the initiative to adjust the company's business and product portfolio. It was intended to strengthen our profit structure and operational efficiency. Operating performance in Q4, excluding these one-off costs, expanded both Q-o-Q and Y-o-Y, demonstrating continued improvement in our business fundamentals and profitability. There was net loss of KRW 351.2 billion down Q-o-Q, primarily due to foreign currency translation loss stemming from the higher year-end exchange rate. EBITDA in Q4 was KRW 1.162 trillion, with an EBITDA margin of 16%. Next is shipment area and ASP trends. What we are seeing recently is that panel shipments by product have diverged from traditional seasonality, reflecting instead the downstream conditions, customers' inventory levels and strategic panel buying trends as well as differences in customer and/or product strategies among panel suppliers, particularly for the company, as we maintain profitability-focused product portfolio, shipment of low-margin midsized LCD models continue to shrink. Specifically in Q4, shipment area for TV and notebook PC panels grew quarter-on-quarter, while shipment for monitor and tablet panels declined. As a result, despite the strong seasonality, total shipment area rose modestly Q-o-Q to 4.0 million square meters. ASP per square meter was $1,297, down 5% quarter-on-quarter largely because shipment of certain small and midsized OLED models were concentrated in Q3. Although it fell Q-o-Q, it is up 49% year-on-year, reflecting continued progress in upgrading the business structure toward OLED and supporting expectations at the high level will be maintained going forward. Next is revenue share by product group. Overall revenue share remained largely unchanged from Q3. First, mobile and others accounted for 40% of revenue, up 1 percentage point Q-o-Q, mainly due to shifts in the product mix. IT revenue share remained almost unchanged at 36%, down 1 percentage point Q-o-Q, reflecting the deferring shipments across product categories, as described earlier. TV share out of revenue rose slightly by 1 percentage point as shipments of white OLED panels for TV and monitor increased. Auto revenue share rose to 7%, down 1 percentage point Q-o-Q. OLED products accounted for 65% of total revenue in Q4, unchanged Q-o-Q and up 5 percentage points Y-o-Y. Year-to-date, OLED share rose to 61% from 55% last year, up 6 percentage points. The continued upgrade toward OLED center business structure is steadily broadening and strengthening our growth and profitability base. Next is our financial position and key indicators. Cash and cash equivalents at quarter end were KRW 1.573 trillion, largely unchanged Q-o-Q. As we wind down nonstrategic businesses such as LCD TV and improve operating efficiency, the level of required operating capital has remained lower than in the past. Inventory at quarter end declined Y-o-Y to KRW 2.546 trillion, reflecting progress from our efficiency improvement efforts. Total debt decreased by KRW 1.886 trillion from the end of 2024 to KRW 12.664 trillion. And net debt fell by KRW 1.437 trillion Y-o-Y to KRW 11.0910 trillion. Debt-to-equity ratio improved to 243% and net debt-to-equity ratio to 141%, lower by 20 percentage points and 10 percentage points, respectively, Q-o-Q and lower by 64 percentage points and 14 percentage points Y-o-Y, further strengthening our financial soundness. I will now move on to guidance for Q1. Shipment area is expected to fall across all categories in Q1 due to seasonality. While ASP per square meter is also expected to fall slightly Q-o-Q, it will be tempered compared to the same quarters in the past due to the strong and sustained upgrade to OLED-centric business structure. Total shipment area is projected to decrease by low 20% level from the previous quarter and ASP per square meter to decline by mid-single-digit percent. Notably, ASP per square meter is expected to remain above the $1,200 line even through the seasonality of Q1 up by more than 50% Y-o-Y. I will now hand over to our CFO, Kim Sung-Hyun. Sung-Hyun Kim: Good afternoon and evening to everyone. I am Kim Sung-Hyun, the CFO. Thank you very much for joining today's conference call. Looking back to last year's performance, our most significant achievement was delivering a meaningful scale of turnaround after 4 years, improving profitability by more than KRW 1 trillion Y-o-Y, thanks to the hard work and dedication of all our members. Despite elevated external uncertainty and volatility in global markets, we continue to expand OLED revenue share and persisted with intensive structural improvements. As a result, we reduced our loss by roughly KRW 2 trillion in 2024 versus '23 and further improved results by about KRW 1 trillion in 2025. OLED share out of revenue reached a record high of 61% for the year. It was only 32% when we began business structure upgrade in 2020 and rose to 44% in 2022, then again to 55% in 2024. We believe that we are moving much closer to the complete solidification of our OLED-centric business structure, having terminated the large LCD business with the sell-off of Guangzhou LCD plants in 2025. Allow me to explain the one-off cost in Q4. There were explanation and guidance for costs related to voluntary retirement program provided at last year's October earnings call. And the actual cost incurred roughly KRW 90 billion is largely in line with the guidance. These costs include besides workforce rationalization to strengthen our business fundamentals, local workforce adjustment costs that were incurred while trying to improve our overseas production strategies to proactively address changes in trade and tariff environment, as well as customers' production strategies. Financial impact from the voluntary retirement cost is unchanged from what we described at last quarter. The one-off costs will be offset from about 18 months after implementation and will contribute positively to future results. In addition, as mentioned as part of the Q4 performance briefing, incentive payments tied to last year's business performance were also reflected. It is to recognize our members' role in achieving the first annual turnaround in 4 years and to motivate them further going forward. The incentive is intended to further support our ability to shift towards a technology-centric company by focusing more on improving our fundamentals, build a sustainable profit structure and better achieve our future goals. Last item is the cost associated with the strengthening profitability and improving operating efficiency. It will enable the company to boost future profitability and broader push to improve operational efficiency, such as reducing low-margin products or consolidating inventory and is expected to strengthen business performance overall. Total nonrecurring cost impact in Q4 was in the high KRW 300 billion range, which is the result of the company's activities and work to strengthen our profit structure and future competitiveness. Excluding these items, Q4 operating profit was roughly mid KRW 500 billion, exceeding market expectations. It is an improvement Q-o-Q and Y-o-Y underscoring continued improvement in our business fundamentals and profit structure. Looking ahead, we expect external uncertainty and product level volatility in the downstream market to persist this year. While numerous factors persist in our business environment like macroeconomic-driven real demand, changes in the trade environment and supply chain stability, we will remain focused on stabilizing our business performance by growing our OLED business and driving cost innovation and operational efficiency activities. Next, let me briefly remark on our plan and strategy by business. For small mobile we will expand panel shipment, leveraging differentiated technological leadership and strengthened customer partnerships to enhance business performance and stability. At the same time, we will systematically execute R&D and new technology investments to grow our future opportunities. For medium-sized OLED, we will respond to high-end market demand across product segments by leveraging our technological leadership and mass production experience. We will also respond proactively to shifting market demand and customer requests by more efficiently utilizing existing infrastructure. As to the demand for OLED conversion by product, which is expected to grow, we will carefully assess market size and conversion pace to enhance competitiveness in ways that will differentiate us. For IT LCD, as reflected in recent quarterly shipment trends and results, we are keeping our focus on B2B and differentiated high-end LCD while continuing to reduce low-margin products. It is leading to meaningful profitability improvement every year. We will intensify execution of what is already underway to achieve possibility for a turnaround this year. For large panels, we will solidify our leadership in the premium market through our differentiated and diversified TV and gaming OLED panel lineup on the back of growing recognition of white OLED's competitiveness and close collaboration with strategic customers. We will expand business results and pursue rigorous cost improvement to maintain stable operations. And for automotive, we will sustain our competitive advantage and create customer value based on our market leadership and differentiated product and technology portfolio. Finally, on investment. We maintained a CapEx policy focused on investments in our future readiness and structural upgrade. After investment optimization activities, CapEx in 2025 was completed at mid KRW 1 trillion. In 2026, CapEx is expected at KRW 2 trillion level, up Y-o-Y. This includes execution of the planned investment to enhance OLED technological competitiveness and investment to strengthen OLED business and future readiness. For any new investment decision, we will communicate with the market without delay. This completes our report on Q4 business performance and review of 2025. Thank you very much. Suk Heo: This completes our presentation of business highlights for Q4 2025. We will now take your questions. Operator, please commence the Q&A session. Operator: [Operator Instructions] The first question will be provided by Kangho Park from Daishin Securities. John Park: First of all, congratulations on achieving a turnaround for the first time in 4 years. Now I would like to ask 2 questions broadly about the company overall. The first is, in 2025, the company sold off its LCD company in China and continue with the business upgrade, and it has also increased the share of OLED out of the total revenue. It has also -- which has then improved the business performance as well as the profitability. So looking ahead to this year, then it appears that the share of OLED appears to be set to keep growing, which is likely, hopefully, to keep driving up the revenue. So then my question is, what is the company's outlook for each business? And also what is the expected business performance for the year? And also for the short term, I believe what the company needs in order to quell the negative perception about LG Display is to sever the trend of entering into loss in the first half of the year. So can we expect a better trend in the first half of this year? And the second question is, the company for the past few years has been focused on improving financial soundness, for example, improving the cost efficiency and also lowering the facilities and lowering the inventory level and also improving the overall operational efficiency. Now then again, looking ahead to 2026 and also from a more mid- to long-term perspective, what is going to be the company's new strategic priorities or strategic tasks down the road? And especially for the CFO personally, what would be your priorities or what would be the important part of your action plan? Sung-Hyun Kim: Thank you very much for the question, which was quite specific and also appear to have the answers embedded in them already. I would just like to provide my response at once based on my own interpretation of the questions. Now, of course, so far, there have been work to upgrade our business structure and also improve our operational efficiency and the results or the performance out of that is, I believe, meeting up to the -- to our commitment to the market perhaps not 100% satisfactorily, but we have done the job. But that does not mean that we can put an end to the process or the efforts that we have carried on for the past few years. Rather, they need to continue with new tasks in new phases. Now for the mid to long term, what is important and fundamental to the company is that, first of all, we need to keep growing; and second, we need to be steadfastly profitable every quarter. Now, that would be my short answer to questions #1 and 2. But then now in order to enable the points that I have just made, then there are some points that we also need to reach and allow me to explain a bit more. Now today, an important theme for the company is to turn into a technology-centric company. But then looking around to our external environment, then again in 2026, as you would all know, the environment is still full of uncertainties and also unpredictable elements. So then what should be the end goal for the company is -- so what I envision is that we need to become a normalized and competitive company. And this is because as we went through some tough times in the past few years, I see that the company has become perhaps a bit not typical and also perhaps that has eroded our competitiveness somewhat. Well, as you would know, there were losses to our capital, which made it impossible for us to pay out dividends. And we were seeing large losses up until 2 years ago. Our financial position was quite bad so much so that we had to turn to our shareholders to go into a paid-in capital increase. Now looking at last year's performance, yes, we were profitable, but not in all businesses. And what we need to do now is complete a business structure where we will be profitable in each and every one of our businesses, and so that we can also revive trust from the market. So this means that we also need to reestablish our operations inside the company and across the company. And there is no other choice but for us to continue with our business structure upgrade and operational efficiency improvement. But although the work and the efforts have to continue, I would say that the purpose has slightly become different, whereas in the past, it was more for survival. Now it is more about improving our competitiveness. Competitiveness in our technology, competitiveness in our cost, competitiveness in our products and also competitiveness in our efficient operation. So once we hit all these targets, then I believe we can once again become the market leader. So once we finish that process, then we will once again become a normalized company, win back market trust and also win back the love from our shareholders. So I have been a little bit long winded, but I would say that this is a homework that I have assigned upon myself. Operator: The following question will be presented by [ John Hou Yoon ] from UBS Securities. Unknown Analyst: My questions are also twofold. Now first is about the mobile OLED. Now the number for the smartphone panel shipment for last year and also the target for this year. So could you share the information regarding these numbers? And also depending -- so there were some changes in the product launch cycle by the customers and also looking at the technological preparedness by competitors, what are some of the opportunity factors that the company can expect? And another question. The following question is with regards to the company overall. So following tariffs last year, this year, it appears as if the memory semiconductors trends are going to be the major factor that could affect the business performance of each business segment. So what is the company's perspective and intended response to this trend? Unknown Executive: This is [ Park Sang Yoon ], in charge of a Smart Size Panel. Now looking back to smartphone business performance in 2025. The first half saw meaningful growth in panel shipments, largely reducing the seasonal variation between the first and second halves. In the second half, while the actual demand varied by model, the diversified product portfolio enabled our annual panel shipment target of around the mid-70 million units as planned. And typically, panel shipment jump from the third quarter to the fourth quarter, but last year stood out in that panel shipments were relatively concentrated in the third quarter. Our smartphone business is generating stable results based on enhanced capabilities across our technology, production and operations. This year, we aim to further close the gap between the first and second half while outpacing last year's growth in panel shipment. Now please understand that I am not in the position to comment on details about our customers. But what is certain is that our smartphone panel development and production capabilities are proven and recognized, and we have accumulated sufficient know-how to fully address diverse technical need. And we believe that by efficiently utilizing our existing production infrastructure, we can address swiftly and flexibly both the increasing demand and new technology readiness and grow our achievements. Now I would like to respond to the question about the impact from the memory semiconductors. Largely, there are 2 types of impact. The first is with the increase in the memory price, then there would also be a pressure on the display pricing that it could also go up. And then this could also increase the -- and for the IT, it could also increase the set price, which could a dampen demand. And also the component price could also go up, meaning that there could also be pressure from customers to lower the panel price. Having said that, the impact on the company currently remains limited, but the volatility is quite high. So we are carefully monitoring any changes in the demand as well as the trend and we'll also try to address any impact that might arise. Thank you. Operator: The following question will be presented by Won Suk Chung from iM Securities. Won Suk Chung: They are also twofold. First, as was mentioned earlier, the rise in the memory semiconductor price could also bring some questions about the company's profitability. And so my question regarding the company's profitability is that now about the IT set, now it appears that the outlook for the downstream market for the IT set demand appears to be conservative. So what is the company's outlook for the IT business? And also what would be the possibility of seeing a turnaround? And a related second question is, now the competition appears to be investing or going into mass production with the 8.6 gen plant, but the company at this time appears to have no such plans. Then wouldn't that place the company at a disadvantage when it comes to customers' allocation? And also, what is the outlook for the IT PC OLED for this year. Unknown Executive: For this year, the company's midsized business focused on upgrading our customer structure around global high-end clients throughout 2025, while actively reducing low-margin products. At the same time, we sustained rigorous cost innovation activities, generating meaningful improvement in profitability Y-o-Y. We anticipate this trend to continue into 2026. Now given the rising component prices driven by semiconductors, supply chain disruptions and lingering uncertainties in the broader external environment, full recovery in the market remains uncertain even in 2026, but we will strive to achieve differentiated results and profitability and future proofing. We will stick to our 2-track strategy with LCD focusing on profitability with high-end LCD and with OLED responding to new demand and preparing for new markets with Tandem OLED-based differentiated products. We are closely monitoring the potential for OLED market expansion in IT. So we are closely monitoring the OLED market expansion in IT, but there is still insufficient visibility into demand to justify an 8.6 gen investment decision and external uncertainties remain high, that could also affect demand. So for now, the company intends to monitor market conditions before making investment decisions. In the tablet OLED market that is -- that continues to open up, we have solidified our leading position based on the differentiated competitiveness of Tandem OLED technology at our 6 gen OLED fab. Monitor OLED is actively responding to the growing demand for high-end applications like gaming by leveraging our 8th Gen OLED fab. For notebook PC OLED, we are monitoring the OLED market size and the pace of demand shifting from LCD to OLED, maximizing existing infrastructure while developing future-ready technologies and mass production capabilities to retain a cost advantage even in competitive situation. Operator: We will take one last question. The last question will be presented by [ Sung Kim ] from Kiwoom Securities. Unknown Analyst: My question is with regards to the large OLED. Now thanks to the cost improvement as well as lower depreciation and amortization cost, it appears as if the profitability has been improving since the second half of the year. So then what is going to be the outlook for the TV and monitor OLED this year? And so based on the higher demand for the TV and monitor OLED as well as the lower depreciation and appreciation -- depreciation and amortization, does the company expect the profitability to continue to improve this year? And then also, the next question is now for the TV set companies, they are continuing to see sluggish differentiation and also worsening profitability. So there may also be some pressure to lower the price, but then what would be the company's response and also what would be the company's strategy down the road to continue to secure profitability in the large panel business? Duck Yong Kim: This is Kim Yong Duck, in charge of Large Display Planning and Management. Now our large panel business, despite the external uncertainties and market volatility, achieved the intended panel shipment of approximately mid-6 million level in 2025, growing nearly 8% Y-o-Y. Now the white OLED for both TVs and monitors is recognized by the market and customers for their differentiated value compared to LCD. And that is why I believe that we were able to maintain such business. Now coming into this year, we see that the uncertainty remains and also the market growth potential still remains a bit limited, but the high-end market that we are targeting with OLED maintains a 10% share of the overall market. So then in 2026, based on this projection, we plan to continue strengthening our W OLED, the white OLED lineup for TV and monitors based on partnerships with global strategic partners. And on the back of such partnership. The target for panel shipment in 2026 is set at just over 7 million to grow by around 10% Y-o-Y. And for the mid to long term, OLED TV is expected to maintain unwavering leadership in the market while expanding our performance. And for -- especially for OLED monitors, it is also expected to see continued steep growth compared to other businesses. So we will continue to effectively respond to market trends and also reach an optimal production share between TVs and monitors to continue to expand our business performance. And again, for the short term, this year, there is some positivity expected from some sporting events. But at the same time, some side effects are also expected, especially coming from the supply-demand situation of components, especially semiconductor. So for the company, as we look ahead to continued market growth, our priority lies in securing stability in our production as well as supply. Now for our large panel business, we expect the competition to continue to intensify and it is incumbent upon us to continue to strengthen our technology and also differentiate our products so that we can keep expanding our business performance. So to that end, we will continue to work closely with our customers in close partnership to make sure that we can bring about win-win to all the companies involved with improved profitability. So we will continue to discuss our strategy to that end with our customers. Suk Heo: Thank you very much, and that concludes LG Display's Q4 2025 Earnings Conference Call. We thank everyone for joining us today. Should you have any additional questions, please contact the IR team. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Thank you for standing by, and welcome to the Coronado Global Resources Fourth Quarter Investor Call. [Operator Instructions] I'd now like to hand the conference over to Chantelle Essa, Vice President of Investor Relations. Please go ahead. Chantelle Essa: Thank you, Darcy, and all for joining Coronado's December and final quarter call for 2025. Today, we released our quarterly report to the ASX and filed with the SEC. Today, I'm joined by our Managing Director and Chief Executive Officer, Douglas Thompson; and Chief Financial Officer, Barrie Van Der Merwe. Within our report, you will see our notice regarding forward-looking statements and reconciliations of certain non-U.S. GAAP financial measures. I also remind everyone that Coronado quotes all numbers in U.S. dollars and metric tonnes unless otherwise stated. I'll now hand over the call to Douglas. Douglas Thompson: Thank you, Chantelle, and thank you, everybody, for making the time to join us today. Before we begin, I want to acknowledge two tragic incidents that occurred since mid-December. Our thoughts and prayers are with the families, friends and teammates affected by these tragic events. These events are unacceptable, and we continue to work with the relevant authorities and our contracting partners to investigate. The safety and the health of our people are and will remain our highest priority. The journey this company has been on over the past 3 years has been significant. In 2022, we committed to a disciplined multiyear improvement plan. We've always said that if we executed consistently across our cost base, operational stability, fleet performance, workforce capability and capital discipline, it would pay off. And today, we can say it has paid off. The structural change to Coronado performance is now unmistakable. We have sustainably lowered our cost base, increased production across both regions and stabilized operating assets and expanded our capacity in line with our long-term strategy. Importantly, the business is now more predictable, more resilient and better positioned to leverage improving market conditions, and an endpoint in the past 7 years. Turning to the highlights for financial 2025 and December quarter. Team delivered solid production of 16 million tonnes, which is a 4% increase year-on-year, finishing at the lower end of guidance. In the group, our average mining cost per tonne sold averaged $97 a tonne, a 10% reduction year-on-year. The capital spend was $245 million for the year at the bottom end of guidance and the major investment phase for the business is now complete. We closed the year with exit run rates that outperformed guidance, which demonstrates the structural shift in the production and cost. We had the highest quarterly sales since 2021, quarter 3, the sales volumes increased by 11% quarter-on-quarter and operating cost was reduced by approximately $300 million across the year. Buchanan expansion and Mammoth Underground reached expected run rates in the second half of the year. Curragh's second half saleable production averaged 36% higher than the first half of the year and remained consistently above 1 million tonnes per month for the half year. Focus now shifts to the CHPP upgrades to maximize margin from the now stable low-cost mining base. Terra liquidity support from Stanwell reflects our critical role in Queensland's energy security. $150 million was provided mid-2025 and then the subsequent transaction brought for the 2027 reset we've all been waiting for with rebate forgiveness, and price support that exceeded the original reset expectations for 2027 that we're now enjoying. In 2026 Stanwell's mechanisms are expected to provide between $200 million and $250 million of cash flow uplift depending on prices and nominated tonnages. We also secured a 5-year $265 million covenant-light ABL facility at 9%, which was fully drawn in December and enabled full payment of the Oaktree facility and strengthened our near-term liquidity. So stepping back on this year, the message is simple. Our operating base is now more predictable, our cost structures are materially lower, and our expansion investments are delivering, and we have meaningful leverage to improved prices, a clear path to stronger cash generation, balance sheet deleveraging, and future shareholder returns. Focusing on our group's performance. The quarter delivered continued strong operating results. We achieved the highest quarterly and half year sales volume since 2021. We also set new quarterly and half year records for ROM and saleable production. Strongest half year since 2019 for ROM and since 2021 for saleable production and unit costs continue to trend down. ROM production cost per tonne averaged $56 a tonne, lower since 2021 and 15% improvement over the past 2 years. This reflects the disciplined execution of our improvement plan, including higher grade line utilization and tighter cost control. Our expanded infrastructure at Buchanan and Mammoth is now delivering higher and more stable run rates, translating into meaningful cost, productivity gains and contributed approximately 1 million tonnes of incremental saleable tonnes across the group for the year. The system capacity now 16% pre-investment levels -- above pre-investment levels. We entered 2026 in a materially stronger position to utilize this additional capacity as market conditions allow. For full year, we closed at 16 million tonnes of saleable production, a 4% increase year-on-year. And looking ahead, we expect to lift production rates in 2026, supported by our expansion projects. In Australia, the Curragh complex delivered a strong December quarter across all key metrics. With record ROM production and sales volume surpassing levels last achieved in 2020, our dragline system operated at their highest levels since acquisition of the mine in 2018, consistently accounting for approximately 50% of total waste movement up from historic levels of 30%. This is a significant lower cost method to move prime waste versus truck excavation. These gains reflect the one Curragh plan, which continues to improve pit configuration, decongest operating areas, enhance strike length and enable sustained gains for fleet rationalization, procurement and cost management. At Mammoth, the mine ran all 3 production panels and achieved run rates equivalent to 2 million tonnes per year during quarter 4. As a result, the mining cost per tonne sold in Q4 remained below the low end of guidance. To convert the now stable low-cost mining into maximized margin, we will execute targeted CHPP upgrades early this year. While these works may moderate production in the March quarter, they are designed to unlock additional processing capacity and product yield strengthening cash generation. As noted in our report cyclone Koji impacted the Bowen Basin earlier this month. We therefore, expect variability in quarter 1's performance. What is pleasing is our recovery. Improved resilience of Curragh complex enabled a much better than historic response and recovery and we continue to ship committed products to our clients. In the U.S., Buchanan delivered its strongest month since August 2022 during December. We recorded record daily ROM production and record skip counts as the expansion project benefits came to light. In December alone, Buchanan generated approximately 400,000 tonnes of saleable production, $20 million of earnings and achieved a $67 a tonne unit rate for the month. A great achievement and demonstrates our expectations when we look forward. Expansion is delivering as intended. The additional raw and product stockpiles and the second set of skips have increased capacity and created redundancy, enabling a sustained 1 million-tonne annualized run rate in December. These facilities also decouple maintenance schedules between the mine and the processing plant improving overall efficiencies. Technical conditions in both the north and the southern Longwalls during October and then in November, constrained production, resulting in a modest quarter-on-quarter reduction. However, Buchanan structural improvements to Longwalls, higher skip capacity and an expanded stockpiles, will reduce costs to sustain higher production than at the time of acquisition and support a long life of more than 20 years. At Logan, our 4 underground mines performed to plan and met forecast production for the quarter. The minor vessel delay into January increased sites and port inventories but did not impact the mines nor does it impact plant performance. And these inventories will support sales volumes during two Longwall moves scheduled for the March quarter, one that we're in the process of executing and almost complete. With that, I will now hand over to Barrie to speak to the financial position. Barend Van Der Merwe: Thank you, Douglas, and good morning, everyone. As Douglas said earlier, the production and cost results we announced this morning, is the result of hard work and dedication of many people over the course of the last 3 years or so. With the market starting to show signs of improvement, Coronado is well positioned to take advantage of this with our ramped up projects, lower capital expenditure, good cost control, more robust debt structure and improved liquidity position and support from Stanwell if liquidity weakens. Starting with costs. In FY '25, we achieved approximately USD 300 million in operating cost reductions versus the prior year. Both Curragh and Buchanan averaged around $86 a tonne over the last 3 quarters. This marks a structural shift in the cost position of both those assets now firmly within the midpoint of the industry cost curve. With a full year of production from the expansion projects, improving prices and the earlier-than-planned reset of the Stanwell agreement, profitability and cash flow will benefit materially in FY '26. For the year, the group averaged mining cost of $97.6 a tonne, which is a material improvement from $107 a tonne in FY '24 and $108 a tonne in FY '23. This cost performance is below the midpoint of guidance for FY '25. And this was at $0.645 FX on average for the year. The December quarter has got our strongest for the year with continuing consistent production of 1 million tonnes per month achieved since June. This is off the back of consistent on production and stable mining operations. Having established this rhythm in the mining process and the production bottlenecks shifting to the plants, we are starting FY '26 with a major plant shutdown for 2 weeks in February to work on plant reliability and maximizing the margin from EBITDA. For the full year of production for Mammoth in FY '26, the learnings from the ramp-up embedded in the operation, stable mining performance and the benefits of the February plant shut as well as a PLV index that has risen approximately 30% over the last 3 months. Curragh is set for a profitable and cash positive FY '26 and price and cash flow downside is protected by the recent Stanwell transaction. Douglas said earlier, the challenges Buchanan experienced with geological conditions in October and November, eased up during December. The mine generated $20 million in EBITDA in 1 month with a PLV index at $212 a tonne, well below current trading levels. That 1-month achievement was almost 1/3 of the full year's earnings in 1 month. This shows the value of the recent innovative capital-light expansion project that repurposed an unused ventilation shaft to install added skip capacity. For the full year, the mine was also a cash breakeven after funding its own expansion CapEx at a PLV index of $188 a tonne. This shows the quality of Buchanan and with the benefit of the full year of the expanded capacity and higher prices, Buchanan is set for strong cash generation in FY '26. CapEx spend, as planned, was $38 million in the December quarter and $245 million for the year. This is the bottom of guidance. It reflects the completion of our major investment phase. As these assets now move from ramp-up to steady state, we expect cash generation in FY '26, provided market conditions remained positive as was the case over the last month. Approximately $150 million of short-term liquidity management and working capital initiatives highlighted at the end of quarter 3 were fully settled by year-end. We closed December with $173 million of cash and did not do any liquidity management or working capital management levers at the end of FY '25. $173 million cash balance is, therefore, fully available to the business, and there's not been any -- not been a large outflow of any cash in Jan to unwind any such short-term initiatives. In December, we fully drew the new $265 million, 9% ABL facility and repaid the Oaktree credit facility in full. The ABL has no earnings governance for the first 2 years and does not contain any triggers that can result in review events, defaults or mandatory prepayments. It represents long-term debt committed in the business for 5 years at competitive rates which is provided by Stanwell with whom we have material common interests regarding Queensland's energy security and the regional Blackwater economy. Our high-yield notes only mature in 2029, and we, therefore, have no near-term debt maturities, which allows us to continue to focus on running our operations. The recent reset of the Stanwell arrangement brings forward the originally expected FY '27 reset. It was the remaining ACSA rebate for FY '26 and the early part of FY '27, that establishes a prepayment mechanism when liquidity is below $250 million. This puts Coronado in a better liquidity and cash flow position than that originally expected for FY '27. Depending on prices and Stanwell's nominated tonnages, this will add approximately $200 million to $250 million of cash flow in FY '26. This is in addition to the approximate $400 million ABL and prepayments provided in FY '25. The extent of this support clearly recognizes Coronado's common interest at Stanwell and the importance of the company's contribution to Queensland's energy security and broader economy. It provides a material capital structure and liquidity underpin that protects cash flow and liquidity levels drop below $250 million. In FY '26, we'll continue our disciplined cost control. We'll have lower capital expenditure, too. We'll benefit from a full year of volumes from the expansions that are in steady state. Cash flow will benefit from the latest Stanwell agreement. The improved market conditions and continuing work on minority disposals will focus on improving the capital structure by reducing debt, while at the same time, providing shareholder returns. We'll also ensure that we have liquidity contingency plans in place, ranging from liberating cash from cash back guarantees when our credit rating improves, factoring and unsecured short and longer-term prepayments for coal, if liquidity -- if temporary liquidity buffers are required. We'll be releasing our financial results for 2025 and 2026 guidance to the market on 24 February 2026. With that, I'll hand you back to Douglas for the market outlook and closing remarks. Thanks. Douglas Thompson: Thanks, Barrie. So in quarter 4, the PLV hard coking coal Australian index averaged $200 a tonne, with prices rallying sharply from October through to mid-December and reaching $219 a tonne late in the quarter. That was the highest since July 2024. And as we enter 2026, prices continue to strengthen. Supply side factors drove much of the price increases. Wet weather in Queensland in December, and that continued into planning and ongoing mine inspections and enforcement activities in China during October, November and broader trade flow constraints including the pace of Mongolia border clearances. For the March quarter, we expect prices to remain supported by firm India demand, seasonal Australian weather risk and continued supply rationalization. Coronado's footprint across Australia and the U.S. positions us well as global trade flows continue to shift. In U.S. changes in tariff structures and steel sector policies are reshaping traditional export pathways, putting greater pressure on the high-cost producers. In this environment, our low-cost Buchanan complex remains competitively placed with flexibility to serve non-European markets, while our Australian operations continue to benefit from strong demand. At the same time, the high vol segment in the U.S. remains structurally challenged, narrowing market access for operations like Logan and underscoring the importance of maintaining portfolio optionality as trade patterns evolve. Over the medium term, our outlook remains positive as steel production outside of China recovers and trade policies continue to favor markets across several regions. In this environment, Coronado is well placed to benefit from price changes to our higher production from our expansion projects and structurally lower cost base and increased operating predictability. Together with the Stanwell reset and restored liquidity, these factors position us to convert price momentum into stronger earnings and cash generation. With that, I'll hand over to Darcy and we welcome your questions. Operator: [Operator Instructions] Your first question today comes from Rob Stein from Macquarie. Robert Stein: Okay. Just obviously, the fatalities in the last month or so, no one wants to see and I'm guessing there are lots of activities going on behind the scenes to understand the root cause towards those fatalities across the U.S. and Australian operations. Can you share with us especially in the case of Mammoth, what initial learnings are? How confident are you that the risks can be managed and operations can return back to normal? Douglas Thompson: Rob, thank you. They are tragic incidents that occurred. And unfortunately, both of these are subject to investigation. So one needs to be careful what is communicated but also stick closely to the facts when talking about them. Let me say this, the Logan incident, the operations have returned to normal works, and there are no constraints on the operations post the incident and that investigation is ongoing outside of the ops. With the incident that's occurred here in Australia, investigations are ongoing. There is a milestone date 20 days after the incident, which we are still within to submit to the regulator, which is called the Section 201 Investigation Report and that the operators of Mammoth Mine will be submitting to the regulator. And then post that, we'll be able to talk more about that incident. I can assure you that all efforts have been made by us as demonstrated in the past that these tragic events get the benefit of the full focus of the business and all the learnings that we can get from it are shared with the industry as quickly as possible to prevent future incidents where learnings can be drawn. Robert Stein: And sorry, as a follow-up, is there any -- I think in your report, you said you did quite a few uplifts at Curragh related to Mammoth and continued cost improvement expected in '26. Are we expecting based on that commentary that following that 20-day deadline that milestone date that operations will resume and that they'll ramp back up to close to 100% of the trajectory they were on prior to the incident? Douglas Thompson: Rob, if you don't mind, I want to break your question into 2 pieces. One is me setting the date of when the regulator will lift the directive that we have because we're allowed to -- into the mine, we're allowed to do all other works except coal winning works at the moment that directive is public, and you can read it. So work is ongoing in the mine other than coal winning at the moment with the team. With regard to regulator lifting the directive, that's between the coal mine operator, the contracting company that we've appointed to do the work in them, and we'll clearly very interested and involved in the investigation and ensuring that we return to work safely as soon as possible. With regards Mammoth's capacity to ramp up after the event and keep operations going, I foresee with my experience, no reason why once directives have lifted that operations will return to our planned production rates from that mine. Operator: Your next question comes from Glyn Lawcock from Barrenjoey. Glyn Lawcock: Sorry, I just don't quite understand the answer to question before on Mammoth. So is there a set date? Or is it just the negotiation between the contractor and the safety regulator. So this could go on longer? Douglas Thompson: Glyn, in short, yes, there are milestones that under the law, you need to comply with as a coal mine operator. And as I said, the contractor in this case is the coal mine operator. So you've got a milestone date to submit an investigation on the act, which is called the Section 201 report. And we're still within the 20 days that, that is due for submission. So that is the milestone that I'm referring to. But then it's between the regulator who has issued the directive to determine the lifting thereof. And that's obviously working through that we can demonstrate our controls are appropriate to ensure safe works. Glyn Lawcock: Okay. That's clear. So yes, it's between the regulator and the contractor and how long is a piece of string. Maybe could you just talk a little bit to the status of discussions. I might have missed it. With the Queensland government over where do you need to cash back the rehabilitation fund for Curragh? What's the status there? Douglas Thompson: Well, Glyn, I'll say a couple of things. One is how the world has changed. So obviously, the state regulator has got an obligation to do their determinations, which they did last year. A lot of what their assessment is based on, if you go look at the framework that they're obliged to work with them was based on rating agency determinations. And then the scheme manager has discerned from there. We've met with them. We've shown them our modeling. We've shown them subsequent to the discernment. So this is really important to pull out. They made the determination on what was information at a certain time. Post that, we could only make public to them the deal that we struck with Stanwell. We met with them subsequent to that again. And even this month, we provided them further information to support importance of Curragh to Stanwell and Queensland's energy sector and our liquidity improved strategies that have all been delivered that we committed to them have now all been delivered in our improved position. So they're now working through that information that we've given them, and we're looking forward to their reported outcome. Glyn Lawcock: Again, is there a time line for resolution or at least a ruling? Douglas Thompson: Yes, they have indicated to us that within their framework, and always there's out within that, it will be in the month of February. Glyn Lawcock: February this year. Okay. And if I could squeeze in a last one. I was interested in your comments around the high vol met coal market and the issues that Logan faces now with uncertain pathways, both domestically and export. I mean where does that leave you with Logan then now? Is it formally up for sale? Or what's your thought process? Because you obviously talk about obviously, other ways to unwind the debt structure of the business. Douglas Thompson: Glyn, you track this, I read a lot of what you write about it. So you as well informed or if not better informed than anybody. The high-vol market is in oversupply in the United States at the moment. U.S. market is talking about a reduction in the steel -- domestic steel production this year and next. What's happening with tariffs and threats around tariffs is impacting the Canadian market. So there's a lot of fluidity in the negotiations that are ongoing in the U.S. at the moment. There's a few producers that have recently spent a lot of money bringing Longwall operations online that produce high vol A and B and are looking to place that into the market. But the work that the team has done over the last 3 years, as you can see in the results we're speaking about today and the capital investments behind us and particularly the Stanwell reset, we're now in a fortunate position to pivot to margin ensuring that we drive good margin out of the business, and that includes us looking at our portfolio of products that we produce. And looking at where do we employ our investors' capital into the future for the best sustained returns. Now Logan does have contracted tonnes that we committed to, and we'll continue working towards, and we will be reviewing all of that as part of our strategic plan. Operator: [Operator Instructions] Your next question comes from Daniel Roden from Jefferies. Daniel Roden: Probably just wanted to start with, I guess, the Cyclone Koji impacts there and I guess how you outlined that you have better weather initiatives sort of operations up, like are you currently through a lot of that? Are you still seeing impacts from the operations? And are you able to split or define what inventory level you have at both of the sites and if any of that inventory is quartile? Douglas Thompson: Thanks for the question. There was a little bit of noise on the line. So please forgive me if I get it precisely wrong and don't hesitate to correct me. I think your question related to Cyclone Koji and our response to it and what's changed that I can speak to the improved response. There's a whole host of things that have changed at Curragh over the last 3 years in executing this plan. Primarily, if you start back in the operations, our pre-strip situations, particularly in our northern mine, which is dragline dominated at the moment with two draglines in the north, two draglines in the south. We've got good coal uncovered in near coal that is available for mining operations that when you have a weather event like that, you have an increase of water entering the mine, it takes you a bit of time to pump the water out or leave the water somewhere else and then clean. We fortunately had coal that was higher, so we get back into production relatively quickly. The other resilience to wet weather going forward, and it's adjacent to the Mammoth is we have coal that's being mined from underground now that is stockpiled that we can move to the operations. Now clearly, Mammoth is operating now, but we did have stockpiles of coal that we've got access to and structurally changed to Curragh long term is this augmented coal flow. It's an added benefit of Mammoth. It's not only a lower cost supply of coal. It's a different mining method that derisks it. And then also our inventory positions that we have. If you look at our sales volumes at the back end of last year, a little bit in the U.S., as I mentioned, but particularly in the Australian area. Raining in Australia was a challenge for most people on the Blackwater line above rail providers had a whole host of issues that canceled trains. We had to pivot our strategy through back end of November, early December, around what we moved to port. And you'll see in the results that we focused on moving met coal port and honoring our shipments to our clients, and we worked with Stanwell on product being available at the mine and ensuring that we got it to the power station for them, but we ended up with very large reserves of inventory, ROM inventory and port inventory and site inventory, in particular of product buildup. So unfortunately, we didn't get all the sales we wanted. But some of that has played to our hand at the moment. And that's why I say we versus others that had to call force majeure, they haven't been -- we didn't have to do that because we could meet all our net commitments at the back end of last year and then we had these inventories either in ROM or product that we could keep shipping. The main thing is the mining method across Curragh is a lot more stable than what it has been in the past. It's taken us a few years to address things like pre-strip deficits, get pit configuration sorted out, getting pumping input and export results, which has set the mine up to be a lot more resilient and be able to respond to events like this better than in the past. So all of that, I think, has answered your question. I hope with -- I heard it correctly and tried to cover most spaces very quickly. Daniel Roden: Yes. No, it hasn't. Apologies for the line before. And maybe just a clarification there. So there is portside inventory, you'd expect to destock some of that, but that might not be all in Q1, and you could see some of that destocking in Q2, so some of that working capital might still be neutral in Q1. You might see that outlook further in towards the end of Q1 or Q2? Is that a correct way of classifying? Douglas Thompson: Yes. Look, our rail has been impacted with cyclone at the moment, above-rail providers and actually below-rail providers restricted the number of trains that flowed in the first half of -- or back half of January through this event and then probably a little bit of restrictions into Feb. But we've still been able to get the product for our clients. And then importantly, as Barrie made a point of as well, we've got a major shutdown on our prep plant at Curragh for 2 weeks where we're doing some upgrade works to make it more reliable and get better yields out of the system because we've moved the bottleneck there. In that period, we'll be able to move quite a bit of product to the power stations and then also move what we have at site or the remainder of what we have to port and ensure that we meet our obligations. So we don't see much tipping over into the second quarter, it will all be in our committed sales for the first quarter. Daniel Roden: Okay. And maybe just to follow up on, I guess, working capital as well. I can read obviously, that you mentioned working capital charges outstanding have been cleared in the December quarter. I was just wondering if there's any, I guess, -- are there any outstanding payments or obligations? Are you expecting any future working capital, I guess, changes in the near term, specifically first half '26? Barend Van Der Merwe: Daniel, thanks for that one. So as I said at Q3, we pulled that working capital lever quite hard due to the cash and liquidity position. That's all unwound. It's all settled. So the $173 million at the end of December, is real cash. It's available. There's nothing to be called up from that. I think if you then look forward into Q1, obviously, with cyclone impact, fatality impact, we'll be drawing down especially in Australia, we'll be drawing down on working capital, that would be a bit of an inflow of cash. But then as we have the shut, as Douglas explained, I think we'll build up working capital again and then I would think by end of March, it should all flush through. So as we sit here currently, I don't expect a big working capital impact in Q1 if we execute the plan as we've got it. Daniel Roden: Yes. Perfect. And sorry, last one for me, but the $200 million and $250 million liquidity that you've called out for '26, are you able to, I guess, separate that into what proportion is from the, I guess, waiver and what proportion is from the prepayments? And what conditions outside of the financial conditions? What are the conditions that you would need to say to draw down on that from your perspective and Stanwell's perspective? Barend Van Der Merwe: Yes. So I mean the rebate forgiveness does depend a bit on what the gold price is. So the revenue line drives that. But roughly, I'd say, you can say that the rebate forgiveness put that at $100 million. And then the rest is the prepayments. The prepayments obviously happens. It's an automatic trigger depending on our cash balance. If the cash balance is below $250 million, then we get half of the total benefit; if it's below 200, we get the full benefit. With the full year results, we'll give a bit more detail as to exactly how that gets calculated. But as we sit here today, with the cash balance of about $173 million, and we'd be entitled to that full benefit of the coal prepayments for every tonne that goes to Stanwell, we'd basically be getting paid USD 90 a tonne as opposed to the USD 30 a tonne, that's in the ACSA. And then when you cross over $200 million kind of that margin halves and so on and so forth. So that's kind of a rough idea, rebate under the coal prepayment. The rest automatic trigger that kind of -- that kicks in depending on our cash position. Operator: Your next question comes from Lachlan Shaw from UBS. Lachlan Shaw: Doug and team, I wanted to, I guess, congratulate you on where you've got Curragh in terms of the one Curragh plan. A long time coming. But I wanted to also just sort of ask in terms of how we think about going forward, is there more to come? Are you done? You've had 3 quarters of sort of stable, pleasing cost performance. What more can be done sort of on a go-forward basis, obviously, outside of additional volumes once Mammoth resumes? Douglas Thompson: So it talks to the strategy for the business. And look, you're right. We did in 2022 set about a disciplined plan that required a fair amount of engineering time and money to be spent to turn the ship. But the results are there. You can see Curragh has turned the corner and now it's set up to be a low-cost dragline operations augmented with the underground. There is upside to the plan. As you've been saying all along, there is a mammoth 2, which is probably 2 continuous miners that we can expand, and we've taken that to BFS phase and we'll pause that for the near term because we want to obviously deleverage and strengthen our position as we enjoy the pricing at the moment and enjoy our low cost base for a period of time. But there's upside position there. And then there is a twin seam with another underground mine. As these mines in the Bowen basin ages, stripping ratios will go up and having an underground capability that you can still extract a really valuable resource and leverage all the invested infrastructure longer term. That's going underground, sensibly a very attractive proposition. So we're looking at a few other options there, but not for now. Now for now, focus in '26 is improving margins. So what we'll be doing the biggest thing at Curragh is what we're doing in February is the prep plant upgrades. Now all the long lead items for that upgrade was bought in '25. So it will be the works that get executed over the next 2 weeks or so in February that will give us better reliability and then improve some yields on some of the products that we produce just replacing old technology with new technologies. So that will be the biggest and then we're going to be looking at our mine plans for pivoting where the Stanwell mechanism drove us in the past, particularly because of the rebate situation that we chase incremental tonnage to try and get on the right side of that calculation of margin-driven tonnes. And that will be our focus for the next while. So moving towards let's get the most that we can out of every tonne relevant to what the market is offering us in the near term. Lachlan Shaw: Great. That's really great color. And just my follow-up question. So I might have missed it, apologies. I was late on the call. But with Mammoth, I guess remediation, I understand there's a question there of just waiting for directive outcomes from the regulator. Do you anticipate any sort of ongoing kind of increases to OpEx that might flow there from, for example, additional roof stabilization measures or such measures you might need to take? Douglas Thompson: Well, I don't want to speculate too much because the investigation is ongoing. I must just call out, we're not waiting for the regulator and nor is the regulator just waiting for us to put in our report and then submit. We are working very constructively with the regulator. I must commend them, them and the unions for the maturity and the professionalism displayed during this incident. Do a couple of things. One, treat the respect of the person who lost their life, Jeff and family, but then also all the teammates who have worked very diligently to build a world-class operation in Mammoth that they're all very proud of and make sure that they learn from this and move on. So I thank all of them. And that collaborative approach is ongoing, where our accountability is all owned. Everybody is working towards a couple of goals. Let's learn from this and ensure that we share with the industry. And the other is investing from Mammoth and all its people and all agencies agree to this is getting back to work as quickly as possible and as productively as we can. Impact on additional support and changes, I don't want to venture there until we have a report out coming. But let me say this that I do not see that kind of change being material to the way in which we think about Logan's operations into the future and any of that, that's coming out. Operator: [Operator Instructions] Your next question comes from Chen Jiang from Bank of America. Chen Jiang: First question on your U.S. domestic coal sales, which is close to 1/3 of your U.S. coal sales. I remember Coronado used to provide the market with the fixed price, which negotiated with the customer for the next 12 months. Is that changed for 2026? Because I haven't found any U.S. domestic coal prices fixed provided in today's release. Douglas Thompson: Chen, no, not necessarily. We're just still in the middle of some of those negotiations, and we don't want to preempt or prejudice our clients as well with sharing information that we shouldn't right now. So when it's appropriate, we'll talk about what the domestic is for Buchanan and Logan into the future. Chen Jiang: Sure. So you are still in negotiation with your customer for whatever forward price should be for the U.S. coal for the next 12 months? Douglas Thompson: Yes. I think it -- I don't think I know I read some of your stuff as well. And you guys watch that market and understand the highwall market very closely. What happened around tariffs and U.S. steel ownership and that negotiations were delayed last year. And then over the Christmas break, we're delayed even further. And then with what's happened between the U.S. and Canada and some other trade threats and relief from change, a number of parties have stood on the sideline and just waited to see what exactly the lay of the land is going to be before they commit. So some of that is -- has and continues to impact some of those domestic negotiations. I will say, as I hinted at earlier, and it is public, some of the producers who have built long walls of this type of product and just made major investments into longwalls producing these products have gone early in secured domestic contracts. But obviously, they've got a capital base, they need to support. We're not in that situation with Logan. So we're making sure we pick the best opportunities and make the decisions drive our base outcomes to the business. Barend Van Der Merwe: Chen, just to -- sorry, one thing to just add to that is that, obviously, you've got our U.S. operations important to delineate between the Logan highwall and the Buchanan more premium product space. Chen Jiang: Yes. Yes, sure, sure. And then can I have a follow-up, please? Second question, on your potential minority asset disposal in the release. Are you still exploring that option. So because the met coal price spot PLV, hard coking coal $250 per tonne. So I'm wondering, under the scenario, if current spot stays for the rest of the year or even for the next year, is the minority asset disposal still under your plan? What's the thinking? If you can help me to understand why that is still part of your plan? Douglas Thompson: Yes. So the Board has still given me and the team a mandate to look at minority sales. Obviously, we had to do a lot to our balance sheet last year to get through a very difficult year. I think it's evident in the numbers. So we want to deleverage the business. We have great assets with lots of people that are interested in part of those assets going forward. But as you called out, the world is pretty different. Pricing has improved. We are a very different business. Our capital projects are now behind us. They're fully derisked. And clearly, by what we've spoken about today the run rates delivered in the fourth quarter. They all are delivering -- and like Buchanan that generated $20 million in a month in December and is having another good month this month, frankly. We will make sure that we get maximum value for our shareholders. So we will consider where we are at, where the market's at and our balance sheet and options to strengthen that versus asset sales. But I will say we've had strong interest and we're well progressed in our discussions with parties on that minority sale. Chen Jiang: Sure. I understand. Can I squeeze last question because you mentioned that the deleverage and also into that release mentioned deleverage of the balance sheet. So I'm thinking, looking at the -- your senior debt is USD 400 million, and then you have Stanwell facility, USD 265 million. That's altogether in total USD 665 million, which is still higher than your current market cap. I'm wondering if you can help us understand your plan, if there's a need to deleverage balance sheet over the, I guess, more medium and long term, if the spot price stay for the next quarters or years? And how you are going to do that, given the agreement with Stanwell is in exchange of the thermal sales? Barend Van Der Merwe: Yes, in, that's very good. I mean I think the way we look at it, obviously, the prices are and they were easing it lasts for a year or more than that. Coronado is very well set in that regard because our operational leverage is extremely high. So the business will generate a lot of cash. I think the way we go about it will be to build cash against the debt. So even though we can choose to repay that ABL with Stanwell and prepay it, I think manage liquidity, 1 would rather keep the flexibility and build up cash and keep the gross debt and then deal with those debts as they come up to maturity. I think when we speak about shareholder returns in that sense, I think, in the first instance, deleveraging would cause the equity to respond because I think the company's enterprise value is intact and is in a good place. but there's a lot of debt that makes up that enterprise value, as you rightly remarked, if you look at the market cap, the debt and the equity value is kind of approaching parity now. As one would think as you build cash against the debt, that you'd see an uplift in the equity. So that's quite simply, I think, what we target. In terms of the minority sales earlier, if as Douglas said, we can find suitable transaction with the right value that will help us accelerate deleveraging and get us on the front foot as opposed to just doing it through operating cash flow as and when we generate it. Chen Jiang: Great. That's very good color, Barrie. So to clarify, I guess, the plan from here is just building up cash. And then how we should look at it is the net debt was that total there because total debt is still relatively high. And then the maturities is very, very long-dated probably 2027, 2028 onwards. Barend Van Der Merwe: I think that's what you do in the first instance to just reserve your liquidity position if our high price continues for the second and the third year, then I think you'd start looking at kind of how you do a more comprehensive balance sheet refinancing that maybe resets maturities and kind of cost of debt and those things. But I'm conscious that it's 2 days of PLV above $250 per tonne, so long met life. This concludes the question-and-answer section of today's call. I'll now hand back to Douglas for any closing remarks. Douglas Thompson: Thanks, Darcy. As Barrie said, long met life above $250 per tonne. So for team to set about a multiyear plan to improve the business, takes discipline and resilience and focus. And I am very proud of and very grateful for the people in our business that have demonstrated the resilience and consistency to ensure that we made real progress in these plans that we can demonstrate and set the business up for long term and the celebration of the important milestones in this plan along the way. And while that's all occurred, and while we focus on the plan, we obviously went through some very difficult times last year as a business. And the team stuck to the plan and have delivered ensure that they set the business up now for the future to enjoy the market that we're now talking about, as Barrie said,long met $250 per tonne last. So with that, thank you very much, everybody, for joining today on the call. And if you got any further questions, please do not hesitate to reach out to our Investor Relations team. As you know, Chantelle is always happy to help you understand for modeling reasons and the like. Operator: That does conclude our conference for today. Thank you for participating. You may now disconnect.
Simon Pitaro: Good morning, everyone, and thank you for joining us today. On behalf of Hazer Group, I'd like to welcome you to this December quarter investor webinar. [Operator Instructions] Presenting today is Hazer Group CEO, Glenn Corrie; and Tom Coolican, who will take you through the December quarterly report and provide an update on recent operational and commercial progress. I'll now hand over to Glenn and the team to run through the presentation. Glenn Corrie: Thanks, Simon. Sorry for being a few minutes late, a few technical issues this side. Good morning, everyone. Belated Happy New Year to all of our shareholders, and welcome to our Q2 webinar. Thanks for joining today. As Simon said, I'm joined on the call by Tom Coolican, our Chief Operating Officer. Tom has been with us for 18 months. I'll let him introduce himself shortly, but he's been at the forefront of a lot of our strategic projects, been managing a lot of the graphite monetization work that we continue to share. But importantly, he's also been at the interface with KBR, and he'll share some of those insights with us all shortly. Together, we'll present the results from the quarter. Our quarterly results or at least our report was out last week. We'll also share some other highlights. We've received quite a few questions in the last few days, so we'll try and get through most of those this morning. If we don't, we'll endeavor to get back to you as soon as possible. So Tom, over to you for a very quick introduction before we get stuck in. Tom Coolican: No worries. Thanks very much, Glenn. Good morning, everyone. My name is Tom Coolican, I'm Chief Operating Officer here at Hazer. And as Glenn said, I've been here now for 18 months. So I've spent more than 25 years in upstream energy across major oil and gas companies and also mid-caps as well as start-ups as well. So previously, I've held roles with Woodside Energy, with ENI, the Italian operator, also Jadestone Energy and then more recently with GR Production Services as their Executive General Manager. So what drew me to Hazer? Just as a quick side note, I guess, look, I think it's still -- having been here for 18 months, I think it's still the most promising decarbonization technology for the energy industry. I think that what stands it apart is really its scalability and the ability to actually deliver clean energy where it's needed. So yes, nothing's really changed since I first sort of came across the company, and I still feel very confident that this technology is on the right track. So I'm very happy to be here today, and I'm looking forward to sharing the results with you. Glenn Corrie: Great. Thanks, Tom. All right. If we can just move, Simon, on to the third slide. Great. Well, look, I know everyone is familiar with our vision and mission. Just to recap on our technology for those that are not necessarily that familiar with it. We transform methane emissions. Methane is 25x more harmful than CO2. We convert those emissions into clean energy in the form of clean hydrogen and critical minerals in the form of a very high purity form of graphite. I like to talk about the technology as one technology that serves 3 markets: the hydrogen market, the graphite market or the critical mineral market as well as overall industry decarbonization. So we're at the forefront of the energy transition, if you like. But the really important aspects of our tech that are, I guess, the differentiators and the competitive advantages is that we're low cost. We're a pragmatic, practical, scalable solution, as you will see again today. that integrates into existing facilities and is available to decarbonize a very, very dirty industry today. And you'll see again the size of the industry, the size of the problem and the size of the opportunity for Hazer and our advancing technology. In terms of our agenda, which is the next slide, we're going to effectively just recap on our highlights for the quarter. We will then do a brief update on the hydrogen market, touch a little bit on graphite. Tom will talk to the technology scale up and our go-to-market strategy. We'll come back and talk about steel, that Whyalla opportunity that we've talked about in December last year, the POSCO extension. So there's been a lot going on in steel. Hazer Graphite, of course, the other part of our technology, a corporate update, the catalyst for the next 12 or 18 months and then open up the call for our Q&A. So just jumping straight into our highlights. Thank you, Simon. We posted a solid quarter of performance. We continue to build on those foundations, those important foundations of commercialization and set that stage for a pivotal calendar year ahead. Firstly, we're making really good traction with KBR. Not forgetting, we only signed this deal back in May last year. We got working in earnest in June and July of 2025. We've made excellent progress on the design package and the commercial scale up, not forgetting that we are designing and developing large-scale commercial facilities that are capable of decarbonizing one of the world's dirtiest industries. So -- it's a massive piece of work. We could not be doing it without KBR in terms of the design package. It is on track for this quarter to at least get in front of customers and give them the dimensions of what they're faced with in terms of integrating our tech into their facilities. And in parallel, the global marketing campaign with KBR is also in flight, and Tom will talk to that shortly. Secondly, we cut our first Hazer, KBR transaction with Energy Pathways. So good to get out of the blocks with our alliance with Energy Pathways. It did gain U.K. government recognition during the quarter, which gives it access to some good fast-track approvals. And that project has now progressed through to revenue-generating project, which is the second for the company, but the first for the alliance. So big things in front of us there. It was a pretty big quarter as well for steel. So there's a bit of a deep dive in the pack on steel and how Hazer fits into the overall process. We joined forces with a group called M Resources. We're very excited about this partnership, and we are really strengthening their bid for Whyalla. So we'll talk about that a little bit shortly to the extent we can. And in addition to that, we also signed an extension to our strategic partnership with POSCO after some very positive graphite testing results that they've been undertaking over the past 6 to 12 months. In terms of graphite, we continue to product development, market development progress is still going on. Hazer Graphite is now being confirmed suitable in a number of industries, cement, steel, of course, and we're looking very closely now at asphalt and bitumen. So really big markets, really big opportunities there for our graphite as well as other industries. And then finally, we continue to engage constructively with governments at the federal level, at the state level. And we continue to see improving policy framework at the federal level, which is very important, starting to recognize methane pyrolysis and what Hazer does as a viable clean hydrogen pathway. So we'll talk more about that as well. In terms of numbers, we ended the quarter or in fact, we start the year with over $17 million funding position or cash position. That was bolstered during the quarter by over $5.5 million of inflows that came from the R&D rebate. That came from $1 million and a bit that came out of the capital raise proceeds that was approved at the AGM. Thank you to shareholders for approving that. Our cash burn, you'll see is down substantially quarter-on-quarter, about 30%. And year-on-year, for the same quarter, is down 40%. So we continue to strip out CapEx, strip out any residual OpEx out of the business, and that gives us that extended runway through what we consider to be some fairly significant milestones ahead of us. Looking ahead, we continue to maintain that strong liquidity. We've got more grant funds in the pipeline. We've got revenues flowing from Canada and now the U.K. I'd expect that trend to continue and, in fact, increase as we mature those projects. And not forgetting that we don't have that $4 million to $5 million that KBR are contributing in that $17.2 million either. So that's additional to the work, but that's offsetting a lot of the work that Hazer is doing on the ground. Our pipeline, I'll talk about shortly, but that's increased to $51 million. It's more about quality over quantity. But again, just illustrating that we continue to see strong demand for the tech, and I'll give a bit of insight into that very shortly. Just moving to the hydrogen market. Look, it's a big market, a big problem with a big prize, okay? We -- and this is the problem that we're trying to solve, which is it's -- currently, the addressable market for Hazer is about 100 million tons and that you'll see that on the bar on the left. To put that in context, people often ask, how big is that? Well, actually, it's valued at $206 million -- sorry, $206 billion on order of magnitude out there. But that in context is effectively equivalent to the global iron ore market. So you can give some scale to this. And all of that is produced with steam methane reforming, an incredibly carbon-intensive process, 1 ton of hydrogen, 10 tons of CO2. And it's responsible as a total industry for 920 million tons. Again, in context, -- that is 2x Australia's total CO2 emissions today. So it's a massive industry with a massive problem that Hazer has the opportunity to disrupt. The growth you'll see on the right, ammonia, 3x in the next 25 years, but steel 10x between now and 2050. And we're starting to see that. The deal flow is increasing in steel. We've been public on 2 opportunities. We're very well placed with ammonia with KBR. They're the world's leader in ammonia technology as well as methanol, and we've got the deal flow now coming through steel. So we're well placed on those growth industries. And we've got a very exciting period ahead in terms of our ability to disrupt today's industry, not the future industries, but today's industry. A few words on graphite. It's still a very hot market. It's a critical mineral of the highest order. The U.S., the U.K., EU, Australia of course, have got it at the top of the list. It's a major component of the energy transition, and it's a major sovereign risk as China continues to control the supply side, and Tom will talk about the opportunities we've got on graphite very shortly. In terms of how the industry is playing out, we continue to see methane pyrolysis coming of age. Some of you have picked up the news flow. We're witnessing a shift. There's growing industry support, government investor support for the technology is a viable hydrogen pathway on the back of the challenges that green hydrogen faced over the last 2 or 3 years. ExxonMobil has now come into this space. They are one of the world's largest publicly listed companies. They are $0.5 trillion. They've teamed up with BASF to develop a technology. So that's a really big signpost for the industry as well as the technology. And I'm very confident that's going to spur demand from others in this space like Shell and Chevron and ConocoPhillips and others that see this as a viable technology. KBR, of course, it's a growth pillar for them. We teamed up with them exclusively to get ahead of the game last year. And we're also seeing a big shift with government policy and changes. The U.K., the U.S., Japan all recognize methane pyrolysis now as a viable pathway. And I'll talk shortly to how Australia is now gauging this through the Guarantee of Origin scheme, which is now seeking consultation on methane pyrolysis. So in summary, the industry, the government, the investor support is all starting to gain momentum, and that's very exciting for our company and our technology this year. Tom, good time to talk to, I think, technology scale up and the go-to-market strategy. Thank you. Tom Coolican: Yes. Thanks, Glenn. Okay. So just a quick recap. KBR, one of the world's largest engineering companies, and we signed up with them about 9 months ago now. So it's been a heck of a well within 9 months. Getting up to speed with a playbook of a major multinational that scales up technologies has been a big challenge for us. And I think that getting these early days out of the way, getting the first run on the board, I think, has been a real game changer for us. And it sort of puts us in a position where we are confident that this model works, and we're seeing the first paid study starting to come through. So that's the line of sight that we see to real growth. We've got basically an 11-year term with KBR, and that's backed by a USD 3 million contribution from them. So engineering services and support, in-kind marketing, all sorts of, I guess, growth tools that we need are being provided and supported by KBR for us. KBR's engineering is sort of world-class and world known, and many people will know KBR as the company that delivers some of the largest mega projects in the world in the billions of dollars. But KBR's technology division is a completely separate division that licenses into a lot of those projects. And we are one of 80 technologies that's licensed by KBR into those projects. So there's a lot of new and emerging technologies that KBR continues to incubate and grow and help sort of turn the corner. But there's also the real traditional KBR technologies like the ammonia licensing that just very briefly, ammonia licensing for the ammonia plants that produce a fertilizer around the world, KBR licenses about 50% of those. So they have a very traditional playbook on how to make these really large-scale technology licenses and then also a growth playbook as well, which we are really locked into. So we're firmly in execution mode at the moment with KBR. We're following the bouncing ball. We're following the standard process that they use for developing and growing a technology. We've secured our first revenue-generating study, and we are part of the net zero portfolio. So the big thing now that we're working with KBR is those larger trains and larger projects so that we can engage with the biggest companies in the world for industrial decarbonization and making sure that our large-scale single train capacities are really solid. Just one last thing to mention on that. The cultural fit between KBR and us. We feel pretty lucky actually. We've got similar values and cultures. They're a real creative and inquisitive type engineering organization, and we get a lot of that really good feedback between us that we seem to work pretty well together. We -- scaling up their technologies or scaling up technologies is what KBR's DNA is all about. That's how they've built their company to the scale that it is today. And then following the scale up to deployment and multi sort of industry and multi-global technology deployments are what they're really good at. So yes, we do feel like we found a very high-quality partner in KBR, and we're working as closely as we can with them to really scale up with them. Next slide, please, Simon. So marketing-wise, they started off sort of extracting all of our information and all our existing marketing information to develop all of the package of marketing tools that they have. They need tools that they can actually deploy through their website. And if you go on to their website, you'll see that we're in the clean ammonia and decarbonization section of their website today. They're also fantastic on LinkedIn and marketing and promotion and just getting out there at conferences all around the world. They're at the major global conferences, everything from the ADIPEC conference in Abu Dhabi recently to, I believe they'll be in Barcelona in 2 weeks, again, promoting the technology and really pushing the -- this is a new solution for industrial decarb. So it fits into the industrial decarb toolkit that they use when they talk to their major clients. One thing we like about the way that they do their marketing is that they're actually quite responsive to market forces and market changes. So one month, we'll be talking about how do we make sure we've got clean hydrogen in the best markets in the world. And the next month, we're talking about structural infrastructure projects and how we can actually make sure we've got a solution that works with steel or works with concrete. So they do move pretty quickly. Next slide, please. If we can go on to how we're going. So run #1 on the board. So the Marum Energy Storage Hub project that Energy Pathways have developed and are developing in the west of the U.K. near the Lake District is a complex integrated energy project. And for KBR and Hazer together, this is our first paid concept level, so concept engineering study. So it's great. We're working really closely with KBR, but we actually really like the way Energy Pathways does their business as well. They're integrated really well with the local community, the local government and also their national government as well. So the U.K. government has actually designated this project as a project of national significance. So it's actually a national energy significance project. It covers everything that Hazer has wanted to do. So we've got the hydrogen conversion project and the technology there from methane. We've also got the integration to KBR's ammonia technology as well. And EPP is able to get to fast tracking the government approvals. They've got government support from the ministerial level. So they've got focal points so they can work with to make sure that we don't have any of the usual large-scale robots when we're doing the engagement. But at the same time, they seem to be very connected on the ground as well. So for us, it's a 20,000 ton per annum Hazer facility. So it's right in that sweet spot for size for economics. The study will be ongoing for the next couple of months. Feasibility scope progress is for hydrogen, ammonia and graphite production and EPP are actually actively looking for ways to deploy graphite at both that industrial large-scale supply, but also at the high-end supply as well, which we think is very exciting. And we are leveraging the KBR Alliance for that ammonia integration with their traditional ammonia technology. So from a COO's perspective, just operationally, I'd just like to say that with the commercialization strategy that Hazer has been on, this is the operationalization of it, if that's a word. We're actually now doing what we say we do on the box. We're actually doing those concept studies. We're moving them towards FEED-ready, and this is actually the actual pathway that we see the company is best suited for to actually grow to the next stage. I'll hand back to Glenn here to talk a bit about the sales pipeline. Glenn Corrie: All right. Thanks, Tom. And yes, Ben and the team at Energy Pathways are doing great things on the ground. They're also really exploring that graphite market as well, Tom, in the U.K., which is also getting a lot of momentum. So we're excited about that project. The pipeline is here. We've updated a little bit. You'll see we've added the live projects that we've got. We've got that first-mover advantage, we think, importantly, in Asia, Europe and a bit of North America. You will have seen in the last quarter, we were sitting at around 45 active global customer leads. That's sort of risen to over 50 now. To give you a bit of color on what's come in, we've actually had 3 new steel opportunities on the back of our announcements of POSCO and Whyalla. So the steel industry, as we'll talk about shortly, is really getting a lot of momentum. We have EV company out of Europe that is exploring and looking at the -- not just the hydrogen side, but also the graphite side and one large gas and power utility out of Asia Pac and also carbon trading group in the U.S. So we continue to see big demand for the tech. Asia Pac is starting to really get a lot of pace as they have limited opportunities to decarbonize and methane pyrolysis fits just beautifully into the supply chains in those areas that have limited access to carbon capture and renewables. So we continue to explore opportunities there. If you club all of those opportunities and those blobs together, our pipeline adds up to about 1.5 million tons per annum. And as you remember from the first slide or one of the earlier slides, -- that's over 1.5% of the global demand today. So it's a big pipeline. Of course, we work through it systematically. We've also had some shareholders and observers reach out and offer up some opportunities, which we love. One that I will call out is an RFP in the U.S. called MACH2, which is the Mid-Atlantic Clean Hydrogen Hub that is out there at the moment seeking proposals from hydrogen suppliers for $1 a kilogram. And on the back of that, with ability to secure hydrogen offtake in 2030, and it fits a lot of the opportunities that we've got, and it ticks a lot of boxes for Hazer. So we continue to be active on the ground globally with our pipeline. Just shifting gears to steelmaking. We had a lot going on in the quarter with steel, and Tom will talk to some of the opportunities very shortly. But just so that everybody is aware of how our technology fits into steel. This was in our Whyalla announcement, but just a little bit of an explanation. Steel, of course, is a massive industry with a massive problem. It's 8% of the world's CO2. Our tech is actually a very perfect fit for steelmaking, very strong synergies and where really everything ties together for us as depicted in that illustration. There's clean hydrogen that's used in the direct reduction process of iron ore into iron, and it's got a built-in graphite offtake because graphite is used extensively in the production of carbon steelmaking, in particular, in the use of a recarburizer in the electric arc furnace. So it really is where both prongs of our technology fit wonderfully into one application and that built-in graphite offtake is just so valuable for us. There's other synergies. Of course, we use an iron ore catalyst, and that's consistent with steelmaking. We produce and can produce hot hydrogen that integrates into the DRP process that minimizes energy intensity of the overall process. And importantly, the economies of scale. It's a large industry that needs a large solution. And of course, with Hazer's fluidized bed reactor, we're capable of getting up to very, very large scales that fit nicely into steelmaking. So it's a lot where everything comes together for Hazer, and that's really an extension of several opportunities that Tom will talk to now in terms of Whyalla. Thanks, Tom. Tom Coolican: Thanks, Glenn. Yes. So the Whyalla Clean Steel bid, I'll just give a quick update there. The process for the sale of the Whyalla Steel Works is a government-led and highly confidential process. So there are limits on what we can share. As publicly announced, Hazer has entered into a binding MOU with M Resources, recognizing Hazer's ability to decarbonize steel. M Resources have submitted their bid as part of the process to acquire the Whyalla Steelworks. Hazer technology was a key component of their bid and provides the decarb component. KBR is also supporting the M Resources bid. KBR has a long history of supporting large infrastructure projects in South Australia, including at Whyalla itself. So KBR knows the lay of the land and the ground really well. And look, we're genuinely excited about Hazer's ability to decarbonize the Whyalla opportunity. But also more broadly, it's just another recognition that the Hazer technology aligns with steelmaking very, very well. So it's something that we feel is probably one of the best fits that there is going around for how you can deploy Hazer. Glenn Corrie: So just on POSCO, thanks, Tom. On POSCO, you will have seen we extended our strategic partnership with POSCO. They are the sixth largest steelmaker. In fact, they're the largest outside of China. We're very privileged to be partnering with POSCO in integrating and deploying our tech into clean steel, particularly in South Korea. And on the back of a lot of successful graphite testing over the last quarter, that extension has been signed. Again, big industry, big player. The HyREX process is very advanced. Again, it's a DRP electric arc furnace process. We're now focused having gone through that stage gate of graphite testing. We're now developing the next steps for the project. So that's something to look out for over the course of the next year or so. So a really important partnership for us as we continue to highlight the importance of our technology and its fit into steelmaking. That's probably a natural transition into graphite. Perhaps, Tom, if you wouldn't mind talking to sort of where we are with application testing and the next phase of our graphite monetization plan. Tom Coolican: Absolutely. Thanks very much, Glenn. Just to call out, I guess, this is probably one of the most integrated team efforts that Hazer has done over many years. The graphite has been studied by the universities. It has been developed in all sorts of different applications. And I think now it's sort of coming to a natural business case development. So it's really come out of the research and study. And something to call out, we'll move on very quickly from this slide, but something to call out is that this is -- the Hazer Graphite is an absolutely unique product. It is not standard graphite. It has its own unique properties. It's not carbon black, and it's not other products as well. So the research has given us the insight into what this product is. And now the application development uses that research to actually be able to deliver it to the largest global markets. So just moving on to the next slide there, please, Simon. So the Hazer Graphite being this versatile and valuable product, what we've gone and done basically is we've assessed our graphite across a number of different industries, and it continues to be very encouraging from the results. Where you can see from the strategy that we're looking is for the world's largest markets where we have the largest consumption of carbon-based product that is around the world. And if you think about concrete, concrete is the most significant man-made product in the world in terms of volume. Our strategy, I think that over the last year, especially, we've really refined this strategy to target very specifically the response to market movements, but also the focus on these large volume markets with a genuine direct drop-in application. So what I mean by that is that out of the back of the reactor with no post processing. This product can be dropped straight into these applications, and that's where we've been really looking. And the key for this, obviously, is that the attractive price point, we have a minimum price that we're targeting. And what we're seeing is that at the moment, typically above USD 500 a ton is where we're aiming to deploy our graphite. The work completed so far from the work priority markets that are emerging for us. Iron and steel manufacturing is definitely really high on the priorities just because of what we talked about before with the synergies in using the hydrogen as well as the graphite. Concrete additives is another one where you actually see pretty promising results so far and more to come and also asphalt binders. Now customers there are seeking lower emissions carbon products. They're trying to get away from either the high CO2 products that are post generated or from the mined products as well. And so these are sort of the largest addressable markets that we've been able to identify in the world where we get that price point that we're really chasing. At the same time, and Glenn mentioned it before, we continue to receive strong inbound interest from critical minerals applications. So EV manufacturers, battery manufacturers, defense applications, high-value sectors. These are much more longer-term qualification processes, and they will require post processing. So we've set up our strategy to be short-term large-scale addressable drop in market and medium- and long-term post-processing market so that we can continue to address those inbounds as they come to us. Ultimately, they're not going away, and we need to be able to support that critical minerals view. Finally, our recent MOU with Kemira sort of really strengthens that view with that and the work we're already doing through our Veolia partnership that this particular type of graphite with its properties has some promising opportunities in water treatment as well. And that just shows sort of the breadth of capability of the specific Hazer graphite and its unique properties. Back to you, Glenn. Glenn Corrie: Yes. Thanks, Tom. And I was on a call with the DOE last night, actually in the U.S. and graphite is an absolute priority for the U.S. at the moment and arguably over and above hydrogen. So it's quite a nice fit for us that we can effectively take a gas feedstock and effectively convert that into hydrogen, but also a critical mineral that is so desperately in need in some of these developing nations or developed nations. Just wrapping up, in terms of the corporate side. We just included a bit of an update on government policy just because we see things changing. We've actually had the Arena Board and management at site, which was an excellent engagement. We've come a long way since they backed us back in 2020 or thereabouts. The CDP, of course, operated very successfully. The tech is going to market. So it's a success story in that respect. The pipeline has grown enormously. So I think they were pleased to see the progress that we've made. We talked a lot about emissions. We talked a lot about cost positioning of Hazer relative to green hydrogen and all the other hydrogen pathways. And I genuinely believe that these engagements are super critical for Hazer as policy continues to evolve. And we're starting to see that shift. Some of you may have seen, but the Guarantee of Origin scheme is now out for formal consultation on an amendment that we expect to include methane pyrolysis. So that's strong recognition of Hazer and strong recognition of this extremely viable pathway. I also spent time in Canberra. I met with -- had a privilege of meeting with Minister Ed, the Minister for Industry Science and Innovation, excellent conversation, keeping Hazer relevant in Canberra, but also at the policy level. I met with the Climate Change Authority, the Critical Minerals Office, of course, just to position Hazer and how we fit into the sort of the ecosystem of decarbonization technologies that are available. And so really good feedback on the tech, the progress, but also the funding programs that are available and the grants that are out there now. It's much broader than it ever was. There's industry programs around clean steel, green iron, Whyalla specifically, there's over, I think, at least $1 billion being allocated to Whyalla from the federal government as liquid fuels, critical minerals, they're all open, and we're all exploring all of those at the state level as well, WA, South Australia has earmarked $400 million for -- specifically for Whyalla technology. So we're hunting down and exploring all of these opportunities, and we're very well positioned where we are as a company and an advanced technology. I think that's pretty close to the end. I think if we just move to the next slide and then open up the call for Q&A, I've seen a bunch of questions come through already. So we're keen to get on to those. In terms of our next 12 months, we're going to continue to come out with updates of what the time line and the milestones look like. This year is really all about converting pipeline into licenses, and that's a strategic imperative for us. I hope you can see the signposts are there, the partnerships, the early runs on the board, the design package is there. The pipeline is growing. The funding position is strong. So we're in a very, very good position to execute on those projects and opportunities that give us that pathway into licenses. And we're going to leverage KBR. We're going to leverage all of the work that we're doing with graphite. And just a reminder that one deal here, one sizable deal at 50,000 tons per annum is in our economic model worth about $80 million to $100 million of license revenue. So you can see the size of the prize is there, and that's what we're focused on effectively realizing. We've got to advance our key projects through FEED and contracts. We've had a few questions on Fortis, and we'll talk to that as well throughout the quarter. We're building momentum again there, and we're moving forward very positively. We lost a little bit as we went into Christmas, but we're fully aligned with Fortis, and we've got a plan of attack there, and we'll come out with more information on that shortly. Whyalla is a real game changer, as Tom identified for us. It could be a very transformational project and strategic, not just for Hazer, but for Whyalla as well as for Australia. So that's -- we're really excited about being in the mix there, and we know our technology is differentiated. Graphite monetization strategy is coming together. Look out for near-term updates on that, our strategic partnerships, our offtake signposts -- and then finally, unlocking new growth, new strategic partners, new investors, new deals, new markets. That's the focus of the company at the moment. Those 4 pillars of our strategy. Of course, that's underpinned by a robust financial strategy and a can-do attitude from the team. 2026 is really shaping up to be an exciting year for Hazer, strong tech tailwinds of the market, the government tailwinds, the deep pipeline, the partnerships and the funding position, and we're really excited about delivering. Simon, should we just turn to the Q&A? I just noticed we've 35 minutes or so I'm keen to get some questions going. Simon Pitaro: Yes. And we had probably 12 come in before we started already. So let's just start with those. So Kapil Seth e-mailed earlier about a KBR selecting a biomethanol project in the Middle East. Did you -- and given the KBR Hazer alliance and the overlap work with the demonstration plant, are there active discussions ongoing with KBR to use the Hazer Tech for this plant? Glenn Corrie: Yes. No, that's a good question, Phil. Yes, look, I can't comment on specific announcements that we're going to make or will or may make. But KBR, in particular, has an extensive and strong relationship with many players in the Middle East. There's a number of big Middle East projects that are available or open at the moment, as you've identified. We are throwing those into the pipeline. They're all under consideration. The Middle East continues to be a very strategic market for us. It's got low gas prices. It's a big ammonia, probably one of the largest ammonia markets in the world, along with methanol, big capital, big players. They're not necessarily the fastest out of the blocks, but they are slower burners but big -- but potentially very big projects and too big to ignore. So definitely a strategic market that we'll continue to look into with the right partners. Simon Pitaro: There's been a couple on M Resources, so I'll try and put these together. So Atosha asked, how did the M Resources partnership come about and why were they considered to be a good partner? And I guess if they don't be selected, do you think there's an option for you to still be used in whoever is selected? Glenn Corrie: Very good. Okay. So you might have picked up Atosha in the announcement that we're partly a free agent. Of course, that if -- and we've had this discussion, of course, with M Resources in terms of their ability to win and if they don't, what happens. Look, we've known a lot of the M Resources team separately for quite some time. So there's an established relationship there. It was a natural discussion as they moved into the process. We got to know what they were doing and how they were sort of thinking about the decarbonization aspects of Whyalla. They've made an assessment of Hazer, but also other tech methane pyrolysis technologies. They chose us as well as electrolyzers. They know there's a massive difference between us and electrolyzers. It's literally night and day. So it was clear from the get-go that Hazer could be a very strong fit for that project and the whole decarbonization plans for that region. It moved fast as we got into the back end of last year. And so we got talking about how we sort of would bring this together. We got involved with them. We sort of papered it all up. And from what I've seen, I know Tom has said that we're obviously under confidentiality, strict confidentiality, it's a government process. But what I can say is from what I've seen of the bid and how Hazer fits into it, techno-economically, I'm very confident that their bid is a very, very strong one. And so we are going into this very positively. It's a process that will take a bit of time, but it's a very strategic project for everybody involved. So we're, again, excited about the opportunity with them. Simon Pitaro: Excellent. Let's just move straight into Fortis. Has the site been identified? I know you sort of touched on it briefly, and there's a few other questions about Fortis. So can you just give a quick update on that? Glenn Corrie: Yes, I've seen those, Simon. Yes. So good questions. Look, more broadly, the project is going well. We would have liked to have provided an update at the back end of last year. I think Christmas and New Year got in the way and holidays and the like. But we're back at it. I know feeder under the desk. It's a large project. It's advancing well in strong collaboration with FortisBC. We engage frequently. I know Tom is dealing with the team in Canada weekly, if not daily at the moment on aspects of the project. Our focus is on project maturation. Site FEED, completing FEED with the right partner and getting the project to a development FID. They do take time. We're making good progress, and we're exploring ways to continue to accelerate -- how do we accelerate this project. I know from Nick and Joe and the team in Canada, it's a priority project for Fortis. It's got government backing government support. They've chucked CAD 11 million behind it. And again, just keep an eye out, we expect to make an update on that project in the near term. Simon Pitaro: All right. Can you elaborate on the status of the larger reactors? Glenn Corrie: Do you mind taking that one?? Tom Coolican: Take that one, if you like, Glenn. Yes. Thanks. Yes. Look, the design package we're working on at the moment is a design package, which is fundamentally built around our proprietary reactor hardware design. Where we've targeted the base design is 30,000 tons per annum of production, which is already significantly large in terms of hydrogen production. The design that we have developed has the ability to be scaled up or down from that point. So one of the key elements of our design was we didn't want to go with something which was sort of scale up, scale up, scale up to the point where we hit a limit. What we decided to do is go for actually quite a big reactor design and then be able to scale it both ways down and up, so we can go all the way down to prototyping and all the way up to 50,000, maybe 100,000 tons per annum single-train capacity, but I don't want to push our CTO too hard on what the maximum size would be. The concept of fluidized bed reactors has been around for a really long time. It's a well-trodden path. And so we work with the world's experts in fluidization in process design and in these reactors so that we are confident that we're not going to sort of invent anything brand new here. We're just using the best in the industry to get it exactly right. Some of the principal challenges that we have that are the areas that we feel we've actually had the most opportunity to succeed is in optimization of heat, the conversion basis and the quality of the product. So if we're comfortable that these are actually under control at this 30,000 ton design. This gives us the capacity to be able to move up and down from there. And yes, it's something that we know is a huge challenge for the industry and having those ones really under control, I think, is actually key for us. Simon Pitaro: Thanks, Tom. I think let's probably move to graphite because there's quite a few on the graphite. And so Dave sent this one in, but it covers quite a few of the others there as well. Are there applications for Hazer graphite that are now good to go? No further testing needed? Glenn Corrie: Yes. So Tom, I'll let you jump in. I think, look, with the graphite work that we've been doing is extensive, as Tom explained. We've got -- we're working it internally. We work with all of these strategic partners, Kemira the latest. I get often asked about why an MOU. MOUs in my -- in our view, are value creating because we have partners that actually do work and contribute to the overall strategy of the company. And often it comes as part of the collaboration. But in Kemira's example, we're doing work with water treatment alongside some of the work that we're doing with Veolia out of France. So there's a lot of work going on. We've identified, as Tom said, some strategic markets in asphalt, cement, asphalt, bitumen, steelmaking as priority markets, what we call drop in. limited or no post-processing or preprocessing before they go into the particular application, but they're large markets that have got what we call high confidence to them. And their pricing ranges can be anywhere between USD 300, USD 400 a ton and over $600 or $700 a ton. And that's consistent with our economic model. And of course, that adds great value to the technology and the techno-economics, but also the overall cost of supply of both the graphite and the hydrogen product. So lots of markets. We're prioritizing them. Tom, anything to add on that? Tom Coolican: Yes. I probably just add one thing. No further testing required. Ultimately, your end user, say, for example, it's a concrete manufacturer will do their own testing as well. So we can go with a product, which we say is good to go, and that end user will actually conduct their own tests because they're going to have to demonstrate to the infrastructure project or the government or whoever that it is actually as good as what we say. So there will always be that end user component to the testing, but that shouldn't stop us from actually having everything certified and ready to go so that end user can actually do their final testing. Glenn Corrie: Yes. And steel is built in and is a built-in offtake. That's a beautiful way of thinking about it. The carbon actually goes into the production of carbon steelmaking. So it's a pure sequestration of CO2 as well. So there's a lot of benefits. We don't often call out our graphite as low emissions, and we should more frequently, frankly. But the -- effectively, the emissions associated with our graphite and the way policy is shifting is a very valuable product, not just from an application perspective, but also from an emissions perspective and a pricing point as well. Simon Pitaro: I think we've probably got time for 2 more. David Sell sent this one earlier. Is there any outstanding ARENA grant money due for the operation of the CDP... Glenn Corrie: Thank you, David. Yes, there is. In fact, there's other grant funding available to us as well. I think it's around $1 million, and some of that's going to be released this year. So that's another form of nondilutive. On top of that, I think we've got $2 and a bit million from Mitsui, the Western Australian government, which has got some milestones coming up as well. So these are very valuable funding inflows for us because they're nondilutive, and they contribute to the growth strategy of the firm. There's other grants in the pipeline as well. There's industry growth program and some of those other grants that I mentioned. So we're going to lob in bids on some of those as well. Simon Pitaro: All right. And a final one here. Does Hazer have any analyst coverage? And if so, has that had a positive effect on the register? Glenn Corrie: Yes, we do -- it's a good time to perhaps call out an analyst actually. We've got on coverage, Declan Bonnick from Euroz. Declan initiated, I think, last year or maybe the year before, but very good initiation report. Declan has -- he does updates frequently. I think his target price is sitting at somewhere between $0.70 and $0.80. We've also got Philip Pepe from Shaw and Partners, who covers us. I think his target price is also in the -- in that same sort of range over the next 12 months, $0.70 to $0.80. I think if you'd like to get hold of their research reports, then either reach out to us or reach out to the brokers directly, and I'm sure they can get you a copy. They're excellent analysts. They've been across energy, tech, in the space for a long time. We're privileged to have both of them on board. And I'm also confident that we're going to probably pick up a few more analysts this year and see what we can do with getting them to site and across the -- closer to the technology. Simon Pitaro: All right. Thanks, everyone, who joined us today. Thank you to Glenn and Tom for the presentation. Look, Glenn, I might just hand back to you for a closing comment before I hit the end button. Glenn Corrie: Yes. Look, I don't have anything more to say other than thank you for supporting us. Look, we're in a really good position. We did a lot of work last year to set the foundations of -- for calendar year 2026. I feel like we're in a very good position. I know sometimes some of these things don't go as fast as we'd like. You probably don't appreciate that I'm the most impatient person in the world. So join the club. But we've got a very good tech. It's a very, very strong tech. We've got a strong partner in KBR. We have got, I think, the turning tailwinds now of government support worldwide, including in Australia. We've got that deep pipeline of opportunities that's growing also in Australia that's getting momentum. And we've got that extended runway, that funding runway of over $17 million to enable us to effectively kick some important goals for the company and the technology. So again, thank you for joining the call today, and we'll endeavor to get back to you all with answers to the questions that we weren't able to cover today. Thank you. Tom Coolican: Thank you.
Nicole Shelton: Good morning, and welcome to the General Dynamics Fourth Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. After the speakers' remarks, there will be a question and answer session. Telephone keypad. If you would like to withdraw your question, press 1 again. Please note this event is being recorded. I would now like to turn the conference over to Nicole Shelton, Vice President of Investor Relations. Please go ahead. Thank you, operator, and good morning, everyone. Welcome to the General Dynamics Fourth Quarter 2025 Conference Call. Any forward-looking statements made today represent our estimates regarding the company's These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the company's 10-K, 10-Q, and 8-K filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website investorrelations.gd.com. On the call today are Phebe Novakovic, Chairman and Chief Executive Officer, Danny Deep, President, and Kim Kuryea, Chief Financial Officer. I will now turn the call over to Phebe. Phebe Novakovic: Thank you, Nicole. Good morning, everyone, and thanks for being with us. Earlier this morning, we reported fourth quarter earnings of $4.17 per diluted share on revenue of $14.3 billion, operating earnings of $1,152 million, and net earnings of $1,143 million. To briefly summarize, on a quarter-over-quarter basis, revenue is up 7.8%, and operating earnings are up 2%. Net earnings and diluted earnings per share are relatively flat to the year-ago quarter, which you may recall was a terrific quarter. It included some significant one-time items, which drove unusually high margins, but more about that later. The sequential comparisons are quite attractive. Here, we beat the prior quarter's revenue by 11.4%, operating earnings by 9.1%, net earnings by 7.9%, and fully diluted EPS by 29¢. Full-year numbers are absolutely terrific. Revenue is up 10.1%, operating earnings are up 11.7%, net earnings are up 11.3%, and fully diluted EPS is up 13.4%. Both revenue and operating earnings were up for each of the segments led by Marine Systems and Aerospace, with revenue growth of 16.6% and 16.5%, respectively. They also led the parade in operating earnings with Marine Systems up 25.9% and Aerospace up 19.3% for the year. All of this follows terrific revenue and earnings growth in 2024 over 2023. It would appear that we beat analysts' consensus for both the year and the quarter. So let's move on to the business units. First, Aerospace. In Aerospace for the year, we experienced continuing growth of both revenue and earnings. Continuing strong demand for Gulfstream aircraft, overall strength in Gulfstream service business, and continued growth and performance improvement at Jet Aviation. In the quarter, Aerospace had revenue of $3.788 billion and earnings of $481 million. This represents a 1.2% increase in revenue, but a $104 million decrease in operating earnings on a quarter-over-quarter basis. While the earning numbers are very good on a standalone, they do not compare favorably to a standout fourth quarter in the prior year aided by a number of discrete positive items that were significant increments to earnings. However, the sequential numbers are very positive with a 17.1% increase in revenue, coupled with an 11.9% increase in operating earnings. Importantly, for the year, Aerospace revenue of $13.1 billion is 16.5% greater than 2024. This is on top of a 30.5% growth in 2024 over 2023. Revenue growth was driven in large part by the delivery of 158 new aircraft, which is 22 more than the year ago. Earnings of $1.75 billion are up 19.3% over 2024. So let's talk a little about demand. It was a strong quarter bordering on exceptional. Aerospace had a book-to-bill of 1.3 times in the quarter, and Gulfstream alone had an aircraft book-to-bill of 1.4 times. Even as deliveries increased significantly in the quarter, orders exceeded our internal plan. The delivery of the G700 and G800 and their performance in customer hands is driving increased demand for them, which we experienced in the quarter. We continue to see improved interest across all models in all sales jurisdictions. Interestingly, the overall number of prospects in all areas continues to increase. Let me turn the discussion over to Danny for his perspective on the quarter. Danny Deep: Thank you. So I want to spend some time exploring the $104 million decrease in operating earnings on a quarter-over-quarter basis. As you might imagine, there were lots of puts and takes in the quarter. The margin issue was the G600 product line, which had $75 million less in earnings. That was attributable to the delivery of three fewer aircraft in the quarter, a $21 million variance in liquidated damages, favorable settlements in the prior year's quarter, some higher overhead than in the prior quarter, and the imposition of tariffs in this quarter but not in 2024. If we adjust for these items, the earnings and margin rate on the G600 are very similar for both quarters. On a quarter-over-year-ago quarter basis, earnings on the G500, Gulfstream Services, and Jet Aviation were down modestly. Now in all of this, there is some good news. The earnings for the G800 more than replaced the G650 earnings on the same basis. The G700 also experienced higher earnings despite two fewer deliveries. Obviously, margins are improving nicely on that product. Phebe? Phebe Novakovic: So let's move on to the defense businesses. First, Combat Systems. Combat Systems had revenue of $2.5 billion for the quarter, 5.8% more than the year-ago quarter. Earnings of $381 million are also up 7% on a 10 basis point operating margin improvement. Operating margin of 15% is very good. The sequential growth of revenue and earnings at 12.6% and 13.7% is even stronger, with particular strength at OTS. For the full year, revenue of $9.2 billion is up 2.8% and earnings of $1.33 billion are up 4.3%. As a result of a 20 basis point increase in operating margins this compared to a year ago. All in all, a very nice profile. But the real story is in the order book. Combat saw robust order intake for the fourth quarter resulting in book-to-bill of 4.3 to one. Orders came from across the portfolio with notable awards in munitions but exceptional intake in wheel and tracked vehicle programs at European Land. The book-to-bill for the year is 2.1 times. This all rolls up to a total backlog of $27.2 billion and total estimated contract value of almost $42 billion. This positions Combat Systems very well for the future. In short, this group had a very solid year operationally with expanded margins, explosive order activity, and a strong order pipeline as we go forward. But before I turn to Marine Systems, I'd like to ask Danny to provide some additional color. Danny Deep: So let me give you some additional detail on several key awards. For some time, we have been talking about the strong demand signals we are observing. Particularly in our international portfolio. And as Phebe mentioned, that demand transitioned to some significant awards in the fourth quarter. In Germany, we received two awards for more than $4 billion for our Eagle tactical vehicles. In Norway and The United Kingdom, we were awarded $600 million for our bridges. And in Canada, we received awards for $640 million for light armored vehicles and additional logistics vehicles. Altogether, a nice order distribution both geographically and across our product portfolio. Here in The United States, working closely with the US Army, we continue to make good progress on the acceleration of the next generation M1E3 main battle tank. All of this provides a strong base for continued strength at Combat. I'll pass it back to Phebe. Phebe Novakovic: So turning to Marine. Once again, our shipbuilding group had exceptional revenue growth. Marine Systems revenue of $4.8 billion is up 21.7% against the year-ago quarter. All the shipyards were up, but the submarine programs and Electric Boat were the real drivers of this growth. I am very pleased to report that operating earnings of $345 million are up 72.5% on a 210 basis point improvement in operating margin. To be fair, the fourth quarter of 2024 was the group's poorest operating earnings in that year. Nevertheless, 7.2% last quarter represents a meaningful improvement and real progress in submarine construction. Sequentially, the numbers are much the same. Revenue increased 17.6% and operating earnings 18.6%. For the full year, Marine revenue of $16.7 billion is up 16.6% and earnings of $1.18 billion are up 25.9%. So the story of revenue growth continues with some improvement in operating margin and measurable improvement in productivity. Once again, the operating metrics tell us that we have, in fact, increased our productivity at all shipyards. Danny, feel free to interject your thoughts on Marine from an operating perspective. Danny Deep: As Phebe just mentioned, we have seen demonstrable increases in productivity and throughput at our shipyards. At Electric Boat, as you all know, we have made considerable investments over the last several years, and those investments have enabled a significant increase in output. One key measure of output is submarine tonnage produced, and Electric Boat is up 13% over last year. At Bath Iron Works, we are seeing consistent ship-over-ship learning. And at NASCO, we are seeing a very positive trend in terms of schedule variances against plan for each successive ship we built. Our priority in the Marine group is to remain laser-focused on execution and continue to accelerate production, and we are seeing good progress on that front. Phebe Novakovic: And lastly, Technologies. It was a solid but no growth quarter with revenue of $3.24 billion about the same as a year-ago quarter. Operating earnings in the quarter of $290 million are down $29 million on an 80 basis point decrease in operating margin. The full-year comparisons are somewhat better. Revenue at $13.5 billion is up 2.6%. Earnings of $1.28 billion are up 1.3% on a very similar operating margin. Danny Deep: Let me say that these businesses did very well in an extremely difficult market. The long continuing resolution was particularly and the examination of all contracts by the Department of Government Efficiency hurt growth and slowed contracting activity early in the year. Nevertheless, these businesses persevered and came through it all on a very good basis. Given all of that, the group had very nice order activity for the year. Total orders for the group reached $15.9 billion, resulting in a book-to-bill of 0.92 to one for the quarter and 1.2 times for the year. This left the group with an increased year-over-year backlog at $16.7 billion, and total estimated contract of $49.9 billion. Pretty well done under the circumstances. Danny will give you a little bit more here. Danny Deep: I'll just give a little more color on how this group is positioned going forward. Phebe mentioned a very solid backlog to end the year. This combined with a robust order pipeline of close to $120 billion of qualified opportunities, certainly presents a healthy market picture as we look forward. In addition, at Mission Systems, the transition from legacy programs is complete, allowing them to focus where they have deep domain expertise. This expertise aligns well with their customers' priorities in areas including encryption, subsea warfare, and strategic deterrent. The market outlook coupled with very solid win and capture rates positions this group for durable growth beyond this year. I'll turn it back to Phebe. Thanks. And let me ask Kim to provide details on our cash performance for the quarter and the year. Overall order activity and backlog, and any other items she might like to address. I'll then come back to discuss our thoughts on 2026. Kim Kuryea: Thank you, Phebe, and good morning. Let me first start with orders and backlog. Our order activity and backlog continued to be a strong story and a highlight for us in 2025. We achieved an overall book-to-bill ratio for the year of 1.5 to one, even as revenue grew by 10%. Let me go through the full-year book-to-bill rates for 2025 at each of the segments. First, the defense segments. Combat Systems achieved a book-to-bill of 2.1 times driven by continued robust demand at each business. Particularly at European Land Systems where we received over $10 billion in new awards. Marine Systems achieved a book-to-bill of 1.7 times with each of our shipyards receiving awards for additional ships in 2025. And Technologies achieved 1.2 times a nice award activity at both GDIT and Mission Systems. Moving to Aerospace. Gulfstream finished the year really strong with their second-best orders quarter since the second quarter of 2008. The full-year dollar-based book-to-bill for this segment was 1.2 times, marking the fifth consecutive year achieving a book-to-bill greater than one. The robust demand across our portfolio resulted in finishing the year with a record total backlog of $118 billion, an astonishing 30% increase over last year. Total estimated contract value which includes options and IDIQ contracts, ended the year also at a record level of $179 billion, a 24% increase from last year. It's interesting to note that each of the defense segments ended the year at record levels for both of these metrics, and Aerospace ended at levels not seen since the announcement of the G650 in 2008. Turning now to our cash performance for 2025. I think it's worth noting how we started the year. As a reminder, at the beginning of 2025, we were expecting a free cash flow conversion rate between 80-85%, as we work through some working capital challenges. As we progress through the year, we upped that projection to the low nineties. Well, I'm happy to report that we ended 2025 in line with our third quarter. Let's get to the specifics. The fourth quarter was another strong cash quarter with operating cash flow of $1.6 billion, which brought us to $5.1 billion of operating cash flow for 2025. A billion dollars higher than 2024. After considering capital expenditures, our free cash flow for the year was just shy of $4 billion for a cash conversion rate of 94%. Working capital for the year improved nicely over our original plan due to stronger than expected collections and inventory reductions at Gulfstream. While all of our business units contributed nicely to our cash flow for the year, during the fourth quarter, Combat Systems and Aerospace had particularly strong cash generation. As we signaled, capital expenditures were up significantly in the fourth quarter to $609 million, which adds up to $1.2 billion spent for the full year. For 2025, capital expenditures were in line with our expectations and up almost 30% over 2024. In the fourth quarter, we also paid $490 million to purchase assets that were originally under lease. Combined, we invested 3.1% of revenue on assets to support the facilities and fixtures that enabled the continued growth of our businesses. During the fourth quarter, we were in the commercial paper market to support our liquidity during the government shutdown. But ended the year with no commercial paper outstanding. Our cash balance as of year-end was $2.3 billion with a net debt position of $5.7 billion, down $1.4 billion from 2024. Moving on to our 2026 cash flow projections. We expect to return to our free cash flow conversion rate goal of 100% of net income. This is based on particularly strong operating cash flow, offsetting elevated levels of continued investment across our businesses. Capital expenditures are expected to increase over $900 million or 79% from 2025. Our capital expenditures will equal between 3.5-4% of sales as we continue to invest especially in our shipyards to accelerate production and meet future demand. The free cash flow for the year breaks down as follows. The quarters are expected to each be positive and grow slightly with the fourth quarter still representing the largest, but much less of a climb as compared to 2025's plan. We have $1 billion of notes coming due in 2026. Our plan assumes that these notes will be refinanced, but this is something that we will continue to evaluate as time approaches. Turning to interest. Our net interest expense in the fourth quarter was $63 million, bringing interest expense for the full year to $314 million. That compares to $76 million and $324 million in the respective 2024 periods. Under the assumption that we refinance the maturing notes, we expect interest expense to increase to approximately $340 million due to higher expected interest rates on the new debt. Wrapping up with income taxes. Our 2025 full-year effective tax rate ended up at 17.5%, consistent with our guidance. Looking ahead to 2026, we expect the tax rate to remain at a similar level. Additionally, our cash taxes should remain around the same level, with both years receiving some benefit from the R&D capitalization recovery. That concludes my remarks. I'll turn it back over to you, Phebe. Phebe Novakovic: Thank you, Kim. So let me provide our operating forecast for 2026 with some color around our outlook for each business group. And then the company-wide roll-up. In 2026, we expect Aerospace revenue to be about $13.6 billion, up around $500 million over 2025. Operating margin is expected to be increased to around 14%. This should result in operating earnings of around $1.9 billion. Gulfstream deliveries will be 160 with a little upside. This is fairly close to 2025. In Combat Systems, we expect revenue in a range of $9.6 to $9.7 billion coupled with an operating margin of 14.1%. Which should lead to improved earnings around $1.36 billion at the midpoint of the revenue range. As I noted earlier, the Marine group has been on a remarkable growth story. It will continue in 2026. Our outlook for this year anticipates revenue in a range of $17.3 billion and $17.7 billion with a 30 basis point improvement at the operating margin line. This should result in operating earnings around $1.3 billion. In Technologies, 2026 revenue is expected to be up to $13.8 billion. Operating margins are expected to decrease around 30 basis points to 9.2%. We continue to see long-term low single-digit growth from the group and continued industry-leading margins. The EBITDA margin is quite impressive. This should leave operating earnings of about $1.3 billion. So for 2026 companywide, we expect to see revenue in the range of $54.3 billion to $54.8 billion. We anticipate operating margins of 10.4%, up 20 basis points from 2025 actuals. This should leave us with operating earnings around $5.7 billion at the midpoint of the anticipated revenue range. All of this rolls up to an EPS forecast between $16.1 and $16.2. None of this contemplates or includes any capital deployment. On a quarter basis, if one were to assume an average of $4 per quarter, the first quarter would be off 40¢. Second, off 30¢. The third, off 10¢. And the fourth up 80¢ on a typical fourth-quarter increased volume. To wrap up, as we go into 2026, we feel very good about our business and the prospects for the year. We will do our level best to execute and beat the forecast we have given you. As always, we will be laser-focused on operations. Nicole, back to you. Nicole Shelton: Thank you, Phebe. As a reminder, we ask participants to ask one question and one follow-up so that everyone has a chance to participate. Operator, could you please remind participants how to enter the queue? Thank you. We will now begin the question and answer session. If you would like to withdraw your questions, simply press star 1 again. We'll take our first question from Seth Seifman at JPMorgan. Seth Seifman: Thanks very much and good morning, everyone. Phebe Novakovic: Good morning, Seth. Seth Seifman: Wanted to start off asking maybe about Aerospace profitability. And if you can talk about the market cap from here. For kind of through the product transition. To $708,100. Phebe Novakovic: And 600. Seth Seifman: Going away. There's some market expense for this year. Phebe Novakovic: Because you're breaking up a bit. Are you about margin? Seth Seifman: Yeah. Sorry. Can you hear me a little bit better now? Phebe Novakovic: Yeah. That's better. Thank you. Seth Seifman: Oh, okay. Great. Thanks. So she could say it again because Yeah. So We got every other word. Seth Seifman: Cool. Aerospace profitability, I guess, now that we're through the product transitions, you know, there's some improvement expected in '26 here, but I think the hope is that those margins become more robust. And so how do you think about getting there? And is it the supply chain that's the chief impediment as you know, we're seeing in some other places as well, and what are the plans to mitigate that? Danny Deep: Yeah. I can take that. This is Danny here. Yeah. Look. We think margins are going to continue to improve. As you said, you know, we're up about 70 basis points in '26 versus '24. Think we'll see some improved pricing, improved efficiencies, some lower overheads, and some lower research and development costs, so that will be helpful. I think right now, we have headwinds around tariffs. Some of the cost increases that we've incurred in the supply chain happened before we're able to reflect them in our increased pricing. And we do have the opportunity to increase pricing, but that's often in periods to when the cost increase has been incurred from the supply chain. But we continue to expect improvement there. Seth Seifman: Alright. Okay. Okay. Great. And then maybe if you can update us on your expectations for future submarine contracts? For both Columbia and Virginia that would be great in terms of timing and in terms of how they are different than in the past. Phebe Novakovic: So to be quite honest, we don't know. We know that both of those contracts are out there. The demand is there, and it's simply up to the government when they come to us. So don't know very much, but when we do, we'll tell you. Seth Seifman: Okay. Great. Thanks very much. Phebe Novakovic: We'll move next to Doug Harned at Bernstein. Doug Harned: Hi, Doug. You know what? Hi. Is this Hang On Marine? Doug Harned: You know, the revenues are great. You know, clearly, it appears your throughput's going way up. You know, the Navy has been pushing so long to get throughput up, get back to the two Virginia class per year rate. And how would you describe Marine now in terms of kind of closing that gap on where the Navy ultimately wants to be here given that you've got so much money in the budget right now? Phebe Novakovic: So I'd say we are continuing to approve efficiency retention at Electric Boat. Our throughput, as you know, is up. And the proficiency is really key as is retention. The supply chain remains the gating item, and we have seen significant improvement in some areas, but we still have some suppliers and parts of the supply chain that are at risk. The government has been heavily investing in the supply chain which is why we've seen some improvement. But we need to focus and do more particularly with respect to sole source suppliers where they are bottlenecks. So as the supply chain begins to improve, and increase their productivity and by the way, the quality still remains high. It's not an issue. It's simply really about the constraints that they have in capacity and getting their throughput up. But once they do, that will improve that will be the next big step in improving our productivity throughput and the ability to further accelerate deliveries to the customer. Doug Harned: And then on Combat, in the, you know, the backlog story was really strong, and clearly, European demand is very high. And, you know, our assumption would be that that kind of demand growth would continue. When you look at the scale of the backlog increase you're seeing there, how, you know, how long will it take, or what are your expectations in the ability to convert that to revenue growth over time? Phebe Novakovic: So we'll see some increase in revenue growth this year and when accelerating into '27 when we begin to move into production of some of these programs in Europe. This year, we'll be largely planning and engineering R&D work and then as we move into production. So we have a pretty smooth path, I believe, to transition from our engineering work into production, and now we've got the resources property, plant, and equipment personnel to execute. Doug Harned: Very good. Thank you. Phebe Novakovic: We'll go next to Gautam Khanna at TD Cowen. Gautam Khanna: Good. You made a reference to a tariff impact at Gulfstream at Aero. I was wondering how much you guys absorbed in '25 and what are you expecting in '26? If you could frame that for us. Danny Deep: Yeah. Sure. Sure. So the impact of tariffs in 2025 was $41 million. But let me help you a little bit with tariff as best I can. So there's a cash outlay when the tariff is imposed when the material is coming into the country. But the cost to earnings happens at a different point. As you know, we recognize revenue and earnings when we actually deliver the plane. And that's also when we recognize the tariff impact. And so now there's this other element where how much of that can we get back in terms of some sort of reimbursement, and that's difficult to predict. So the tariffs that we are going to see in 2026 are largely based on cash that we expended in 2025. It will be higher than in 2025, so higher than the $41 million, but those tariffs are contemplated in our 2026 margins. Gautam Khanna: Got you. Thank you. That's helpful. And if we're gonna shift to Marine, the increase in 18% sequentially. How much is that at the yard itself in terms of productivity versus in the supply because historically, guys have called out the supply chain kind of being a constraint. I'm just wondering how that has improved. Relative to before. Danny Deep: Yeah. Look. I mean, I don't know how to apportion both of those impacts, but they're both impactful on the margins. I think as Phebe said, when we get the supply chain operating at a full cadence and at full efficiency, that will have an impact on margins. And then equally so, our own productivity and focus on execution. As we continue to improve and we're on that path, we should expect to see improvements in margins. So we think those improvements will be durable and steady as you've seen from 2024 to 2025. We'll see continued strength there and increases. Gautam Khanna: Thank you. Phebe Novakovic: We'll take our next question from Scott Deuschle at Deutsche Bank. Scott Deuschle: Good morning. Kim, can you walk us through what drives free cash flow conversion to the 100% range in '26? Despite that big step. Step up in CapEx? Kim Kuryea: Yeah. Sure. So we're really looking at, you know, basically strong operating performance out of the business units. And that's the major driver. Obviously, we are increasing CapEx to a significant extent, but that's factored in. And we, you know, our goal is to be at 100% and that's what we're targeting for 2026. And, quite frankly, into the next couple of years. Scott Deuschle: Okay. Just to clarify, is the Navy offering some working capital support for the Navy CapEx? Kim Kuryea: Not at this point. Scott Deuschle: Okay. Not to our knowledge. Okay. And then, Danny, given the strong orders and demand at Gulfstream, as well as the strength on the production and supply chain side, I guess, wouldn't the delivery growth in 2026 be higher than this 1% increase? Ask another way. What's the limiting factor on delivery growth at Gulfstream? Phebe Novakovic: So well, let me take that on. We have provided you with the deliveries that we are quite comfortable at the moment that we can execute. Final test, delivery tend to be the long poles in the tent. But we are working to expand our completion capacity through increased efficiency and where necessary additional tooling and fixtures. But let's just put this in some perspective. '24, we had a 30.5% increase in revenues, and from '25, we had a 16.5%. That's in the hard-to-do category. So what we're doing right now is working to absorb that growth while increasing margins. So we believe this is a prudent plan. It's focused on meeting our obligations to our customers. And expanding our productivity. Scott Deuschle: Makes sense. Thank you. Phebe Novakovic: We'll move next to Sheila Kahyaoglu at Jefferies. Sheila Kahyaoglu: Good morning, everyone, and great quarter. Maybe, just on your last comments, given we're on Aviation, the order momentum has been secured. Can you talk a little bit about what's driving that? Maybe by geography, was it bonus depreciation? Or is it the new model into you have going in? Phebe Novakovic: I think a number of factors have driven the increased demand. Certainly, our new products have. The 800 led the demand, followed by the 700 and the 600. I suspect bonus depreciation was a factor as is the strength of various economies. I would also tell you that the pipeline is active. And growing. And we have a good activity. So we like what we see on the demand side. Sheila Kahyaoglu: Great. And if I could follow-up maybe on the capital deployment comments. How do we think about GD combat what's going on there? There's been a lot of press about capacity and missions and ammo. You know? How are you thinking about capacity coming online for combat and how that factors into the 3.5% of CapEx to sales ratio over the next few years? Phebe Novakovic: So the majority of or half at least of the CapEx for this coming year is at Electric Boat. We have been investing in Combat Systems across the portfolio, and we'll continue to do so. On the munitions side, we have a and have executed that capacity up in Northeast Pennsylvania. To 36 rounds a month for the last twelve months. We've increased the load pack and established a load pack assembly facility, and with the capacity of 550,000 rounds a month. And we've increased our propellant capacity. So all in all, we see some instances of need additional investment, and we'll make that accordingly. Sheila Kahyaoglu: Great. Thank you. Phebe Novakovic: We'll take our next question from Matt Akers at BNP. Matt Akers: I guess, Phebe, historically, you guys have usually guided x capital deployment, and I think probably a lot of us just go ahead and stick it in our models anyway. But just, I guess, given some of the pressure we've seen on the industry on buybacks, I guess, you comment on maybe whether we should be a little bit more cautious on assuming that this year? Phebe Novakovic: So our capital deployment strategy for the last number of years has been to continue to invest in our growing business. As resulted in increased backlog. So we think we believe and plan on additional investments in our portfolio. To ensure that we're able to efficiently execute that back and provide for the demands and needs of our customer. We have for let's let's on the on the dividend, you know, we've paid a dividend for over twenty-five years. And every year in March the board decides the extent of any increase but we're committed to the dividend and we never comment on share repurchase. I know that it's not particularly popular right now. So our habit and penchant for not commenting on share repurchases, I believe, appropriate. But I think it's our strategy remains heavily invested in the business. Because it's justified given the demand and the backlog. Matt Akers: Yes. Got it. And then I guess just one more kind of the CapEx with the step this year. I mean should we think of this as kind of a multiyear investment that needs to be made? Or is this more something that will kind of revert to more normalized levels in '27 and beyond? Phebe Novakovic: Thanks. We'll continue to invest, year over year. In our businesses because we have a long-term growth there, and it's embedded in our backlog. We believe that that's appropriate. So the investments year over year in CapEx may vary a bit. But you should expect that strategy going forward. Matt Akers: Great. Thank you. Phebe Novakovic: We'll move next to Myles Walton at Wolfe Research. Myles Walton: Thanks. Good morning. You've previously given medium-term margin expansion sort of color for Aerospace. I was curious if you could maybe update those margin outlook targets. Phebe Novakovic: We believe there's margin improvement, headroom at Gulfstream, and we'll continue to pursue that. You know, it's not about necessarily pursuing growth that's in our backlog, but it's about execution, execution. That's throughout the whole company. It's really a strategy Gulfstream and Jet Aviation are no different. So we all continue to push margin, and we see high probability of improved margins over time. Myles Walton: Is mid to high teens still reasonable for '27? Phebe Novakovic: Well, I think as we execute this backlog, we'll continue to push margins. We've got lots of puts and takes in this business as you all know and how all of the costs and the pricing opportunities play out over the next couple of years will drive it. But you should expect significant and consistent margin improvement over time. Throughout our plan period. Myles Walton: And is the Combat growth in '26 absorbing much of any headwind on the Ajax program, if you could size that? Phebe Novakovic: Wouldn't say there's any headwind on the Ajax program. We have a pause in the fielding, but we are highly confident in this vehicle. It has been tested for tens of thousands of miles. And we have great confidence in it. Myles Walton: Okay. Thank you. Phebe Novakovic: We'll take our next question from Robert Stallard at Vertical Research. Robert Stallard: Thanks so much. Good morning. Phebe Novakovic: Morning. Robert Stallard: Phebe, given some of the geopolitical activities over the last few weeks, I was wondering if you've seen any change in the conversation with your European customers with regards to buying US sourced equipment rather than stuff you actually make in Europe. Phebe Novakovic: We have not. But let me remind you the biggest source of business that we have in Europe are EU European based and almost fully sourced. European businesses. They're indigenous businesses. That we've had for, in some cases, over twenty-five years. And they are manned, run, led, and sourced in Europe. Robert Stallard: Okay. And then secondly, on the Aerospace side, you know, there's been concerns over the last few months perhaps over this AI bubble. I was wondering if there has been any notable change in your backlog here and whether there has been any increase in AI-related orders over the last, say, six to twelve months? Phebe Novakovic: You mean a Gulfstream AI driven? From AI driven company? We haven't seen any of that. I'd say the demand is across the portfolio, very heavy in the Fortune 500, high net worth, and Fortune 500 companies high net worth individuals, but there's no one particular segment that jumps out or is anomalous. Robert Stallard: Okay. That's great. Thank you very much. Phebe Novakovic: We'll go next to Ron Epstein at Bank of America. Ronald Epstein: Hey. Good morning, everybody. How are you? Phebe Novakovic: Morning, Ron. Ronald Epstein: Just a couple quick ones here for you, Phebe. Battleships. How do you think about battleships? Battleships, Golden Dawn. I mean, that's a lot of stuff going on. How do you think about that with your ship business? Phebe Novakovic: Bath is participating in the design with other industry partners on that battleship that's just recently announced. I think it'll be quite some time in playing out. But it really is at its beginning design phases. So really too soon to project anything. In terms of time and Ronald Epstein: Is there, like, gonna be a down select? Have they imported it? You know mean? Is I don't know how to think about it. Because they're gonna be, like, a physical Phebe Novakovic: I don't believe we know the competition strategy right now. Ronald Epstein: Got it. Okay. Yeah. Fair enough. And then is this too simple of a way to think about Gulfstream? So I mean, this you know, everybody's been asking those questions. So sorry. Apologies, everyone. But in kinda really simple terms, you guys have brought to market sort of a refreshed fleet of kit. Right? So a bunch of new airplanes. That's driving demand. Because you got the newest stuff out there. You know, it's early days in many of these programs. So as you go down the learning curve, that's you should get some margin expansion. So as we walked out over the next several years, naturally, should we just see margins improve because you just get better at building a new airplanes? And you're presumably not to put words in anybody's mouth, not gonna launch anything immediately. So you've got this stuff maturing. Margins go up. And demand stays good because you got a new product out there. That's too simple a way to think about it. Phebe Novakovic: Anna, I think you have quite eloquently defined and expressed our strategy. Our new airplane guard, our driving demand. We continue to come down our learning curve. The supply chain is improving as a way to go, but it's definitely better than it was. And all of that will drive additional margin improvement. Measured over time. But the investments we made years ago in these new products are coming to fruition, and the market is benefiting. From this whole new family of clean sheet airplanes. Nobody else has anything like it. We worked hard. We earned it. This isn't something that just happened overnight. There's a lot of long thoughtful, targeted R&D and capital investments. Ronald Epstein: Got it. Got it. And then maybe if I can just flip it one last one. Sure. Been running that company for a while, and you've been on the hill, been all over. How do you think about some of the stuff coming out of administration directing defense companies on what how to deploy capital. I mean, you know, as a leader of an organization, that's, you know, deployed capital arguably pretty prudently over the years, how do you think about that? Phebe Novakovic: Well, our strategy over the last several years is aligned with the administration's intent commitment to an intent to increase production, and we are an increased demand signals are very strong. So we have been investing in our business, and we'll continue to do so. I think that's the best way to think about it. Ronald Epstein: Got it. Alright. Thank you. Phebe Novakovic: We'll take our next question from John Gadden at Citi. John Gadden: Thanks for taking my question, I wanted to keep digging into the trend in munitions. You had so many positive callouts in the prepared remarks. Obviously, we've seen a lot of growth in the weapon systems and munitions subsegment within Combat Systems. And I get a lot of questions on how long that strength might last, where production rates and run rate revenue can go over years and what incremental margins on munitions revenue like, look like versus overall Combat Systems margins. So I know you might not wanna give all that detail, but I was hoping we could dialogue a bit about the trajectory just to get a better handle on the shape of the business over the coming years? Phebe Novakovic: We have a good business in munitions. We are a supplier to many of the missile companies. So we expect that the demand signals that the administration and outside The US have been issuing are manifesting in contract. We expect that to continue. Stores and inventories are low. And those inventories need to be replaced. So we are well positioned. We'll continue to work our margins as we always do. This is a business that tends to be in the 14-15% margin range. We expect that to continue with some variability. It's all about their operating leverage. And their ability to come down their learning curves and control their cost. John Gadden: Okay. That's very helpful. And if I could just ask one more on supply chain and Gulfstream. And I know there's been some dialogue on that already on the call. But specifically, with commercial aerospace productions volumes ramping, do you think there's any knock-on impact on Bizjet supply chain, whether it's demand for materials, subcomponents, labor, etcetera, Anything there to think throughout? Phebe Novakovic: Well, labor is not a problem. Are you asking whether we see material issues in the supply chain? John Gadden: With Boeing ramping production dramatically, Airbus as well. Is there a knock-on Phebe Novakovic: I say that some well, let me answer this way. Say that some of the suppliers have ramped more successfully than others. We know the ones who still have some work to go. They're committed to making the investments to increase their capacity. So it's really about capacity throughput and the causes for that constrained environment in some of those suppliers is really just about the investment in capacity training a workforce, but quality remains good, which is critical. So, Audra, I think we have time for one more question. Operator: Thank you. That question comes from Andre Madrid at BTIG. Andre Madrid: Thank you for taking my question. Good morning. Phebe Novakovic: Good morning. Andre Madrid: I wanted to really nail down into international a bit. Could you maybe tell us what the book-to-bill was for the quarter and for the year? And how are you thinking about demand moving into '26? I know we've talked about it in each of the individual segments. But is it fair to say that growth on international will probably outpace the broader business in the year. Phebe Novakovic: Are you talking about Combat Systems primarily? Because there is none in Marine group. Gulfstream. So Andre Madrid: Yeah. Yeah. Okay. Yeah. Danny Deep: Yeah. I can answer that. Yeah. So I think as Kim said, we had a book-to-bill in the fourth quarter at specifically at European Land Systems of over four to one. So that was by far the biggest impact. I think as you think about it in the context of Combat, which is where the bulk of our international activity is, European Land Systems will be the fastest grower by far. And so we expect to see really, really positive growth over the plan period and you'll start to see the real acceleration, as Phebe said earlier, in '27 and beyond. Some of these are long cycle programs but certainly at European Land Systems, we expect to grow quickly. Andre Madrid: Got it. And then if I could squeeze one more in. I know back at AUSA in October, you highlighted some of the demand that you're seeing around UGVs. We've seen them being used to extreme effect in Eastern Europe right now. What do you think the market looks like for unmanned ground? I mean, is that something that might be much more tangible in the years to come? Is there, like, kind of a, you know, a benchmark that you guys are setting to for how that business might perform? Phebe Novakovic: We're not setting a particular benchmark, but I would say that the US Army is in a period of transition. But they moved to the most advanced technologically capable systems both in their unmanned systems, mobile protected firepower, communications, and in GPS denied environment. So we're seeing really a transition as the US Army modernizes its force. And we don't have any particular benchmark, with respect to some of the smaller areas for us, but we've made those investments to support that growth and we're quite confident that we are well positioned to support them going forward. Andre Madrid: Thank you. Appreciate it. Phebe Novakovic: Alright. Well, thank you everyone for joining our call today. Please refer to the General Dynamics website for the fourth quarter earnings release and highlights presentation. If you have additional questions, I can be reached at (703) 876-3152. And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: On hold. We appreciate your patience and ask that you please continue to stand by. To all sites on hold, we appreciate your patience and ask that you please continue to stand by. Your program will begin in three minutes. 12 sites on hold. Thank you for standing by. Your program will begin in two minutes. Good morning and welcome to the Navient Fourth Quarter 2025 Earnings Conference Call. This call is being recorded. Currently, all participants are in a listen-only mode. We will conduct a question and answer session. Instructions will be provided at that time. At this time, I will turn the call over to Jen Earyes, Navient's Head of Investor Relations. Please go ahead. Jen Earyes: Hello, good morning, and welcome to Navient's earnings call for 2025. With me today are David L. Yowan, Navient's CEO, and Steve Hauber, Navient's CFO. After their prepared remarks, we will open up the call for questions. Today's discussion is accompanied by a presentation, which you can find on navient.com/investors. Before we begin, keep in mind our discussion will contain predictions, expectations, forward-looking statements, and other information about our business that is based on management's current expectations as of the date of this presentation. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company's Form 10-Ks and other filings with the SEC. During this conference call, we will refer to non-GAAP financial measures, including adjusted tangible equity ratio, and various other non-GAAP financial measures that are derived from core earnings. Our GAAP results, description of our non-GAAP financial measures, and a reconciliation of core earnings to GAAP results can be found in Navient's fourth quarter 2025 earnings release, which is posted on our website. Thank you. And now I will turn the call over to David L. Yowan. David L. Yowan: Thanks, Jen. Good morning, everyone. Thank you for joining the call and for your interest in Navient. First, Joe Fisher is joining me this morning. I want to extend our sincere thanks to Joe for his dedicated service over twenty-plus years and the solid foundation and team he helped build. We wish Joe all the best in his next endeavor. Also joined this morning by Steve Hauber, who was appointed Chief Financial Officer earlier this month. Steve is also a twenty-plus year veteran of the company and brings strong leadership and deep experience to the role. He most recently served as our Chief Administrative Officer and played a key role in managing our transformation and our expense reduction efforts. Steve's appointment is part of a broader set of changes that better align our management structure with the business strategy for Earnest and Navient that we shared in November. As we mentioned in November, starting January 1, our in-school lending business was transferred from Earnest to Navient to consolidate our education activities, which also includes the legacy FFELP and private loan portfolios. This morning, we reported Q4 and full-year results that demonstrate our underlying ability to drive high-quality loan growth while at the same time reducing operating expenses. Our reported results include an additional provision on our private legacy portfolio and restructuring costs largely related to our expense reduction initiatives. During 2025, we effectively completed our Phase One transformation within legacy Navient and will exceed our $400 million expense reduction objective. These operating expense reductions increase our already substantial future life of loan cash flows by $2 billion cumulatively, providing increased financial flexibility and even greater levels of capital for new growth. The benefits of our investments at Earnest and the expense reductions we have achieved are reflected in the operating leverage within our 2026 outlook. We expect that we can fund year-on-year loan growth of $1.5 billion or 60% with total expenses that are lower than last year by roughly 20%. As set out in November, we are operating with lower expenses and also with improved capital efficiency, which should enable us to finance our growth plans simply by utilizing the capital being released with an existing back book portfolio. Earnest had its strongest quarter of the year, more than doubling origination volume year over year accompanied by high credit quality, totaling approximately $634 million in new refi. This brings full-year refi originations to $2.1 billion, more than doubling volume from the prior year. In-school lending also had a great year, originating its highest ever level of new loans of $4.1 billion with strong credit quality and margins. Steve will take you through some more detailed statistics showing the continued momentum at Earnest in a few minutes. We continue to invest in capabilities at Earnest. An important part of the executive changes we made earlier this month was the establishment of a vertically integrated CFO role at Earnest. We're currently conducting a search for fintech experience to fill it. The momentum at Earnest and the actions we took in 2025 position us well going into the New Year. Turning to guidance for 2026. We're currently targeting total loan originations of $4 billion, which would represent growth of approximately 60% over 2025. We expect refi and in-school lending growth of over 50% each and less than $100 million for personal lending while we continue our pilot program. As you see, we took the incremental provision in the fourth quarter largely relating to the private legacy portfolio, which were loans originated more than a decade ago. There were minimal additional provisions for FFELP or refi loans. While this provision has a significant impact on reported earnings per share, the effect on the life alone cash we expect to receive from the legacy is immaterial. Steve will take you through these in more detail in just a minute. We also continue to return capital to shareholders through share repurchases and dividends and expect to continue to do so in 2026 with share repurchases being opportunistic, as they were in 2025. When I assumed the CEO role in 2023, the company had multiple business lines and products supported by a significant shared service footprint of capabilities and expenses. The executive organizational structure at that time reflected an operating company business model, with multiple enterprise functional heads reporting into the CEO. We have been migrating and expect to continue to migrate toward a holding company management structure with carefully managed and lower central costs. Earnest and Navient's education finance activities will both manage directly more of the services needed to operate their respective organizational structure we announced earlier this month are another step in this migration. I'm very excited about Navient's and Earnest's prospects for 2026 and we look forward to reporting on our achievements in the coming quarters. With that, I'll turn it over to Steve who will provide more detail on Q4 results and Thank you, Dave, and thank you, everyone, for joining today's call. I will review the fourth quarter and full-year 2025 results and will provide our outlook for 2026. During the fourth quarter, our actions to further reduce operating expenses position us to over-deliver on the $400 million expense reduction target in our legacy activities established two years ago. At the same time, Earnest continued to demonstrate strong loan origination growth with its highest refi quarter of the year, ending the year with total originations of $2.5 billion. We also provided for additional expected credit losses in our private legacy portfolio and recorded restructuring costs related to our expense reduction efforts. In total, core earnings per share for the fourth quarter were $0.02. On a full-year basis, we reported core loss per share of $0.35. Let's turn to Slide six, where I will review Earnest loan origination growth in 2025. Refi originations were $2.1 billion in 2025, which doubled the volume from the prior year. Refi rate check volume, measured as prospective refi customers completing a soft credit pull to receive a personalized rate quote, increased nearly three times from 2024 to 2025. This growth demonstrates positive tailwinds and strong demand for our refi product. We are generating demand and converting volume efficiently. As you can see on the slide, both 29% and 35%, respectively. These efficiency gains are lowering our cost per dollar of volume and driving stronger operating leverage as we scale. Capital efficiency is also improving. As we shifted toward vertical securitization structures, the amount of equity required to finance these loans has declined materially. To summarize the refi story in 2025, demand is improving, we're efficiently converting that demand into high-quality loan volume. We deliver a great customer experience and we're benefiting from both stronger operating leverage and improved capital efficiency. In-school originations also grew to $4.1 billion in 2025, approximately half of which related to borrowers pursuing graduate degrees. We remain focused on the 2026 peak season, the expanded market opportunities, and targeting strong growth in 2026. We are approaching the graduate lending market expansion with discipline and strong momentum. Our platform, partnerships, and underwriting discipline put us in a good position to serve our target customer segments with our highly rated products and customer experience. Slide seven provides similar loan origination growth information and compares the 2025 to the same quarter in the prior year. We maintained our positive growth momentum in the fourth quarter, with refi origination growth of two times, improving trajectory for our expense efficiency metrics and strong credit quality. I'll now cover segment financial results, beginning with the consumer lending segment on Slide eight. Fourth quarter net income was $25 million compared to $37 million in 2024. Consumer lending net interest income declined year over year mostly due to lower outstanding balances and the product mix of the portfolio. Looking forward, we expect consumer lending net interest income in 2026 to remain relatively stable compared to 2025. We expect new originations to outpace amortization of the portfolio in 2026, leading to growth in our total outstanding balance of private loans. Year over year expenses in the fourth quarter were down slightly, as efficiency gains more than offset the expense impact from higher origination volume. Moving to credit, private charge-off rates declined from 2.48% in the third quarter to 2.24% in the fourth quarter. Delinquency rates increased from the third quarter to the fourth quarter, with thirty-one plus day delinquency rates increasing from 6.1% to 6.3% and ninety-one plus delinquencies increasing from 2.8% to 2.9%. We recorded a provision of $43 million in the fourth quarter, $9 million of which related to new origination. The remainder primarily reflects a weaker macroeconomic outlook and a response to fourth quarter delinquency trend, largely within our legacy private loan portfolio. Federal Education Loan segment results are on Slide nine. Fourth quarter net income of $27 million was $8 million lower than the third quarter, mostly due to third quarter net interest income benefiting from the adoption of lower prepayment rate assumptions. Comparing Q4 to the prior year quarter, net income was $17 million higher. The increase reflects lower provision and the impact of decreasing interest rates on the different index resets on assets and debt. Additionally, expenses in this segment were 20% lower, facilitated by our variable cost structure from outsourcing the servicing of our portfolio. Provision in the Federal segment in the fourth quarter fell to $1 million. The total delinquency rate improved slightly from Q3, declining from 18.1% to 17.5%, while the net charge-off rate rose eight basis points to 23 basis points. The higher charge-off rate in the quarter primarily reflects loans to borrowers affected by 2024 natural disasters that were written off in the quarter. FFELP prepayments remained historically low at $225 million in the fourth quarter compared to $322 million a year ago and over $1 billion two years ago. With the slow amortization of the FFELP loan portfolio, we expect relatively stable net interest income throughout 2026, barring unexpected macro events impacting the interest rate environment. The allowance for loan loss excluding expected future recoveries on previously charged-off loans, for our entire education loan portfolio is $77 million, which is highlighted on Slide 10. Slide 11 shows the results from our Business Processing segment. In October, we completed our final obligations under the transition services agreement for our Government Services business. The TSA revenues and expenses from this quarter represent the tail end of this activity, totaled less than $1 million, and are reported in the other segment. The earlier than expected completion of the TSA allowed us to begin our final push to remove remaining legacy shared expenses. We will over-deliver on our $400 million expense reduction target. More detail on the total expenses can be found on Slide 12. We closed 2025 with fourth quarter total core operating expenses of $88 million, a 40% improvement compared to 2024. Restructuring expenses were $11 million in the quarter, as we recognize charges related to our legacy structure and environment that will no longer be in our expense run rate. This included $6 million of restructuring costs related to the earlier than expected retirement of significant components of our former technology infrastructure. Full-year 2025 total expenses were $438 million, a decrease of close to 50% compared to 2023. This decrease is the direct result of our focused and aggressive efforts to reduce our expense base through divesting the BPS business, transitioning to a variable servicing expense structure, and significantly reducing our corporate expenses. As illustrated on Slide 12, this momentum is continuing into 2026. Let's turn to our capital allocation and financing activity, which is highlighted on Slide 13. In the fourth quarter, we completed our fourth securitization of the year, bringing our total issuance in 2025 to nearly $2.2 billion of term ABS financing. We continue to see strong investor demand and achieved high effective cash advance rate in these financings. Our current cash and capital positions provide ample capacity to distribute capital and invest in strong loan origination growth. In the fourth quarter, we repurchased 2.1 million shares at an average price of $12.67 as our shares remain significantly below tangible book value. In total, we returned $41 million to shareholders through share repurchases and dividends, while maintaining a strong balance sheet with an adjusted tangible equity ratio of 9.1%. Slide 14 provides our outlook for full-year 2026. We are targeting total loan originations of $4 billion with growth rates over 50% for both our refi and in-school loan products. We expect to achieve this growth while reaping the benefits of our investments and capabilities at Earnest and our legacy expense reduction efforts. Specifically, we expect expenses in 2026 of $350 million, which is $88 million lower than 2025 total expenses. Our outlook for full-year 2026 core EPS is a range of $0.65 to $0.80. This range is net of a $0.35 to $0.40 per share impact due to upfront CECL charges and operating expenses related to our expected $1.5 billion year-over-year increase in loan originations. As I wrap up my comments, I want to express my appreciation to Joe for his years of valuable contributions to the company. I'd also like to thank the Navient team for their continued dedication throughout our strategic transformation. Thank you for your time, and I will now open the call for any questions. Operator: If you have a question, we ask that you pick up your handset for best sound quality. Additionally, we ask that you please limit yourself to one question and one follow-up. We'll take our first question from William Ryan with Seaport Research Partners. William Ryan: Good morning, Dave, and congratulations, Steve. First question is on the credit metrics of the private legacy portfolio. Obviously, a big question among investors, it's about reserve adequacy and there's been some deterioration since you took the charge in the third quarter. Could you maybe walk us through what you saw over the course of the quarter that prompted you to bump up the reserve rate or build the reserves for that portfolio in the provision and some idea of what the ending reserve rate on the legacy portfolio is? And I have one follow-up. David L. Yowan: Hey, Bill. Good morning. Thanks for your comments. Let me start out by providing some context of what we've seen across our portfolios over the last two quarters and the actions that we've taken to respond to those. If you go back to the third quarter, we conducted a comprehensive review of the assumptions underlying the life of loan cash flows for our legacy portfolios. When we did that, we made assumption changes around the level of prepayments that we're seeing in both the FFELP portfolio and the private legacy portfolios. Those assumptions extended the life of the portfolios significantly in some cases. We also looked at the default and delinquency experiences that we've had over the preceding recent history, and we made some adjustments based on what we had seen there about the life of loan cash flows. We also made some assumption changes about future financings that impact the periodicity and the amount of the life of loan cash flows. So we did that all in the third quarter. And cumulatively and in isolation from everything else that was going on in the portfolio, those assumption changes increased our expected life of loan cash flows by a little less than $200 million. As we went into the fourth quarter, the recording that you see there really reflects two things. One is there was a deterioration or further deterioration in the macroeconomic scenario. That deterioration impacts all portfolios and represents about 20% of the back book provision that we're taking this quarter. The rest of the back book provision is almost exclusively focused and related to the private legacy portfolio. These are loans originated more than a decade ago, where we did see the sequential increases in delinquency rates that Steve described for you. Those delinquency rates are in the consumer lending segment, which includes private legacy, refi, and in-school as well. If you look into the segments there, the delinquency increases were almost exclusively focused in private legacy. And so our provision expense responds to what we saw in the fourth quarter with what we think is an appropriate provision. I think Steve can talk about the end of quarter reserve levels, which is the second part of your question. Steve Hauber: Yes. On the reserve coverage, we ended the year in the mid-three percent range. I think the way to think about that, clearly, that reserve coverage will shift over time as the mix of our portfolio for private changes with more of the portfolio centered around refi. And so you think about the 3.5% at the blend, similar to what Dave was saying, as we look at the statistics in the consumer lending segment, similarly, you have that blend and mix issue with the refi and legacy. The three and a half percent is the amount we're at at year-end. David L. Yowan: If you look today, Bill, over half of the private legacy portfolio is refi. That percentage, given where we're originating and where we're rolling off, is only going to increase into the future. And so NIM reserve ratios, etcetera, are migrating more towards representative of the refi portfolio and less of private legacy on a segment basis. William Ryan: Okay. Thank you for that. And one more accounting-related question. Obviously, the $4 billion origination is above the consensus. I believe it's somewhere between $3.4 and $3.5 billion. And you noted that the growth investments included the expected CECL charges. You're out looking for a FinTech type CFO. Has there been any internal discussion or thought about the use of fair value accounting? Obviously, that would kind of alleviate some of the pressures that you're facing as it relates to the CECL tax and puts you on a level playing field with several of your peers that have already adopted that accounting methodology. David L. Yowan: Yes. Bill, we're certainly looking at others in the space that have utilized fair value accounting. We're not ready to announce that certainly at this point in time, but it's certainly something that's on our radar screen is what I would say. William Ryan: Okay. Thank you. Operator: Thank you. We'll take our next question from Jeffrey Adelson with Morgan Stanley. Your line is open. Please go ahead. Jeffrey Adelson: Yes. Hey, good morning. Thanks for taking my questions. It's nice to see the origination guide and you make reference to this additional $1.5 billion. I guess, I'm just curious with given the opportunity you've got ahead, I know you're still maybe piloting in the personal loan space here. You do have this nice plus opportunity ahead. I'm curious if, number one, you've continued to do any work or any findings you can share with us on what you think that plus opportunity could be for you ultimately maybe on an annual basis. And just in light of the acceleration in originations and that plus opportunity, you still do have this runoff overall in the portfolio from the legacy FFELP book. Just kind of curious, like, how you're thinking about eventually returning to positive loan growth, positive top-line growth? And how long that might take at this point in your view? David L. Yowan: Yes. Thanks for the question, Jeff. There's a lot there. I'll try to address all parts of the Look, personal loan launch, we did manage to cross-sell launch in the fourth quarter. We've also begun to go outside our existing customer base. We're very much it's too early to call or share any results from that other than to say that we're achieving the testing and learning that we set out in the initial launch and we're encouraged by the initial results. Even if we address our less than $100 million that we've talked about, it's still going to be a pilot year for us in 2026. And so it's not going to impact our financials in any meaningful way in 2026. Plus opportunity, we sized that for '26 in the November presentation at around $3 billion. I would say that 2026 is clearly a year of transition, and I think you're seeing this from others in the industry as well. I think there's a high degree of variability and uncertainty about exactly how long that transition period is going to be, and exactly what the market opportunities are. We're very excited and confident about our ability to grow that book of business at more than 50% in 2026. And we're very focused on that. In terms of the runoff and the mix, I think Steve provided some comment in his remarks. I don't know this for sure, but it may be the first time in a while, but the balances in the private legacy portfolio are actually going to be stable year over year. So we're originating loans that are more than offsetting the runoff of private legacy and other portfolios as well. That's been a long time coming. As I'm sure you can appreciate in the loan growth that we are projecting and targeting for this year. Which we have a lot of momentum. You can see in the fourth quarter, it was our best quarter ever at Earnest. One of the things, for the year. One of the things that we are seeing is an increased interest from federal borrowers to refinance. You go to the November presentation as well in the appendix we showed some of the interest rates that are associated with federal lending over the last few years. There's opportunities for customers to lower their rates and for us to make high-quality loans. We continue to see that into January. And so we're very optimistic and confident about our ability to continue the momentum on that loan growth in that particular product. Jeffrey Adelson: Okay, great. And maybe you could just touch on any of the early conversations you've been having with some institutions regarding some more formal, you know, whole loan sale or flow programs. I know you're already executing on the securitizations strategy, in a more capital-light manner, but just any sort of expectations around potential for lower sales from here? David L. Yowan: Yeah. Look, I think we've said consistently and so I'll continue to say that we feel like we have a number of opportunities, channels for us to distribute loans, both the loans that we're making today as well as any potential expanded opportunities that we can find as we leverage the platform at Earnest. Right now, and you could see this in the slides that Steve referred to, securitizations in 2025 for us were an incredibly capital-efficient way for us to finance the production of refi and in-school as well. The initial equity requirement is lower by a significant percentage and is just a fraction of what the legacy portfolio has required in terms of equity capital and unsecured capital. And so given the economics of securitization and our ability to finance them, that's why we've continued to throughout 2025 have a make and hold strategy. And that's why our target is to continue to have that. If the relative economics of securitization and loan sales and flow agreements change, if we identify origination opportunities that have a better source of capital than the securitization market that we have, then we feel confident in our ability to pivot and take advantage of the opportunities that those different financings present. Jeffrey Adelson: Okay, great. Thank you, guys. Operator: Thank you. We'll take our next question from Terry Ma with Barclays. Your line is open. Please go ahead. Terry Ma: I wanted to talk about credit. You guys so far have highlighted just the delinquency trends in the legacy book. Kind of talked about the reserve associated with that. But when I look at the private refi book, there's also a noticeable uptick in delinquencies there for ninety-day delinquencies is about 20 basis points year over year. It looks like it drove the bulk of the dollar increase in ninety-day delinquencies for the total book. So maybe just kind of talk about what you're seeing there with respect to credit performance. And then since you're kind of leaning into originations there, maybe just talk about reserve adequacy and kind of like direction of travel for credit metrics for the private refi book. David L. Yowan: Yeah. Thanks, Terry. I think in terms of what we're seeing, we did see a slight uptick in delinquency levels from year-end and from last quarter. We feel really good about our overall position with refi. What we see there, of course, is on an absolute basis very low delinquency rates. We've seen signs and have expectations that that will improve as we move forward here. I think also important to reference on refi would be the high quality of the loans that we originated in 2025, which is also what we saw in 2024. And so we're feeling good about that. And in terms of the reserve levels for refi, that was part of when we did our review back in the third quarter, we did make adjustments to refi to add to the reserve levels there. Modestly. Feel good about that being the right level of reserves going forward for refi and still thinking about that refi book being on a life alone basis below 2% in terms of lifetime losses. Terry Ma: Got it. Thank you. And then maybe just on the origination outlook, I may have missed it, but called out 50% upside for or increase in originations. Your business there is kind of outgrown the overall growth in the market the last two years. But as to the material step up, are you seeing what's driving the incremental opportunity? Is there something changing in competitive dynamics? Or are you just kind of going after the market more aggressively? Thank you. David L. Yowan: Yes. So, we were coming off 2025 was the best marketplace year we've had in school since we entered that five or six years ago. So we have a lot of momentum in that space. Just based on the organic customers that we serve. And obviously, additional opportunity from Grad PLUS even if in a transition year, which 2026 is, gives us confidence that we can accelerate the growth rates in that particular product. That's why you see the 50% increase there. Terry Ma: Got it. Thank you. Operator: Thank you. We'll take our next question from Richard Shane with JPMorgan. Your line is open. Please go ahead. Richard Shane: Good morning, everybody. A couple of things. I guess it's all related. You expect to grow the private book in '26. You have about $525 million in maturities on the debt side. Over the last decade, you guys have been very disciplined about returning capital to equity holders using cash flows to return it capital to equity holders and consistently paying down debt. As the strategy transitions and you start to at least grow the private book, you talk about being opportunistic in terms of equity repurchases. What does that look like? Obviously, you're trading at a huge discount to tangible book. Assuming yesterday's close. So opportunistic, seems to be there today. Should we expect sort of consistent purchases in '26 with the levels we saw in 2025? David L. Yowan: Yes. Thanks, Rick. Look, we're not signaling any change in the way we're thinking about share repurchase. I think you summarized it well in terms of what we've been doing from a capital management perspective. One thing I would say is that as you think about '26 and you think about the share authorization that we received from our Board last over the years, December in the fourth quarter, which was $100 million as the share count has come down significantly the amount of share repurchases has declined as well overall. The opportunistic is in fact based in part on the valuation of the shares and we continue to believe that the discount to tangible book value provides an opportunity for us to repurchase. So same strategy scale to the size of the share repurchase authorization that you saw, which is scaled to the overall size of market cap and shares outstanding in the company. Richard Shane: Got it. Okay. I appreciate that. And I would be remiss not to congratulate Steve and also equally importantly not to thank Joe for all of his conversations and help over the years as well. So thank you guys and congratulations. David L. Yowan: Thank you, Rick. Operator: We'll take our next question from Caroline Lotta with Bank of America. Your line is open. Please go ahead. Caroline, your line is open. Please proceed with your question. Caroline Lotta: Hey, sorry about that. So the guidance slide says it reflects the current outlook. So what are the macro assumptions underpinning the guide specifically in terms of unemployment rate? And then also in terms of interest rates thinking about refi volumes next year? Or this year, sorry? David L. Yowan: Caroline, thanks for the question. Look, I don't have them right in front of me, but you can think of those as really like the blue chip consensus for unemployment and interest rates. We don't have an in-house economist, so we're relying as many firms do on some of the providers of those scenarios. And if Jen could provide those to you offline, but it's really a consensus macroeconomic assumption for next year. Caroline Lotta: Okay. Thanks. David L. Yowan: Yep. Operator: Thank you. We'll take our next question from Sanjay Sakhrani with KBW. Your line is open. Please go ahead. Sanjay Sakhrani: Thank you. Good morning. Can we go back to the deterioration in the private legacy portfolio? I'm just curious like what exactly is driving deterioration on loans that were originated a decade ago. And I'm just curious like is it that those students or those consumers are now seeing job loss? I mean, what's the driver of the higher delinquencies there? David L. Yowan: Yes. Thanks, Sanjay. I think it's probably important for us to zoom out a bit and some of what Dave was talking about earlier when we did our third quarter review. Our private legacy portfolio, which as you know, was originated more than a decade ago, it's a portfolio that has gone through some cycles. And so clearly, there's a strong component of that portfolio that's been making payments consistently. You have other borrowers who have struggled at times, and we've been there to help them with payment programs and the like as we manage through things. We go over the course of the years, clearly going through the pandemic, the pandemic release cycle, the return to repayment cycle, with many of these borrowers having federal loans as well. It's put them through some changes and some challenges there. I think what we're seeing here is that the performance quarter to quarter, even though it slipped, we're seeing positive momentum in terms of those borrowers getting on track. And heading into 2026. We're optimistic that those trends will improve. I think in terms of really what's affecting borrowers, I mean, clearly, there's a variety of factors, including those I mentioned. Also macroeconomic factors. Inflation, and the like. But I'd say in terms of just how we're sizing it up in general, I think it's just important to kind of the cycle they went through. And now that we're past a lot of that, kind of the positive momentum that we expect to see going forward. Sanjay Sakhrani: Okay, great. And then I know you guys didn't really, kind of give a whole lot on the outlook for NIM and provisions. I'm just curious as we think about those other components for NIM for 2026. Is there any way to contextualize sort of the path because it was a little bit weaker than we had anticipated for both FFELP and consumer lending. And then obviously, kind of what's being baked into provisions given some of the delinquency trends and the growth differences that you talked about? David L. Yowan: Yes. So first on the NIM side of things, for the FFELP portfolio, we're expecting relatively stable NIM given the slowdown in the prepayment of the FFELP loans. So year over year, I'd expect that to be relatively consistent. In terms of the private or the consumer lending side, what we saw in 2025 is a good parameter for 2026. And clearly, what we're seeing there is with the portfolio remaining stable or increasing slightly in 2026, that's a positive mix of the portfolio towards more refi goes the other way in terms of overall margin. So I'd say it's a relatively stable outlook there as well. In terms of provision, what's in the forecast here is provision on new originations. And, you know, obviously, our reserve levels that we have at the end of the year are what we expect going forward. So really that's what the provision entails for 2026. Sanjay Sakhrani: Got it. Alright. Thank you very much. Appreciate it. Operator: Thank you. We'll take our next question from Mark DeVries with Deutsche Bank. Your line is open. Please go ahead. Mark DeVries: Yes. Thank you. As we look out to 2027, should we expect the same level of net incremental growth investments which you called out as laying on the '26 earnings expectations by $35 million to $40 a share? Or is that going to trail off? David L. Yowan: Hey, Mark, thanks for the question. Look, focused at the moment on '26 and trying to execute against that. I think if you go back to the November strategy presentation, Earnest is now very focused on some products that have particularly high growth rates, high addressable TAMs. The personal loan product is going to be in pilot in 2026. And we're encouraged by the opportunities there and trying to test and learn and make sure we can understand where we can best take advantage of that high addressable TAM. The refi market has every year, there's federal loans that are being made in significant amounts. That add to the addressable TAM in that market. And the expansion of the Grad PLUS opportunity. So there's lots of room for growth. We're not here to give a 2027 outlook, but if you just look at those three products that we have, the addressable market and the expansion opportunities, we think are large and sustainable as well. So I'd sort of leave it at that for 2027. Mark DeVries: Okay, fair enough. Thank you. Operator: Thank you. At this time, there are no further questions in queue. I would now like to turn it back to Jen Earyes for closing remarks. Jen Earyes: Thanks, Angela. And thank you, everybody, for joining today's call. Please contact me if you have any follow-up questions. This concludes today's call. Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good morning, and welcome to AT&T Inc.'s Fourth Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. Following the presentation, the call will be opened for questions. As a reminder, this conference is being recorded. I would now like to turn the conference call over to our host, Brett Feldman, Treasurer and Head of Investor Relations. Please go ahead. Brett Feldman: Thank you, and good morning. Welcome to our fourth quarter call. I'm Brett Feldman, Treasurer and Head of Investor Relations for AT&T Inc. Joining me on the call today are John Stankey, our Chairman and CEO, and Pascal Desroches, our CFO. Before we begin, I need to call your attention to our safe harbor statement. It says that some of our comments today may be forward-looking. As such, they are subject to risks and uncertainties described in AT&T Inc.'s SEC filings. Results may differ materially. Additional information as well as our earnings materials are available on the Investor Relations website. With that, I'll turn things over to John Stankey. John? John Stankey: Thanks, Brett, and Happy New Year to everybody. I appreciate you joining us today. As you can see in our earnings materials, we have a lot to cover. So I'm going to quickly summarize a few highlights from our results and then spend most of my time discussing how our investments and differentiated position support our long-term outlook for improved growth and significant capital returns. After that, Pascal will provide a little more color on our fourth quarter performance, planned changes to our segment reporting next quarter, and key drivers of our financial guidance through 2028. So our prepared comments are probably going to run a little bit longer than usual, but we'll allow a little extra time to take your questions. During our Analyst and Investor Day in 2024, we outlined our path to become the best advanced connectivity provider in America, and I believe our team executed well against this strategy in 2025. We met or exceeded all of our consolidated full-year financial guidance driven by another solid year of 5G and fiber subscriber growth. We reported over 1,500,000 postpaid phone net adds for the fifth consecutive year and over 1,000,000 AT&T Inc. Fiber net adds for the eighth consecutive year. We also accelerated the growth of AT&T Inc. Internet Air with 875,000 net adds, which more than doubled our customer base from where we began the year. The result of this operating momentum was the best year for consumer broadband subscriber growth in a decade. This strong growth is a result of over five years of executing a sustainable investment-led business model that centers on providing customers with all of their advanced connectivity needs from one trusted provider. We also made progress on many of our capital allocation priorities in 2025. During the first half of the year, we achieved our target of net debt to adjusted EBITDA in the 2.5 times range and commenced a share repurchase program. Overall, we returned over $12 billion to our shareholders through dividends and buybacks, which was more than a 50% increase from 2024. Our improved financial flexibility and confidence in our investment thesis also positioned us to make opportunistic strategic investments that benefit our customers and ultimately our shareholders. This includes our agreements to acquire spectrum licenses from EchoStar and fiber assets from Lumen. We continue to expect both these transactions to close early this year. These transactions represent key building blocks that significantly expand the total addressable market for our advanced connectivity services in the years ahead. Our investments in 5G and fiber, both organically and through our acquisitions, have positioned us to accelerate and scale the execution of our strategy in 2026. This includes the pace of our fiber expansion. Within our traditional operating region, we continue to expect that our annual pace of fiber construction will ramp from 3,000,000 new locations in 2025 to a run rate of 4,000,000 by the end of this year. We also expect to accelerate the availability of our fiber internet services outside of these areas following our acquisition of Lumen's fiber assets and build capabilities. Including GigaPower and the fiber assets that we're acquiring from Lumen, we expect to reach over 40,000,000 customer locations with our fiber services by the end of this year, up from 32,000,000 at the end of 2025. Beyond 2026, we plan to expand our fiber reach by approximately 5,000,000 locations annually through the end of this decade. We expect this to drive rapid expansion of our opportunity to sell fiber and 5G together, to both households and businesses at unmatched scale. The size and pace of our fiber deployment have positioned us to achieve these objectives with consistent execution and a high degree of capital efficiency. Over the past two years, in an inflationary environment, our average deployment cost per fiber passing has increased by approximately 2% annually. We expect a similar trend over the next three years. While our Internet strategy will remain fiber-first, our investments in wireless network modernization and spectrum materially expand our opportunity to offer our advanced internet services over fixed wireless to the right customers in areas where we do not reach with fiber. Today, we're able to offer advanced internet services over fiber or 5G to over 90,000,000 customer locations across the country. You can see the benefits of our scale in the improved growth of our advanced home internet connections. During each of the past two quarters, we've added over half a million combined AT&T Inc. Fiber and Internet customers, which is nearly 30% growth in net adds versus 2024. Our convergence strategy is a winning play both structurally and in the market. During the fourth quarter, we once again saw acceleration in the portion of AT&T Inc. Fiber customers that also have our wireless services. Our fiber convergence rate climbed 200 basis points year over year to 42%, which is our fastest annual increase since we began tracking this metric. This is further evidence that where we have fiber, we win with fiber and 5G. The impact of this success on our wireless business is material. We estimate that our share of postpaid phone subscribers is 10 percentage points higher in areas where we offer fiber than in areas where we don't. The power of our converged offers is evident across our business. In areas where we offer converged services, we rank number one in brand love and number one in Net Promoter Score with consumers and small businesses in both wireline and wireless. And Internet connectivity. And we're number one or number two with medium-sized businesses and enterprises. Scores for our converged offers are not simply better than our standalone services; they're improving in most categories. So it's no surprise that our converged customers remain our most valuable with lower churn and a propensity to take higher internet speeds, attach more wireless lines, and stay with us longer. Our acquisition of Lumen Fiber assets, which we expect to close in short order, is a key example of how we've positioned AT&T Inc. to materially improve share in home internet and wireless. We're acquiring a fiber network with only 25% customer penetration, well below AT&T Inc. fiber penetration of 40%. We estimate that fewer than 20% of these customers also subscribe to our wireless services. This is less than half of the convergence rate we've achieved in our current fiber footprint. We already have extensive wireless distribution in Lumen geographies. Soon, we'll have the network assets and deployment capabilities needed to offer customers a better choice for connectivity at home and on the go. When we complete our work at the fiber location, we believe we're able to offer that customer access to the internet on a lower marginal cost structure than any competitor with industry-leading product performance. We see this as a structural advantage that provides us with the flexibility to price and position our fiber services to reach customers in underserved categories and geographies and ultimately achieve higher penetration. This includes value-conscious consumers who are currently being served by networks with lower capacity and higher marginal costs. Our ability to put the right offer in front of an expanding customer opportunity positions AT&T Inc. to compete on performance and value and not by leading with uneconomical device offers. As we accelerate the expansion of our fiber availability, this is how we expect to go to market. With offers and marketing strategies that yield attractive returns by driving deeper fiber penetration and growth in high-value converged customer relationships. We're also making progress towards our goal of discontinuing legacy services in the large majority of our footprint by 2029. We stopped the sales of all targeted legacy copper-based services in 85% of our wire centers. The FCC has approved our applications to discontinue copper-based services in more than 30% of our wire centers by 2026. We appreciate the FCC and Chairman Carr's continued recognition of the importance of modernizing communications infrastructure and remain committed to supporting our customers every step of the way. The transformation of our network and support infrastructure is also driving the transformation of our cost structure as we benefit from open technologies, simplify our business processes, and deliver a better customer experience. Last year, we achieved over $1 billion of cost savings, and we plan to accelerate efficiency gains across the company by leveraging AI, moving more customer transactions to digital, and achieving greater operating leverage as we grow our customer base. We've been investing at the top of our industry for years, and we expect this to continue based on the capital investment outlook we provided through 2028. This outlook anticipates that our major capital projects will be substantially completed by 2030 or sooner. As we complete these investments, we expect our capital intensity to decline from a high teens percent of revenue to the mid-teens, driving higher durable long-term cash flow. But our shareholders will see the benefit much sooner. We believe the nature of our sustained investments and execution against the priorities I just outlined position us to drive improved growth now. That's exactly what's reflected in our long-term outlook. Over the next three years, we expect to drive accelerated growth in adjusted EBITDA, double-digit adjusted EPS growth, and strong free cash flow. We also expect to return $45 billion plus to our shareholders over the next three years through our attractive dividend and consistent pace of share repurchases. This represents nearly 30% of our market cap and over 75% of our expected free cash flow. Over time, we expect that our improved growth, declining capital intensity, and higher free cash flow will provide us with even greater flexibility to support enhanced shareholder returns. Over the past five years, we've evolved how we operate our business to be investment-led, customer-centric, and focused on being the best advanced connectivity company in America. This has changed how we talk about our company, and I think it reflects how we see industry assets reordering to compete with our success. So beginning with our first quarter results, we plan to adopt new segment reporting that aligns with this reality and the ongoing transformation of our company through the end of this decade. Pascal will walk you through the details of our planned new segment reporting and long-term guidance in just a moment. At a high level, we'll begin reporting the growth in our domestic wireless and fiber-based businesses, which we refer to as advanced connectivity, separate from the results of our legacy operations. By separating the performance of our advanced connectivity business from our declining legacy segment, we believe investors will have greater transparency into the returns we're generating on our growth investments in 5G and fiber. I'd like to close by reiterating a point that I made last quarter, which is that this is a great time to be in our industry. In my career, I've never seen federal policy this supportive of market-based investment in advanced networks. This welcome policy stance has been adopted at the front end of an AI revolution that we expect to increase the need for dense fiber networks and more symmetrical connectivity into and out of homes, businesses, and devices. We operate in a competitive marketplace. This is not new. And neither are the keys to success, which are investing in best-in-class technologies at scale in order to provide customers with connectivity that they can depend on at good value. This is a winning play, and by running it well, I'm confident that we'll lead our industry in advanced connectivity service revenue and adjusted EBITDA by the end of this decade. With that, I'll turn it over to Pascal. Pascal? Pascal Desroches: Thanks, John. We had a strong finish to the year and met or exceeded all of our 2025 financial guidance. In my view, one of the key takeaways from our fourth quarter performance is that it demonstrates our continued success at driving profitable growth even in a competitive operating environment. We achieved over 4% growth in consolidated adjusted EBITDA during the fourth quarter while expanding adjusted EBITDA margins by 20 basis points. This reflects the margin gains we achieved from growth in 5G, fiber, and fixed wireless service revenues driven by gains in convergence relationships while taking costs out across the company. We are also winning with the right customers with the right offers, and we believe that our investment-led convergence strategy positions us to sustain profitable growth over the next several years. Before I cover our long-term outlook, I want to highlight a few items from our fourth quarter and full-year results. Adjusted EPS grew by over 20% in the fourth quarter to 52¢ and nearly 9% for the year to $2.12. This was above our 2025 guidance for adjusted EPS at the higher end of the $1.97 to $2.07 range, with the upside primarily driven by a lower-than-expected effective tax rate and solid growth in adjusted EBITDA. Full-year free cash flow was $16.6 billion, which grew by over $1 billion and came in towards the higher end of our 2025 guidance in the low to mid $16 billion range. This includes cash taxes of $1.1 billion, excluding DIRECTV, which were below the low end of the expected range by approximately $400 million. However, this cash tax benefit was offset by a decision to accelerate our planned pension funding by a similar amount. So in the quarter, the combination of lower cash taxes and higher pension contributions were effectively neutral to free cash flow. We made a $1.15 billion cash contribution to our employee pension plan in 2025 and expect to contribute an additional $350 million this year. As a result, we remain on track to contribute $1.5 billion of cash tax savings from provisions in the One Big Beautiful Bill Act to our employee pension plan by 2026. Looking ahead, we expect annual cash taxes of approximately $1 billion to $1.5 billion through 2028. Our cash tax outlook primarily reflects further assessments of expected savings due to this legislation. Our goal is to put these savings to work over the next three years to fund working capital and growth initiatives. As John discussed, we are planning to adopt new segment reporting beginning with our first quarter 2026 results. Our largest segment going forward will be called advanced connectivity, which primarily represents results for our domestic 5G and fiber services. In 2025, advanced connectivity drove about 90% of our revenues and over 95% of our adjusted EBITDA on a recast basis, and substantially all of our organic and inorganic investments support growth in advanced connectivity. Our legacy segment represents results from our domestic services provided over our copper-based network. We have a goal of discontinuing a large majority of copper-based services by 2029 and are managing our legacy segment to achieve this outcome. As John noted, the separation of our advanced connectivity results from our domestic legacy operations should provide investors with a better framework for assessing the returns on our investments in 5G and fiber. For example, over the past two years, our consolidated adjusted EBITDA grew by over 3% annually, while EBITDA from advanced connectivity grew considerably faster at an average of more than 6% annually. We also expanded EBITDA margin in this segment each of the past two years, which highlights how we are achieving profitable growth across 5G and fiber services to both consumers and businesses even in periods of increased competitive activity and while making significant investments to scale our growing fiber and fixed wireless footprint. We've posted materials to our Investor Relations website that recast our results over the past three years under our planned new segments. We also intend to provide results for our mobility business as a supplemental disclosure for a transitional period. Now let's talk about where our business is headed. In our earnings release, we provided long-term guidance through 2028 that anticipates improved growth in consolidated financial performance driven by investments in our advanced connectivity segment. Here's how we expect to achieve that growth across our primary service categories. We expect total wireless service revenue growth in the 2% to 3% range annually over the next three years. The primary driver of this outlook is growth in consumer and customer relationships as we continue to gain wireless subscriber share through convergence in areas where we offer fiber and fixed wireless Internet services. Our outlook assumes a relatively stable trend in postpaid phone ARPU as our consistent disciplined approach to pricing is balanced by gains in underpenetrated categories such as value-focused customers as well as growth in converged customers who enjoy a service discount that is typically more than offset over time through lower churn and the purchase of additional services. We also continue to plan for an operating environment with elevated levels of new and existing customers that are eligible for device upgrades. While this has no impact on our service pricing, it does impact the calculation of ARPU as we amortize a portion of our device offers through our wireless service revenue. This was approximately a 90 basis points headwind to our reported postpaid phone ARPU growth in 2025, and our outlook anticipates a similar headwind this year. We expect our advanced home Internet service revenues to grow organically by 20% plus annually through 2028, which is consistent with the annual growth we have achieved in these revenues over the past two years. The primary driver of this outlook is growth in customer relationships as we expand the reach of AT&T Inc. Fiber and the availability of Internet Air as we complete our 5G network modernization and continue to deploy spectrum from our EchoStar transaction. Our long-term outlook assumes a lower contribution from ARPU growth than we have seen over the past few years. Similar to our approach in wireless, we intend to maintain a consistent approach to home Internet pricing balanced by gains in underpenetrated customer categories at different price points as we materially expand the availability of home Internet services. Our outlook also factors in the portion of our convergence discount that we allocate to Internet services as we grow our converged customer base. We continue to expect that we will close our acquisition of fiber assets from Lumen during the first quarter, which will add approximately $900 million of annualized fiber revenues. So we expect that our reported growth in advanced home Internet revenues in 2026 will exceed 30%. Our business customers continue to utilize a range of fixed connectivity services at different stages in their life cycles. Over the past few years, growth in our business fiber and advanced connectivity services, which includes fixed wireless, has been more than offset by declines in business transitional and other services, which includes mature product categories such as VPN. Our outlook anticipates that service revenues from business customers across wireless, fiber, and fixed wireless will accelerate over the next several years and more than offset expected continued declines in transitional and other services. Altogether, we expect that total business service revenues within the advanced connectivity segment will grow at a low single-digit CAGR through 2028. We also intend to maintain our cost transformation initiatives across the business. We achieved over $1 billion of cost savings in 2025 and expect to achieve an additional $4 billion in annual cost savings by 2028. We expect these savings will be driven by the operating efficiencies John discussed earlier, along with reductions in legacy operations and support costs. Our long-term outlook does not anticipate a material contribution to EBITDA growth from our pending acquisitions until 2028, which is also when we expect these investments to become accretive to adjusted EPS. Putting this all together, we expect to achieve growth in consolidated adjusted EBITDA in the 3% to 4% range in 2026, improving to 5% or better in 2028. We expect adjusted EPS to be in the $2.25 to $2.35 range in 2026, with a double-digit three-year CAGR through 2028. For 2026, our outlook for adjusted EPS includes approximately $0.05 of dilution from stand-up costs and higher interest expense related to our transactions with Lumen and EchoStar and an effective tax rate in the 22% range. We also expect depreciation and amortization expense of about $20 billion annually through 2028 as incremental depreciation from our growth investments is offset by the roll-off of depreciated assets that have reached the end of their useful lives. For 2026, we expect free cash flows of $18 billion plus, reflecting primarily growth in adjusted EBITDA, lower pension contributions, and lower legal settlements, partially offset by higher capital investments and cash interest. We expect free cash flows to grow by $1 billion plus in 2027 and approximately $2 billion in 2028, driven primarily by growth in adjusted EBITDA. As John discussed, we have plans to accelerate and scale the execution of our strategy this year, and we expect some upfront investments to drive this outcome will be reflected in our first quarter results. This includes incremental spending as we prepare to integrate and scale the retail operations we've agreed to acquire from Lumen and investments to drive acceleration in the pace of our fiber deployment. We are also lapping approximately a $100 million of one-time benefits we disclosed in the first quarter of last year. So in the first quarter of this year, we expect adjusted EBITDA growth to be below the run rate we expect for the full year, with free cash flows in the $2 billion to $2.5 billion range. Before we take your questions, I want to cover our outlook for capital allocation and capital returns. We ended 2025 with net debt to adjusted EBITDA of 2.53 times and cash and cash equivalents of $18.2 billion. During the fourth quarter, we closed on a $17.5 billion delayed draw term facility. Based on our strong balance sheet, ability to draw on this facility, and our outlook for $18 billion plus of free cash flow in 2026, we are in an excellent liquidity position as we plan to close our acquisition of assets from Lumen and EchoStar early this year. Immediately following the closing of these transactions, we expect our net debt to adjusted EBITDA to increase to approximately 3.2 times and then to decline to approximately three times by year-end as we grow adjusted EBITDA and free cash flow. We also expect to receive cash from an equity partner that will also co-invest in the acquired Lumen Fiber assets. We continue to expect that our net leverage will return to a level consistent with our target in the 2.5 times range within approximately three years following the closing of these acquisitions. And we continue to expect that we can achieve our deleveraging objectives while maintaining a consistent approach to capital returns. In 2025, we returned over $12 billion to shareholders, including over $8 billion in dividends and over $4 billion in share repurchases. As we outlined in our earnings release, we expect to return $45 billion plus to shareholders during 2026 to 2028. Under this capital return plan, we expect to maintain our current common stock dividend with a consistent pace of share repurchases through 2028, including approximately $8 billion of buybacks in 2026. Our board has authorized an additional $10 billion of share repurchases after we complete buybacks under the current authorization. This means we have the necessary board approvals to execute our planned share repurchases through approximately the end of next year. To wrap up, we executed well in 2025, and we're confident that we're positioned to drive improved growth and strong capital returns over the next three years. Thanks for listening to our extended presentation. Brett, we're now ready for the Q&A. Brett Feldman: Thank you, Pascal. Operator, we are ready to take the first question. Operator: Thank you. We will now begin the question and answer session. Brett Feldman: And while you're assembling that, I want to point out that Jeff McElfresh, our Chief Operating Officer, is joining us for the Q&A portion of the call. Thanks, Rocco. Operator: Thank you. And our first question today comes from John Hodulik at UBS. Please go ahead. John Hodulik: Great. Good morning, guys. Questions, if I could. First, on the fiber convergence rate, 42%. Increased by 200 basis points. John, where do you expect this level to get to over time, maybe over the course of the decade? And do you expect the sort of rate of penetration to continue to improve from here? And then follow-up to that, do you think you can play catch up in the Lumen territory and get to those numbers? And then second, consumer wireline revenue growth looks like it slowed in the quarter. Could you just talk about some of the drivers of that slowdown? I think, Pascal, you mentioned some of the discounting going on, on that side and just how you expect that to progress as we look through '26? Thanks. Good morning, John. So first of all, I do expect the convergence rate to continue to improve. And we've, I think, shared that we have an objective when we were talking to you in our investor call or our investor conference December that right now we've got plans in place that we're going to drive that to 50%, feel very comfortable with that. I don't expect it to stop there. You've heard me say many times that I think we're in a structural realignment of the industry and ultimately this is going to be an industry of converged providers that operate assets that allow for consolidated services to businesses and if I think back looking at the rearview mirror on history and you look at what bundled rates were when there were other compelling bundles in the market, We approach periods of time where 80% of consumers were bundling and certainly I would expect that at some point in time over the long haul, you might see some similar to that occur, whether it's 75% or 80% or 70%, I don't know where it settles in. improvement in that rate But our expectation is that you're going to continue to see ratably over time. In fact, that's the realignment that we're dealing with here, which is as churn goes up on unbundled customers by a bit, we're dealing with that problem right now. Ultimately, the fix to that is to get to more consolidated customers give us a better churn rate and that that realignment is what we're betting on in our financials moving forward. And simply put, if we finish this year at thirty two twenty twenty five at 32,000,000 fiber passings and we're going to finish this year at 40,000,000 just do the math on it and that's how we're basically driving our revenue growth and our share and and controlling our service revenues and what we're doing moving forward. In terms of our out of what I'll call the out of traditional out of region footprint, I'll throw a lumen into that right now. We have traditionally, just like we did with Giga Power, been more conservative in our business case expectations as to how we perform in those footprints. As I've shared with you previously, we started the Giga Power construct that way and actually we see ourselves in the early quarters of gigapower performing very similarly what we do in region. And whether or not we can hold that dynamic all the way through the life cycle over three and four years remains to be seen But I'm really optimistic right now that we've seen better performance than what we might have assumed as we kind of do our traditional financial modeling. We expect Lumen to be de rated a bit in what I would call terminal penetration. When it's all said and done, But if it's not and we actually perform equal to what we do within our current footprint, That's going to be upside in terms of our business case and our financial modeling and how we think about our future projections that we share with you in our guidance. So that one will play out over the course of the next couple of years and I'm confident the teams demonstrated that they can be pretty fluid and creative in how they approach these things. And I'm sure we'll learn some new things and new tactics in how we operate in those markets that allow us to continue to get better. On the consumer wireline side, we were I think part of it is kind of look at how we've ratably dealt with pricing over the year and try to be clear and where, as I've said, look for opportunities where we can add value when we do price adjustments. So we manage the customer base effectively. That certainly has been one of the reasons that we've seen a little bit of a slowing on a comparative year over year basis. That doesn't mean that I think we're done with taking price opportunity. I think we're just being very careful and strategic when we do it. Intensely competitive market and we'll continue to be that way. Pascal in his comments clearly indicated to you as we bundle more customers, we are making the decision at the front end to provide some better economics to customers to do that. We think that plays out effectively over time through the form of lower churn. But when you do that, tend to slow some of your growth on ARPU at the front end as you're adding the second product into the household. Again, as I said, on the call, I think last quarter, that's more of a feature, not a bug. And we're being pretty deliberate about it. And when you hear us being able to continue to improve margin structure, even though you're seeing some ARPU dynamics soften a bit look, that's a good combination and I'll take that. And I think we through the cost structure. can continue to run the business that way given our opportunities for managing John, one other thing that I would add is, when you think about just the cadence of the quarter, there were some pricing adjustments made probably in the November time frame that didn't have a full quarter effect that will have a full year effect going into 2026. And more importantly, we gave you our forward guide for our expectations of growth in advanced home Internet. That's the combination of both our fiber and our fixed wireless products. We expect those to grow organically 20% plus. And that's all before the positive impact of the Lumen territories, which bring it over 30%. So we feel really good about how we're performing there, and it is right in line with our strategy. John Hodulik: Great. Thanks for the color, guys. Brett Feldman: Thanks. We'll take the next question, please. Operator: Our next question comes from Benjamin Swinburne at Morgan Stanley. Please go ahead. Benjamin Swinburne: Thank you. Good morning. I guess two questions around your long-term outlook. One is whether you guys are saving any capacity for meaningful spectrum investments. There's a, I think, a potential for a lot several auctions, over the next couple of years. Under the current FCC. I know you guys obviously have the EchoStar transaction getting ready to close, but just any envelope for additional spectrum investment or just your view on any needs there would be helpful. And then I guess similar kind of question more near term, definitely getting more questions from investors about a a foldable iPhone and what that might mean in terms of consumer demand and upgrade rates. Just curious if the '26 guidance incorporates any view at AT&T Inc. on sort of what that might mean the business and the competitive environment. Thanks, guys. John Stankey: Yes, Ben, let me maybe start and then I can have Jeff give you a little bit more color on the device Yes, we have reserved capacity for other strategic options My point of view on spectrum is I think I indicated this when we did the EchoStar transaction, that by doing this transaction, I viewed it as preemptive and opportunistic for us. That allowed us to be a lot more strategic and judicious about what we do moving forward. And I still believe that's going to be the case My point of view right now is that the industry is lining up where there's particular spectrum bands that are most useful to particular players in the industry. And we should see a dynamic moving forward where it's less of a buffet rush with everybody moving for the exact same bands all at the same time. I think that could be good over time and I think we can all pick our moments when it's appropriate to go visit the buffet. And that may not require us to be as aggressive all the time. And I also believe part of the reason that we're so bullish on fiber and why we're investing the way we are is we are getting to a point where networks are down and the technology is getting a lot better at price points and how we radiate more deeply into networks. And we get dynamics of how we offload as we pick up more combined customers We have market share dynamics that play out. One should conclude that given the depths of the networks that are out there today when we're all hanging 300 megahertz off of the cell tower This isn't the days where we're growing 10 megahertz at a time. On these networks. We put large swatches of capacity out there. We have a lot more flexibility in how we manage things. And that means that you maybe don't need to think it the same nationally about how you invest in spectrum assets. As maybe you have done in the past and that has a a bit of an opportunity for you to think differently about returns in markets and investments as you move forward. But we'll be in a position to do what we need to do to sustain the business You've heard me talk about how important spectrum is to this this company and our business model. And we pay a lot of attention to it and try to make sure we have the degrees of freedom. On the foldable iPhone, I just offer a perspective and Jeff maybe go into a little more color There are foldable devices in the market today and they are very capable devices, some really impressive ones. And if you look at the user base who is has a strong affinity for those manufacturers, and you look at the conversion rate of those that have left non foldable devices to foldable, it's pretty predictable as to who sees a foldable device being a good form factor for them. And I think that's a good indicator that if you were to apply those same kind of acceptance factors and put it in and just say just because there's a different manufacturer making them, is everybody suddenly going to be more in tune or desirous of a foldable device the indications in the market would be that that's not a broadly applicable form factor. It certainly has its place and there's utility that it brings but I don't think this is going to be the kind of thing where 80% of the base they need that form factor have to move to a Jeff, do you have a point of view? Jeff McElfresh: Not much to add to that, John, other than you should expect that AT&T Inc. will remain focused on the acquisition of quality customers. We're very disciplined and offering the right value proposition to the right customer segment. And then, we're not anticipating any significant elevation one way or another as John just described. Thank you. Brett Feldman: Thanks, Ben. We'll take the next question, please. Operator: Absolutely. Our next question comes from Peter Supino, Wolfe Research. Please go ahead. Peter Supino: Hi, good morning everybody. Two, if I may. The first, both on broadband actually, First, regarding your comments on fiber ARPU. Think we all appreciated your point about mix and promotions and how those are accounted for. In ARPU, At the same time, Comcast and Charter behaving differently in terms of the way they price existing customer broadband rates. And so I'm wondering how you're thinking about the price of fiber for your existing subs, your retail rate outlook? And then a question about FWA growth. Looking out two years, it looks like your DSL base will be gone if we just extrapolate recent decline rates. And I wonder in that scenario, should we expect FWA sales to hold up And if so, should we worry about a supply demand problem in high capacity broadband as that DSL demand goes away and three powerful carriers continue to try to grow DSL? Thank you. Hi, Peter. Look, I've said it before, I think we're in a distinctly different place in cable. One is we currently sit under their pricing umbrella. We're not at their levels So we have a lot more degrees of freedom in how we manage our ARPUs and our various offers in the market. That they have. So it's one thing, understand why they're having to make the changes they're making they're priced higher and their products inferior. And so they're the ones that's having to readjust to the market, not us. We've got the better product, we're priced lower. And that's why this is a problem for them. And as a result of that, I think we've got all the actions we need when you think about the fact that we have owners economics on both our products we can play with the value across and we don't have to run one product to zero to make the other one worthwhile to somebody I just think we're in a great place for us to be able to manage our value to the customer and what we bring out to them And when you're doing it on the foundation of a better product, that's a good thing. I made the point I made in my comments for a reason. How do we continue to win and grow and share We continue to grow our footprint. 32,000,000 fiber passings at the 2025, 40,000,000 at the end of this year, That's a growth rate that is we've never had that. And it's going to be $5,000,000 a year thereafter. And when we work in that base and you have a product that people love, they love it, it's number one. I said that for a reason. It's priced competitively in the market. It performs better. You put a great wireless product with it. You have all the tailwinds you need to be able to continue to do the right things in the market. And there is a structural advantage on how that technology works and performs as well as the cost of operating it once it's in service and what you do with it. And then, yes, their DSO base is going to go away. That's by design and the plan. It probably can't happen fast enough. We're working really hard to try to make that done get that done in a graceful fashion. The fact that we have access to the EchoStar spectrum has helped us tremendously. In managing a lot of those customers into the right place and allows us to pre position a bridge product in some cases before we have fiber deployed under this aggressive rate and pace that we're working through. And I don't worry about a supplier demand problem. Market really isn't growing too much today and it's pretty staid given the lack of home movement. So it's a tough environment right now. It probably won't stay that way at some point. I expect home switching to probably increase at some point and that's going to be to our advantage when that happens. Because it will open up a whole bunch of choices and jump balls that don't occur today that we're going to win more than our fair share on. And when I step back and think about the supply and demand, we win because we have a better product. And I'll take share as a result of that. So no, don't worry about it. We have if you've noticed our conversion rate on our fiber customers have been dropping like a rock. Most of our growth right now is in new accounts. So we know how to play in this market. We're giving you volume today and we're going to continue to do it. Jeff, you want to add anything? Jeff McElfresh: You can help. Brett Feldman: Thanks for the questions, Peter. We're going to go to the next one, operator. Operator: Absolutely. Our next question today comes from Michael Rollins at Citi. Please go ahead. Michael Rollins: Thanks and good morning. Couple of questions on wireless. So first, can you discuss the macro factors that you may be seeing that can influence postpaid phone growth for AT&T Inc. in 2026, whether it's population growth, including immigration, demographics, business, and the prepaid to postpaid transfers. And then second, how is AT&T Inc. responding to the promotional changes from your competitors to sustain your financial performance? And within this context, AT&T Inc. maintained the annual wireless service revenue growth guide of 2% to 3%. And as you look into that, I'm curious if there's different contributing factors with respect to price and volume relative to what you anticipated when you established the target during the Analyst Day? Thanks. John Stankey: Jeff, you want to pick that up? Want to take a sip of tea. Jeff McElfresh: Yes. Happy to. Thanks for the question, Mike. At a macro level, it's no surprise that the wireless industry itself is penetrated and very mature. And so you do see a lot of switching activity that's occurring between competitors. Are there macro factors that are slowing incremental new entrants into the traditional postpaid voice? Certainly, is some aspect to that But from our perspective, the plays that we've been running in this competitive environment have delivered not only growth in our margins, but overall growth in customers. And so we're able to withstand some of the competitive dynamics. As we've mentioned before, and John's alluded to earlier in his remarks, we still see incremental opportunity in underpenetrated segments for AT&T Inc., and those segments are being served at a growing accelerated rate for us with the plays that we're running around convergence. We still don't have the share we aspire to have, in some value-conscious price-sensitive segments. Think fifty-five plus one to two line accounts and as well in the small and medium business segment. Both of which we're seeing some success And interestingly enough, we're seeing success in those segments as a result of our go-to-market conversion strategy. John kind of alluded to this a second ago, the actual number of accounts that we see that we're growing it's not just adding wireless customers to existing fiber accounts, but we're actually pulling existing wireless accounts adding fiber and the new new accounts that we're establishing in the market. Are from many of these growth segments. So from that perspective, we plan for the competitive intensity to continue. It's not as though it's going to abate. And the playbook that we have proof points that we're winning in, we're gonna continue to execute that. John mentioned this expansion of growth opportunity. The funnel is going to grow incredibly here in 2026. A couple of points that he called out in his prepared remarks, we've got 10 rates in fiber inside the Lumen footprint at 20 you know, 25% and we've got attach rates of AT&T Inc. mobility service is in that base buyer estimate somewhere around 20%. So there's immediate opportunity for AT&T Inc. to continue to grow. To continue to provide value to customers with a superior set of products and all of that is factored into the guidance that we've offered. Brett Feldman: Thanks, Mike. We'll go to the next question, please. Operator: Absolutely. Our next question comes from Sebastiano Petti with JPMorgan. Please go ahead. Sebastiano Petti: Hi, thank you for taking the question. I guess Pascal, one quick clarification question. Does the year-end leverage target, does that assume some level of cash inflows from the Lumen JV and just, I guess, monetizing a portion of that with a network partner? And then I guess, second question for Jeff and or John. Just helping us think about as you think about the shape of the fiber build, you're trying to talk about going from 32 to 40 the year. Can you help us think about what does that mean from a seasonality perspective as we think about FWA and fiber over, net additions over the course of the year. I mean, similar, you know, to prior years, there's one half look, the second half look higher than first half in terms of net additions there? And then I guess what if any distribution changes you would be thinking about as it relates to fiber and FWA, whether it's maybe training the stores, opening up distribution channels. Just help us maybe think about the shaping there as well. Thank you. Hey, Sebastiano. A couple of points. I noted in my remarks, we have we expect to close on an equity partner later on year, which will bring us some proceeds associated with the percentage of the assets that they acquire. And we also expect to grow our EBITDA during the course of the year should also help in our overall leverage target. So we feel really good about our ability to do both Hi, Sebastiano. I expect there's going to continue to be seasonality in our broadband dynamic. And I think that the consumer part of it, which is the bigger part, will we'll probably always have that to some degree And yes, there'll be better volumes second half of the year than the first half of the year, third quarter will be better than fourth quarter. And as I think I tried to share all with all of you when I was at one of the conferences late in the fourth quarter that would be some down seasonality and and fixed wireless that would occur in the fourth quarter, none of you listened in your estimate changes. But so I do think that's going to be part of the dynamic that we're all going to work through. And that's perfectly okay. Now offsetting some of that seasonality is we have footprint expansion. And so we have even though there's seasonality to it, when you have an opportunity to sell that increases, you're going to have some volume that comes as a result of that. And that's going to be really hard for all of you to estimate this year because not only do you have footprint increases but we have a ramping dynamic we're going to be working through. We have closed the Lumen transaction in a record time or we will close it in a record time. Projecting And as a result of that, that means we've had a more compressed time to be able to do the pre planning you would normally do at the day of close to be able to turn up those assets and move forward. And we have some things that we're going to have to continue to finish up and ramp and scale to get to be our best selves. We're going to execute on this asset in a way that we are normalizing products between the two operating companies. You're going to do all the things you should do when you do a transaction like this, which is rationalize your information technology infrastructure, standardize position on brands in the market, go to common ways of driving supply chains and engineering and putting data into databases and all those things. And that's some hard and challenging stuff. We have all that planned out. In many cases, we're in pretty good shape But I know that for the first quarter or two, we're going to be on a learning curve on some of that stuff with people from a different company having to learn some new processes and new ways of doing things. So that ramp dynamic on that footprint is going to take a little bit of time. And that will factor into clouding seasonality as you think about those You've a ramp dynamic, you've got seasonality. You got larger footprint. You have offers that are going be moved in the market, training that has to be done for individuals going be distributed and selling those products. So I think it's going to be a little bit challenging for all of you to kind of just go back and look in the rear view mirror. And come up with the dynamic around it and we'll we'll give you some updates, but you should expect we're going to be on probably a solid two quarter ramp here of getting ourselves up the learning curve and getting more effective And Jeff, why don't you make some comments on some of the distribution changes we have lined up? And so our distribution assets that are in the Lumen footprint and territory are already there, and we've got a solid position just as we did with our gigapower experiences in the markets the footprint that we were building. And as you should expect, that our product offers and our ability to service that base will be available in short order akin to the commentary that John made. I mean, the pace of which the team is moving to get this transaction closed is is is record setting. It's akin to the speed at which we lifted the initial tranche of the three, five EchoStar spectrum upon our wireless network. That too, in terms of fixed wireless, we expect to sell more this year than we did last year. The ramping of that will occur nationwide as our AT&T Inc. Internet advertising and messaging to build top of funnel awareness. Hits the marketplace in full force, but you should expect that to continue to ramp as the year goes by. At the end, we are focused on building a durable long term Just like we are in our organic sustainable build engine inside of the Lumen footprint. footprint. And the distribution changes that we have to support activating that network in each of the footprints is a play that we that we know how to run. We don't anticipate many changes to our go to market distribution strategy from what's already proven to be a winning play. Thanks for the question, Sebastiano. We're going to go the next one now. Operator: Absolutely. Our next question comes from Michael Ng with Goldman Sachs. Please go ahead. Michael Ng: Hi, good morning. Thanks for the question. I just have two. First, I was just wondering if you could talk a little bit more about the EBITDA growth inflection to 5% plus in 2028. What are the key drivers Is it more on advanced EBITDA growth accelerating or the legacy declines improving? we think about And then any thoughts on 2027 and just the linearity as the next three years? Thank you. And I just have a quick follow-up. Pascal Desroches: Sure thing, Michael. Here's the thing to think about that we are going through this year. We're bringing in the Lumen assets. We're going to incur pretty significant acquisition initial cost to integrate those assets. And to build this and to add to the distribution behind them. We expect those to moderate as you look out the next two, three years. Plus, we've mentioned to you our we are we those assets haven't been fully penetrated. And over time, more and more of those assets will become penetrated contributing to earnings growth. That coupled with the fact that each year that goes by, you have less and less of a contribution or dilution from our legacy footprint. Those things in combination gives us great confidence we're going to be able to drive an acceleration of EBITDA growth as you work your way through each year of the plan. Michael Ng: Perfect. Thank you, Pascal. And follow-up. Yes. Just on mobility, service margins, really strong in the quarter. I think the fourth quarter was the first time this year it was up on a year over year basis, which seems positive just given all the concerns around competition. I was just wondering if there's anything you would call out from a cost perspective that may have been particularly impactful this quarter relative to the rest of 2025? And maybe some of the key cost initiatives as we go over time? You guys talked about AI and digital transactions, but just would love to to hear about anything notable for the quarter and the next year. Thank you. Pascal Desroches: Mike, look, across the board, we continue to do a really good job of managing all the costs that are not geared towards customer growth. This in 2025, we incurred pretty significant step up in customer acquisition costs along with advertising. And we those if you strip those out and you look at the underlying business, it was pretty substantial cost savings. You can see some of those dynamics in our trending schedule and it's across the board. Look at where we what we are doing whether it's in AI, shuttering legacy footprint and the underlying infrastructure, all those things are contributing, and we expect that to continue. In fact, we expect the next three years to say $4 billion more than $4 billion in cost And it's a muscle we have built, and I feel really good about our ability to do so as you look ahead Right. Very clear. Thank you, Pascal. Thanks, Mike. We promised we'd give you a little time because we went a little long on the prepared remarks. So operator, you can go ahead and take one more question here. Operator: Absolutely. And our next question comes from Sam McHugh of BNP. Please go ahead. Sam McHugh: Yes. Thank you, Two questions, if I can. First on bad debt. I think it's stepped up a little bit in this quarter. I don't if you could give us some color on what you're seeing amongst consumers at the moment. And then secondly, the guidance and cost cutting and accelerated EBITDA growth. What are we thinking about in terms of cost reduction? Obviously, you've kind of stepped back from giving color on cost reductions. And if you could talk about what you're seeing over the next few years whether they just accelerate as we decommission copper through the outlook period? Thank you. Hey, Sam. A couple of things. Bad debt what I would tell you is this, it's really we haven't seen any discernible changes in consumer payment patterns. The increase in bad debt is a function of the higher equipment sales that we have that come that often comes with long term receivables. And along with just higher service revenues. That's really what's driving the overall dynamics in bad debt And as it relates to our overall cost plan is I mentioned in my commentary is we expect about, over $4 billion over the next three years of cost savings. And I would tell you it is across the board. Yes. Legacy decommissioning will contribute pretty significantly to it. But other areas, are garnering productivity gains through the use of digital, through the use of AI. And we expect that to continue. And it's a muscle we have built over the last several years. And I have high degree of confidence we're gonna be able to continue to execute on that Yes. I maybe add something to think about here, Sam. Terms of what we've been doing. We are investing high levels and I acknowledge that we're doing that. And we expect that we need to demonstrate returns and improvement as a result of those to invest in a higher level. We talk a lot about what we're doing on the network side and how that's driving revenues and share and opportunity there. We haven't spent a lot of time we're investing at high levels in our software technology base in this business to improve our ability to face off against customers, be it more agile in the market take advantage of some of the things that Pascal just talked about, from a digital perspective that I think you're going to see a lot of movement on this year. But what's important to understand is we're investing at pretty high levels there We're getting very large increases in our productivity for the software we're developing and writing right now. So we haven't pulled back our investment because of those effectiveness or efficiency savings. We're getting more done and we intend to get more done because there is a lot of good opportunities to apply improvements in software and how we change our processes than what we've traditionally been able to fit through the funnel. And as a result of that increased capacity and improvements in effectiveness, we can see a lot more of these projects now start to drop through. And so we did a nice job this year in managing our cost structure and business as an example. And I will tell you that that's an artifact of us having been able to do some more work on software to improve our labor cost structure in that area than what we probably would have guessed we could have done twenty four months ago. And so we kept investment levels up we used that extra capacity to go do a few more things. We get benefits from costs on it And I guess the good news is, and I think my team is tired of me hearing about it is, I keep turning over rocks and seeing more opportunities to go after things and we go after things. And I'm not worried about running out of rocks to turn over. So I think it's just a matter of us executing around it. Brett Feldman: Thanks for the question, Sam. Operator, we'll take one last question and then we'll turn it back to John for a few final thoughts. Operator: Absolutely. And our final question today comes from Michael Funk at Bank of America. Please go ahead. Michael Funk: Yeah. Great. Thank you all for fitting me in. John, quick one for you then a quick follow-up for for Pascal if I could. So looking at your national advertising right now, the converged offering, very little differentiation provided between fiber and in fixed wireless. So just wondering how you're thinking about maybe more rifle shot targeting FWA for the remainder of 2026 and your view on the market opportunity there? Hi, Mike. We didn't just fit you in. We had a plan to make sure you could be in. So it's good to hear from you. No, I appreciate it. The look, we spend a lot of time paying attention to where customers understanding are of our products. And our perceptions and that's discrete for consumer and business. And we believe and we've done a lot of AB testing on this and we know this that actually we have more to gain right now from a broader I'll call it a generic internet message than at the national level a targeted message. We want to build awareness that AT&T Inc. is a capable national Internet provider across consumers and business broadly, and we have a lot of upside in the customer base to do that. And our tracking of our advertising, our approach on that would suggest we've made some really good calls around that and it's helping. What we then do is we come underneath that with as you refer to it, the targeted rifle shot There are other ways to go put the targeted rifle shot in front of the right customer in the right place. And this is fundamental and core to our strategy, which is right product, right customer, right place. And you can use digital means and you can use information on our customer base and third party information to go and put the right offer in front of the right customer that matches up to the technology that we have in the particular geography that then comes in and builds and extends on that national message that you're referring to. So we track a lot of things, as you might guess, and we're looking at, do people have an awareness that AT&T Inc. is the leading fiber provider Where are we weak? Where does it not match up against where we got inventory to go sell? You can do things on that given it's a very geographic and regionally centric business. To do things below the national level to bolster those kinds of things that you may not see based on where your home residence is and what you do. And you should want us to do it that way because at the end of the day, capabilities like fiber are local, and you want to be very, very discreet about how you do things. Now having said that, when you get up to 60,000,000 fiber footprint, your decisions on where you do some certain things in the funnel are going to change. Than when you're at $30,000,000 So you'll see an evolution of this over time. I hope that gives you enough context on it. Michael Funk: That does, John. Thank you. Okay. And with that, go ahead. I'm sorry. Pascal, can I ask one of you as well? You mentioned you expect handset amortization to basically be flat year over year, I think, in 2026, just curious what that says about your view of wireless competition in the marketplace or AT&T Inc.'s willingness to, to compete? Yes. Couple of things, Michael, to keep in mind. One, my commentary was that we expect about the same level of headwinds that we saw this year. On a percentage basis. Overall, I think, John, laid this out in his remarks. Our basis of competition is going to be different than our peers. Ours is about using our broadening base of fiber customers to drive additional converged relationships. That's our priority when we are looking at our investment spend. And that won't will be much more disciplined outside of those areas. Therefore, I think on balance, we are confident in our ability to manage the overall ARPU dynamic, despite having to incur the additional promotional costs. John Stankey: All right. With that, I really appreciate you all joining us this morning and maybe spending a few extra minutes given we wanted to kind of refresh guidance and give you a little insight into it. What we're going to be doing after we bring on some of these additional assets. So we now kind of shared that plan with you and I think what we've outlined is a view of the future of how we're not only going to report in this business, but how we're going to operate it. And I appreciate your patience in understanding in our segment adjustments. I know it's more work for all of you We didn't take this lightly We're going to try to assist you through make sure that we can get you through it in a way where you view it as being completely transparent and more insightful for how we're operating the business and less. But look, I think the numbers speak for themselves when we start to talk to you about how we're generating profits in this business and how we're investing. The time has come for us to to look at things differently. And the shift that's occurring in this industry is pretty significant. And as a result of that, it's time for us to adjust and make these changes We have the right assets in hand after we close these transactions in front of us in my view. And frankly, it's up to us and it's entirely in our control as to how we deliver on this plan that we just laid out for you and shared with you today. And I feel really good about that. I I like we're entering the fund cycle here in what's been a bit of a slog over the last couple of years to get us in a position to do these kinds of things. I believe that we have the right regulatory environment for us to operate this business in I think the incentives to invest in this industry are strong and good right now. I think AT&T Inc. has put forward the right technical and technology direction and our foundation in that regard sets us up with an ability to differentiate I think we have the right position structurally in this industry as things are changing fairly dramatically and as we start to approach what's going to be a very, very clear increase in importance and connectivity with the dawn of AI And I believe strongly we've got the right team in place to do this that is clear on their mission and their charter. And the combination of those things I think should give you a lot of confidence that we can deliver on this plan moving forward. And look forward to coming back and reporting with you on our progress. So thank you very much for your time. Operator: Thank you. 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 Otis Worldwide Corporation's Fourth Quarter 2025 Earnings Conference Call. This call is being carried live on the Internet and recorded for replay. Presentation materials are available for download from Otis Worldwide Corporation's website at www.otis.com. I will now turn it over to Robert Quartaro, Vice President of Investor Relations. Please go ahead. Robert Quartaro: Thank you, Krista. Welcome to Otis Worldwide Corporation's fourth quarter 2025 earnings conference call. On the call with me today are Judith Marks, Chair, CEO, and President, and Cristina Mendez, Executive Vice President and CFO. Please note, except where otherwise noted, the company will speak to results from continuing operations excluding restructuring and significant nonrecurring items. Reconciliation of these measures can be found in the appendix of the webcast. We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties. Otis Worldwide Corporation's SEC filings, including our Form 10-Ks and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially. Now I will turn it over to Judith Marks. Judith Marks: Thank you, Robert. Good morning, afternoon, and evening, everyone. Thank you for joining us. I hope that everyone listening is safe and well. 2025 marked our fifth full year as an independent public company, a milestone that reflects our resilience and leadership in shaping the future of urban mobility. At the heart of this success are our 72,000 colleagues worldwide, whose dedication to our purpose has made this possible. Every day, we move 2.5 billion people safely and reliably and maintain approximately 2.5 million units across the globe, earning the trust of customers and passengers alike. That trust remains our highest priority. This year, we achieved multiple important milestones, ending the year with strong momentum heading into 2026. We secured record modernization orders, building an unprecedented backlog, and our new equipment backlog grew. We achieved record adjusted free cash flow of $817 million in the fourth quarter, reflecting our continued focus on working capital efficiencies and collections. We continue to grow the largest maintenance portfolio in the industry. We successfully executed the uplift program and completed our China transformation initiatives, including buying out the minority shareholder of one of our joint ventures in China, Otis Electric, while driving operational excellence across our business. For the year, we generated $1.6 billion of adjusted free cash flow and returned approximately $1.5 billion to shareholders through dividends and share repurchases while investing approximately $100 million in targeted bolt-on acquisitions to strengthen our service portfolio and expand our presence in key markets. With these results, our strong backlog, and the largest maintenance portfolio in the industry, we are confident that our strategy will continue to deliver attractive results in 2026 and beyond. Moving to slide three, Otis Worldwide Corporation closed the year with solid performance in the fourth quarter, driven by our service-driven business model. Organic sales grew 1% in the quarter, with service up 5%, including broad-based growth across all lines of business. Maintenance and repair grew 4%, while modernization increased 9%. Adjusted operating profit margin expanded 70 basis points, driven by a 100 basis point improvement in service margin. We delivered double-digit adjusted EPS growth in the quarter, up 11%, which was the highest level this year and our strongest performance in the last six quarters. At approximately 2.5 million units, the largest in the industry, our maintenance portfolio grew 4% for the fourteenth consecutive quarter, allowing us to grow and invest in our global service network and demonstrating the heart of our flywheel strategy. Modernization was a standout in the quarter, as orders increased 43%, and we ended the quarter with the backlog up 30% at constant currency, the highest since spin and positioning us well for 2026. We are driving meaningful modernization growth through our industrialized manufacturing and installation capabilities and our commercial strategy, including phased packages that limit disruption and provide budgeting options for our customers. The tremendous modernization opportunity ahead remains evergreen, as by the time all of the aged units are modernized, they will be ready to be refurbished again. Quarterly adjusted free cash flow was $817 million, another record since spin, reflecting our continued focus on collections and working capital efficiency. And we continue to be an innovation leader. For example, in November, at the eighth China International Import Expo, Otis Worldwide Corporation unveiled Gen3 Comfort for residential modernization, Skyrise Mod and Link Mod for scalable high-rise elevator and escalator modernizations, an upgraded smart cab, and new AI tools, including the Otis AI inspection robot and the Otis AI agent, to enhance safety, diagnostics, and real-time collaboration. These solutions bring AI-driven safety, connected service capabilities, and enhanced accessibility to customers and passengers, supporting urban renewal and aging communities. We also recently launched our Gen3 product family in EMEA. Gen3 builds on our Gen2 platform and comes standard with Otis One, our Internet of Things connectivity solution, enabling predictive maintenance, real-time health monitoring, and remote intervention, which improves uptime and service quality. These products complement Otis Gen360 and comply with the latest and most stringent safety standards while providing customers with smooth, comfortable, and digitally connected rides in stylish cabins that can be customized to meet their unique needs. Our Otis One connected units continue to grow globally as we approached 1.1 million connected units, providing predictive maintenance, data-driven proactive repairs, and valuable application of AI for productivity and customer value. The growing connectivity is also driving subscription revenue, which increased 35% in 2025. Turning to the full year, Otis Worldwide Corporation delivered solid organic service sales growth, up 5%, and expanded adjusted operating profit margin by 40 basis points. Since spin, we have improved margin by 30 basis points or more each year, underscoring our steady operational progress and the disciplined focus that enables consistent delivery. Adjusted EPS grew 6%, and we generated approximately $1.6 billion of adjusted free cash flow for the year. This strong cash flow enabled us to return $1.5 billion to shareholders through dividends and share repurchases. With a positive new equipment backlog at year-end and with modernization backlog at an all-time high, this level of free cash flow conversion should be sustainable. Cristina Mendez: Turning to our orders performance. On Slide four, orders for combined new equipment and modernization increased 10% during the quarter, driven by solid performance in EMEA and The Americas. Our total backlog at constant currency grew 8%, and when excluding China, the increase was 14%. New equipment orders at constant currency declined 2% in the quarter. We saw strength in EMEA, up mid-single digits, driven by growth in Western and Southern Europe, and in The Americas, which also increased mid-single digits. This was offset by a high teens decline in Asia Pacific due to a tough comparison. We continued to see improvement in China, which declined mid-single digits in the quarter and in the second half, in line with our expectations. At constant currency, our new equipment backlog increased 2% year over year, and excluding China, it grew 9%. Modernization closed the year exceptionally well, delivering the highest quarterly order since spin and surpassing the record we set in Q3 of this year. Orders grew 43% at constant currency, with over 100% growth in EMEA, over 20% growth in The Americas, and high teens growth in Asia Pacific. We ended the quarter with a modernization backlog of 30%, reinforcing our view that we remain in the early stages of a multiyear modernization cycle supported by the aging global installed base. Our service portfolio grew 4% in 2025, bringing it approximately to 2.5 million units and strengthening our leading position globally, with low teens growth in China, high single-digit growth in Asia Pacific, low single-digit growth in The Americas, and approximately flat performance in EMEA. Recaptures and cancellations remained roughly net neutral for the year, making conversions the primary driver of portfolio growth consistent with past years. We ended the year with a stable retention rate outside of China, enabled by our ongoing focus on investment in service excellence. This represents an improving trend in our retention rate excluding China as anticipated. As you know, the Chinese market exhibits structurally higher churn due to competitive dynamics and shorter contract duration. Our global teams executed well this quarter, securing strategic customer wins that reflect the strength of our solutions and the trust our customers place in Otis Worldwide Corporation. As we install, service, and modernize their elevators and escalators, we deepen relationships and build loyalty that supports long-term recurring revenue growth. In The Americas, Otis Worldwide Corporation secured a major new equipment project in Dallas to provide 39 elevators for a new pediatric hospital developed by Children's Health and the University of Texas Southwestern. The scope includes 26 Skyrise units and two Gen3 elevators with our Otis One Pro Connected service platform. This project reinforces Otis Worldwide Corporation's role in delivering advanced vertical transportation for the critical healthcare infrastructure. In China, Otis Worldwide Corporation was selected to supply more than 490 heavy-duty public escalators for Shanghai Metro Line 19. These escalators are equipped with sensors that enable real-time remote performance monitoring. The new line will span 29 miles and include 34 stations, and we are proud to continue our long-standing relationship with the Shanghai Metro, where Otis Worldwide Corporation already supports approximately 2,700 elevators and escalators across 13 lines. In London, Otis Worldwide Corporation won a comprehensive service and modernization contract program for 172 escalators across the London Underground, bringing the total number of units we service for Transport for London to more than 300. Our teams will maintain, refurbish, or replace units, ensuring safety and reliability for equipment that operates up to twenty hours a day and supports 1.2 billion annual passenger journeys. Building on a legacy that began with the first Otis passenger escalator at Earls Court in 1911, Otis Worldwide Corporation continues to deliver trusted expertise and innovation for urban mobility in the capital of The United Kingdom. In Kuala Lumpur, Otis Worldwide Corporation has secured a landmark new equipment project at Armani Halston KLCC, delivering 26 Skyrise elevator systems featuring our Compass 360 destination management technology, Otis One IoT solution, and eVue smart screens to enhance passenger experience. Working with Armani Group and project developer Veslin, this collaboration brings advanced vertical mobility and innovative design to one of Malaysia's most prestigious developments. Turning to our fourth quarter results on Slide five, Otis Worldwide Corporation delivered net sales of $3.8 billion with organic sales up 1%. Adjusted operating profit excluding an $18 million foreign exchange tailwind increased by $29 million. Adjusted operating profit margin expanded by 70 basis points to 16.6%, driven by strength in service margin, which increased 100 basis points in the quarter. Adjusted EPS grew approximately 11% or $0.10 in the quarter, driven by strong operational performance, favorable foreign exchange rates, and a lower share count. With that, I will turn it over to Cristina to walk through our results in more detail. Cristina Mendez: Thank you, Judith. Starting with service on slide six, service organic sales grew 5% in the quarter with growth across all lines of business. As our service flywheel continues to deliver solid top-line results, maintenance and repair organic sales grew 4%, with maintenance driven by 4% portfolio growth and 3% positive price, partially offset by mix and churn. Repair growth was solid, up mid-single digits, but slightly softer than our expectations heading into the quarter, as we prioritized investments in service excellence, which should drive improved retention over time. These investments, together with our growing portfolio and continued high enough field mechanics, should accelerate maintenance and repair top-line growth in 2026 and beyond. Modernization organic sales grew 9%, with notable strength in China, where sales more than doubled. And as Judith mentioned earlier, we are pleased with the progress in modernization orders and our record backlog, up 30% at constant currency, which establishes a solid foundation for sustained modernization growth in 2026. Note that our strong modernization orders in the quarter include the large Transport for London project that Judith mentioned earlier. We are just scratching the surface of the modernization opportunity ahead. As units from past construction cycles continue to age, they should create a durable multi-year tailwind for modernizations. Service operating profit of $638 million increased $49 million at constant currency, with higher volume, favorable pricing, productivity, and gains on asset sales more than offsetting higher labor costs and mix churn. Operating profit margins expanded 100 basis points to 25.5% in the quarter, the strongest margin expansion of the year, matching our record service margins from last quarter. This performance reflects the continued strength and the discipline of our service execution. Turning to new equipment on Slide seven, new equipment organic sales declined 6% in the quarter as growth in EMEA and Asia Pacific was more than offset by decline in China and The Americas. EMEA sales grew 6%, driven by strength in The Middle East and Southern Europe. Asia Pacific grew low single digits, supported by solid growth in India and Japan, partially offset by weakness in Korea. The Americas declined 5%, slightly below our expectations due to timing of project execution. However, with a strong orders performance for six consecutive quarters, the region's growing backlog provides a clear line of sight for a return to positive new equipment sales growth in 2026. Overall, our total new equipment backlog increased 2% after seven consecutive quarters of decline. And excluding China, new equipment backlog grew 9%. And while China remains down on a year-over-year basis, we are encouraged by the improving order strength that Judith mentioned earlier. New equipment operating profit of $47 million declined $15 million at constant currency, and operating profit margins declined 110 basis points to 3.6%. As mentioned in previous quarters, the new equipment margin rate is more sensitive to small variations in operating profit, given the smaller size of the business segment. The operating profit decline was driven by lower volumes, unfavorable price tariff headwinds, and mix. These were partially offset by productivity, including the benefits of restructuring actions. Moving to the full year 2025 adjusted EPS bridge on Slide eight, 2025 adjusted EPS increased $0.22 to $4.05, up 6% year over year, reflecting solid operational execution and the continued contribution from our service business. Below the line, lower share count and noncontrolling interest supported EPS growth, more than offsetting higher interest expense. Note that the operational bar on this chart now includes the impact of tariffs, which was previously combined with the impact of foreign exchange rates. As studies become part of the baseline for 2026, additionally, we finished the year with our best fourth quarter cash flow since spin, working capital execution supported by excellent collections and sustained overall. We closed the year with solid operating performance, confirming the resilience of our strategy and service model. With our record modernization backlog, continued strength in maintenance and repair, and a growing new equipment backlog, we are well-positioned to deliver attractive growth again in 2026. I will now turn it back to Judith to discuss our 2026 outlook. Judith Marks: Thanks, Cristina. Starting on Slide nine with the market outlook, we expect the global new equipment market outlook to continue moving towards stabilization in 2026. Within The Americas, in 2025, the region grew low single digits with mid-single digit growth in the U.S. and Canada, driven by demand in residential, healthcare, and data centers. We expect this positive trend to continue this year. In EMEA, the market grew low single digits in 2025, with notable strength in Spain, Germany, and The Middle East, partially offset by declines in Italy and France. We expect EMEA to continue to grow this year, driven by broad-based growth in both Europe and The Middle East. Asia Pacific is anticipated to accelerate in 2026 after growing low single digits in 2025. We anticipate this acceleration to be driven by steady growth in India and Southeast Asia, a slight improvement in Japan, and stabilization in Korea. Within China, the pace of decline moderated in 2025, in line with our expectations, and we expect the trend to continue improving. In total, we expect Asia to decline in 2026. Turning to modernization, as of 2025, there were almost 9 million units in the 23 million unit global installed base in the prime age for modernization. This population includes units over 15 years old in China and over 20 years old in the rest of the world. These aging units drove a 13% increase in the modernization market in 2025 in dollar terms with synchronous growth globally. We expect this trend to continue for the foreseeable future due to past construction cycles and continued aging of the installed base. Turning to our sales outlook on Slide 10, total organic sales are expected to increase low to mid-single digits, driven by accelerating growth in our service segment as well as moderating declines in new equipment sales, which are expected to be down low single digits to flat. Within service, we expect mid- to high-single digit growth with acceleration in both maintenance and repair and modernization, building on the strong ramp-up in 2025. Maintenance and repair should benefit from this year's mid-single digit portfolio growth, solid pricing, and strong field performance. All of our regions are now running under the uplift operating model with a clear focus on service excellence and customer centricity. In addition, in 2025, we continued to ramp up our resources, adding approximately 1,000 field professionals in anticipation of continued portfolio growth and strong demand for repair work. The strong repair demand is being driven by the same aging of the installed base that's supporting modernization growth. Within modernization, revenue growth should be driven by execution of our robust year-end backlog and continued aging of the installed base. Together, we expect a one to two-point improvement in our service organic growth rate over the 5% service organic growth rate achieved in 2025. New equipment organic sales are expected to be down low single digits to flat. We finished 2025 with a strong backlog that, excluding China, was up 9%. And in 2026, we should see growth in all regions excluding China, with notable strength in Asia Pacific, and with The Americas returning to growth. The backlog in China remained down significantly as of year-end, which will weigh on sales, particularly in the early part of the year. As a reminder, backlog conversion in China is typically around nine months. Therefore, a faster market recovery may positively impact our sales prospects due to the book and ship volumes. In addition, while new equipment sales in China are expected to decline this year, we have seen a significant improvement in China new equipment orders in 2025, an encouraging trend. On an actual currency basis, we expect total net sales of $15 billion to $15.3 billion. With this accelerated organic sales growth, we expect adjusted EPS to grow mid- to high-single digits for the full year. I will now pass it back to Cristina to review the 2026 outlook in more detail. Cristina Mendez: Thank you, Judith. Turning to our financial outlook on Slide 11, we are expecting another year of solid profit growth, driven by the strength of our service-driven strategy. At constant currency, adjusted operating profit is expected to grow $660 million to $100 million, accelerating profit growth on the back of a stronger top line. As our new equipment segment is stabilizing and modernization continues a steady growth trajectory, we should be able to sustain this level. And given this dynamic, we expect adjusted free cash flow of $1.6 billion to $1.7 billion this year. We will continue with our shareholder-oriented capital allocation strategy, targeting a dividend payout ratio of 40% and executing approximately $800 million in share repurchases. Note, however, that we will remain flexible with other potential investments, including bolt-on acquisitions, which may impact our capital allocation in the year. Turning to Slide 12, we have delivered strong profit growth every year since spin, driven by sustained service top-line growth and consistent margin expansion, which increased 350 basis points over the period. As we look to 2026, we are confident our service-driven strategy will continue to support this trend. We remain committed to accelerating service top-line through volume and value growth in maintenance and repair while also capturing the tremendous modernization opportunities ahead. We will continue to drive productivity through increasing density and digital capabilities while also capturing the year-over-year cost benefits from the transformation programs finalized in 2025. These positive contributors will partially be offset by wage inflation, mix, and churn. And in new equipment, we expect a small headwind from commodities, although relative to our annual spend in this category, this impact is expected to be modest. As we execute the new equipment backlog, we expect lower margin to flow through the P&L. In service, we continue to invest in Service Excellence as we have seen very good results in customer satisfaction demonstrated by the stabilization of our retention rate in our most valuable markets. We are confident that these investments will support continued strength in the top line. Looking at the first quarter, we expect service top line to ramp up sequentially, with first quarter service organic sales growth of approximately 6% on the back of strong execution in repair and modernization. New equipment top line is expected to be down in a similar range as the fourth quarter, though we anticipate it will improve as the year progresses on the back of the positive backlog at year-end. EPS in the quarter is expected to be around flat. Turning to Slide 13, 2025 has been a year of transformation of our operating model. We have navigated external macro and geopolitical challenges while building a foundation of service excellence and customer centricity. In 2026, we are poised and ready to accelerate our top line and deliver a strong operational performance. Organic sales growth is expected to improve from flat in 2025 to up 3% in 2026 at the midpoint of the guide. The improvement is driven by acceleration of both maintenance and repair and modernization, coupled with stabilizing equipment sales. Constant currency adjusted operating profit growth at the midpoint of the guide is expected to increase over 70% compared to last year. This is an indicator of our improving operational performance due to an accelerating top line, stabilizing retention rate, smart pricing, and disciplined execution. Taken together, we expect mid- to high-single digit growth in adjusted EPS. While at the midpoint of the guide, this year's adjusted EPS growth is similar to last year's, our operational performance is accelerating, and our cost savings initiatives are capturing the benefits of past investments while leveraging the industry's largest maintenance portfolio, our digital capabilities, and our best-in-class productivity. We are excited about the opportunities in front of us, and we have the resources, talent, and a strategy in place to capitalize on them in 2026. Longer term, we remain confident that our service-driven strategy will continue to deliver sustainable shareholder value. With that, I will ask Krista to please open the line for questions. Operator: Thank you. We will now begin the question and answer session. Star one. We also ask that you limit yourself to one question and one follow-up. For any additional questions, please re-queue. Your first question comes from the line of Amit Mehrotra with UBS. Please go ahead. Amit Mehrotra: Thanks. Morning, everybody. Appreciate the question. Maybe you can talk about growth expectations for maintenance and repair within the services segment for '26? And then how you expect, you know, service profits to trend relative to the mid- to high-single digit revenue growth outlook in that segment? And then maybe related to that, any you could talk about on the progress you're making on retention and churn as well? Judith Marks: Sure. Thanks, Amit. Let me talk to the growth expectations. I will ask Cristina to talk to the profit expectations. And then we will circle back on retention and what we are seeing. Listen, we ended the year, obviously, at a 5% service top line growth, and we were targeting a little bit higher on repair, although we did see our repair trajectory stabilize and actually be much better in the second half than the first half. As we go into this year, we are expecting our repair rates to ramp up to be 10% plus. So that will bring maintenance and repair up higher, and we are actually expecting at least a point gain in maintenance as well. Take that with modernization backlog conversion, and that is why we felt that we would be one to two points higher, and we have line of sight to that with our backlog. Cristina? Cristina Mendez: Yeah. And Amit, on the profit and margin rate side, this acceleration of top line should also flow through profit, and we expect an acceleration of service contribution in the year. In 2025, we contributed PPY versus previous year, $150 million. At constant currency in 2026, this is going to be $200 million. So very consistent with the acceleration of dollar profits strategy that we have been selling over time. And look, when you look back, we have delivered this very strong performance in our service business consistently. In the last five years, we have grown service margins by 40, 50, even 60 basis points every year. We are expecting margin expansion again in 2026. This is on the back of growth in volumes. We also are improving our price capabilities, being much more adapted to customer demands, much more smart pricing. We also have the benefits of productivity and the uplift run rate. On the headwind perspective, we have the investments we are placing in the stabilization of the cancellation rate that Judith will talk to in a minute. But we are very positive about the results of these investments in 2025. So we will continue selectively investing in customer excellence. All in all, very strong service performance expected for 2026. Judith Marks: Yeah. Listen. I could not be more pleased with our service teams, and I think we are. I am convinced we are making the right investments in service quality and service excellence. It matters to our customers, and it will, as we have said all throughout 2025, make a difference in retention rate in '26, '27, and '28. Our goal in 'twenty five was to stabilize that retention rate after seeing a decline from '24 to '25. And ex-China, we are pleased to say that we have done that. And now we expect small growth to start yielding in 'twenty six. But what I would tell you is we are very focused on several key markets. We want to ensure that we are retaining the right units in our portfolio. Having the largest portfolio is wonderful at 2.5 million units. But we want to make sure that every unit is not just accretive but we continue to retain the key units that have the largest profit contribution. In the past, we have grown in more of the emerging markets, so while the portfolio may not grow at the same rate in 2026 at that 4% that we are very proud of, it will grow in terms of the value it contributes. You will be able to measure that, Amit, and everyone listening, is in our maintenance revenue. You will be able to measure it in our repair revenue, which is where it will show up. And then we will share retention trends as we go through the year. Amit Mehrotra: And just as a quick follow-up on the new equipment margins. Maybe just a question on how much do you think this trajectory is structural versus cyclical? Obviously, the China market, which is your highest margin new equipment market, tops, so maybe it is just cyclical. But, obviously, there is a need to capture more service revenue. So I am just trying to understand the price competition there and whether you can bounce that trajectory back up if you get some macro tailwinds. Cristina Mendez: Yeah. No. Look, Amit, on the new equipment side, the new equipment segment is a very small piece of our business. And it will become smaller as we continue executing our service-based strategy. The margins are going to be a headwind in 2026 because of the ongoing decline of volumes, mainly coming from China. And as you know, China is our highest margin geography. We have the benefits from the China transformation restructuring and uplift, but most of the benefits are in the baseline. The run rate from China transformation is $20 million smaller on a year-on-year basis than in 2025. Commodities are also a small headwind, very small in the broader scheme of things on an annualized annual spend in this category. But it is a matter of navigating through the backlog and stabilizing the new equipment segment. In margin rate terms, we expect 2026 to land at the same rate of Q4 2025. Amit Mehrotra: Got it. Thank you. Good luck, everybody. Appreciate it. Cristina Mendez: Thank you. Operator: Your next question comes from the line of Joseph O'Dea with Wells Fargo. Please go ahead. Joseph O'Dea: Good morning. Thanks for taking my questions. Can you add a little bit more color around the service margin in the fourth quarter and when you get 100 bps year-over-year growth? Think about, you know, mod as being kind of the lowest margin within that portfolio, repair being the highest, repair was a little lighter than you expected. And so when you think about maybe some of the mixed components within that, that would be helpful. And so what you are doing to drive the margin expansion in each one of those individual pieces and specifically what you were able to achieve in mod margins? Judith Marks: Yeah. Let me let Cristina go through some of the specifics, Joe, but let me start by saying, when you think about it, as we have seen this impending opportunity in modernization, we have known that that has the potential, obviously, to be dilutive to the service segment. The good news is with the repair volumes growing, and they ended the year at 5%, they are still growing at a larger even though the rate is five, it is a larger bucket of core revenue to grow on than mod. I will tell you, though, we strategically have focused on modernization seeing this large market that was going to continue to grow, as we call it, almost evergreen, and so we industrialized our modernization approach. We have integrated it into many of our new equipment factories. We have a common supply chain, we are getting scale benefits. We have dedicated and specialized installers, specialized sales reps. And now that the modernization scale is starting to emerge, we are seeing the margins grow as well. So we are pleased to say, again, the modernization margins are getting much closer to the 10% medium-term target we set. Originally, we had talked about first surpassing new equipment margins. We have done that. Now we are at the point where it should be more than double new equipment margins. Even if new equipment margins are typically around 5%, so we came very close to that as we ended the year. And I think with more scale, you will see more of that. Just one specific call out, though, on modernization revenue growth. We did see it pretty much everywhere, but our China team, because of the mod bond stimulus program, had significant orders in the third quarter, and their orders were up over 35% for the year, pretty flat in the fourth quarter because they happened earlier this year. But our mod revenue in China, Sally and the team really turned the revenue very quickly, and that revenue grew 100% in the fourth quarter year over year and was up 75% full year. So mod margins look strong in China, just like the new equipment margins do, but let me let Cristina add some more comments. Cristina Mendez: Yeah, Joe. So I can give you more color of the components below the 100 basis points margin expansion in service. And let me start by saying we are very pleased with this strong performance and encouraged by the ability to continue growing service margins in the future. So as Judith pointed out, repair accelerated, and repair has the highest margin within the service segment. Modernization margins are ramping up. We increased 50 basis point modernization margin quarter over quarter Q4 versus Q3. And there is a third component that is a one-time effect of the sale of assets of a few transactions of service centers. This is related to our service transformation strategy. We are changing our operating model, as you know, and we are thinking on models that will benefit customer experience by reducing lead time in the delivery of spare parts. So we have sold a few service centers because we are outsourcing to a third party that can handle the process more efficiently, and this was $14 million in the quarter. One four. If we exclude this effect, service margins will have expanded 40 basis points, which is still a very solid expansion. Joseph O'Dea: Got it. Thank you. And then is there a go-forward benefit from the transactional service center's effects such that contribution in the quarter as a is a run rate contribution? Or was it more one-time in nature? Judith Marks: That was more one-time in nature, but the benefit will be retention rates. Because, again, it was not core for us to be managing some of our own spare parts. We have a third party now that, that is their business. Better central location for that for quicker and more efficient spare parts delivery so we can get the right part to our mechanic to repair the unit in a shorter cycle time. Joseph O'Dea: Got it. Okay. And then could you just talk a little bit about the China stimulus program with a little bit of color on, you know, how that's grown. And so we go back to kinda when it started. And the size of it. What the size of it was in 2025. And, you know, how you're thinking about it in '26. Judith Marks: Sure. And it's still it's young, and yet it's continuing to evolve. The whole focus was twofold from the Chinese government when this was started in about mid-2024. It was to make living more attractive for Chinese citizens, especially those that were getting older in some older residential buildings, and also to drive consumption. As part of the government's focus on driving consumption in a deflationary environment. In 2024, the size of the program was about 80,000 units. That could be modernized, again, fully funded by the government but needing to be supported by local governments where they would put forward, you know, the number of units they wanted to do. That ramped up to 120,000 in 2025, and I think our team from a share perspective, without giving any numbers, did an excellent job capturing the market due to our customer connections, our agents and distributors, and our relationships. And we did deliver all of our units in year, which is a key element of the program. And that's really what drove it. Again, fully full stimulus, fully funded by the government. The government itself has said that program will continue in 2026. At at least the level comparable to 2025. We've not seen if it's going to increase yet, we're obviously watching signals because right now, it was a one a one value program where we would fit solutions to fit that 150,000 RMB. We believe that there's been rational assessment of, well, if you have taller buildings that need more content and more equipment, maybe we should have different levels versus just one value. So we think it's going to continue to evolve. We view it as positive in 2026. It should look at least like 2025, and our Otis team is prepared to capitalize on that. Joseph O'Dea: That's helpful detail. Thanks a lot. Operator: Your next question comes from the line of Nick Housden with RBC Capital Markets. Please go ahead. Nick Housden: Yes. Hi. Thank you for taking my questions. My first one is on modernization. So the mod backlog was up 30%, which is a very strong number. And you've discussed how you've been industrializing your modernization business. So it'd be good just to kind of understand how you think about the annual growth potential in that business in the next couple of years because I don't think any of us are expecting sort of 30% numbers, but just thinking about how you kind of pencil in the acceleration in that business. Judith Marks: Yes, Nick, thank you for asking. We've seen this market starting to grow, and now it's growing at some pretty healthy rates. I shared in my opening comments, we think the market segment grew 13% in 2025. And you could tell from the arrow, that's going to continue to go up. It's not as well instrumented in terms of segment measures as the new equipment market where most of the providers share information to a neutral third party. So some of this most of this is actually based on our own estimates. But we are seeing demand increase. We originally started in this market primarily with full replacements, but in lots of discussions, remember, of the installed base is residential. Multifamily across the globe. In so many discussions with our customers, they were looking for alternative ways to phase this in over time. So earlier in the year, we introduced our Arise package set in EMEA, which has the largest population of aged units. Because just due to the aging in Europe and the building construction cycles. And between the full replacements, the mod bond stimulus in China, and, again, these partial replacements that let people with our tools budget for this and do it over multiple years and have less disruption, in office buildings and other places, we are seeing this market pick up significantly. If you look even this year on our orders, first quarter, we were up December, 22% third quarter, 2743% in the fourth quarter. I mentioned transport for London. That is a major several decade long project between maintenance and modernization that we'll be doing for the London Underground. So we have a combination of volume business and major projects business. So you I don't believe you'll see us convert that 30% I I know for sure, in 2026 because there are multiyear major projects in there too. But we see a steady growth rate in the market and it is growing in every region and every country where we do business. Which gets us excited. Lastly, just in terms of the how, we did specialize our sales force for this. We created packages so it's easier to show the value proposition for our customers. We provide capital planning tools. So they can get ready financially. Then we have the operations side ready, I mentioned earlier. And then the installation side. What we wanna do is become very productive and have a lot of get that out and I think we are getting through the learning curve with our installation crews. And then we believe this will then have the ultimate benefit of the of the conversion and the retention on service. So for us, modernization, it's another lubricant on the flywheel but it will drive its own significant revenue stream and margin and, more importantly, profit contribution in the near term. And I think planning it in the teens if not more, is an appropriate place to plan. Nick Housden: That's great. And then my second question is I was just wondering if we could maybe unpack the EPS outlook a little bit more. It looks like it's slightly below what the market was expecting and the mid- to high-single digits. I'm just wondering what it will take to get back to the kind of 10% plus ambitions that you've previously discussed at Investor Days. You know, Mod Growth this year should be good. You mentioned repair, I think you said growing 10% this year. There's an FX tailwind as well. So kind of seeing potentially only mid-single digit EPS growth in that guidance was maybe looked a little conservative to me. But just curious to hear your thoughts there. Judith Marks: Yeah. I'll have I I will have Cristina Listen. We we chose to be conservative. I just wanna be very transparent about that. Because we, yeah, we we just wanna make sure that what we commit we deliver, and anything we continue to do, which we'll be happy to talk about above and beyond that, we will deliver that to our shareholders as well. But we did choose to start conservative for the year. Cristina Mendez: And from the components perspective, we the midpoint of the guide, Nick, is 6% EPS growth. That is around 23¢. The operational component of that growth is much stronger in 2026 than in 2025. We are increasing from $09 year over year growth in 'twenty five to 15¢ in 2026. And this is on the back of the acceleration of operating profit in service. As I said before, Service operating profit is going to grow $200,000,000 at constant currency in the year. On the other side, we have FX that is a little bit favorable. We are talking about 8¢ in 2026. And it can be even more favorable because we are assuming euro at $1.18 and yesterday, the spot was $1.20. So the stronger the effects the more EPS we will deliver. Below the line, we expect this to be roughly flattish because we have the headwinds of the interest rate that is essentially the refinancing of the debt that comes mature, and interest rates are now higher than five years ago, But we have the ongoing benefits from share buyback, 800,000,000 guided for the year and a little bit positive on the tax rate. We are expecting to finish the year at 24.5%. Nick Housden: Great. Thank you very much. Judith Marks: Thanks, Nick. Operator: Your next question comes from the line of Christopher Snyder with Morgan Stanley. Please go ahead. Christopher Snyder: Thank you for the question. I wanted to ask about maybe the margin opportunity if we look beyond 26. The company has delivered really impressive margin expansion over the last two, three years. Without much help from the market But a lot of that was driven by the restructuring programs, both the uplift savings and the China transformation savings. You know, I think over the last twenty four to twenty six, you guys have in the slides that it was, I think, 240,000,000. So I guess my question is what is the ability here to expand margins as we look beyond these programs and just kind of more on a core operational basis. For the business. Thank you. Cristina Mendez: Yeah, Chris. So first, let me let me comment on the restructuring program because definitely they have been a tailwind in in margin. We have also navigated a significant deterioration of the new equipment market worldwide, particularly in China. When you look at our top line, new equipment has been a drag in growth of $400,000,000 ish in 2024 in 2025 and we are expecting to trend towards stabilization, still around 100,000,000 each this year although it can be better depending on China because China has shorter book and ship. So it's true that we have those tailwinds, but they have also helped us to navigate the situation regarding the equipment. On the other side, I want to emphasize the strength of our service business. On share on service, we continue delivering margin expansion beyond Uplift. And that's thanks to the increased productivity. We are proud to be best in class in the industry in our product We are also connecting units with IoT, more than 1,100,000 or 1,100,000 units in 2025. And as we continue growing the portfolio, we will have more density and more productivity. In addition to that, pricing should also help to expand margin rates because pricing has a higher flow through in profit And we have a few pricing actions, again, very targeted to adapt our price to customer demand. That will benefit in 'twenty six and beyond. Judith Marks: Yeah. Chris, I would just sum it sum it up to say without top line growth, we've achieved this margin expansion. And this profit contribution with just think what we can do, not just think, Our plan is to drive growth in our company. If you were gonna see, we did not have top line growth. We were flat this year. A lot of reasons, but it doesn't matter. We were flat. We are obviously showing we're gonna have top line growth in terms of sales. And with that, that profit fall, that flow through will be visible. Christopher Snyder: Thank you. I really appreciate that. If I could maybe follow-up on you know, the conversion of modernization orders you know, mod revenue has obviously been very good. But orders and backlog have been even better for a while now. I guess kind of my question is, can you just kind of maybe talk about that mod conversion I would imagine it's faster than the new equipment market. But any color there, because it does feels like back and orders have been running ahead of revenue for some time now. Thank you. Judith Marks: You're you're accurate, Chris, and we're just we're we continue to build up that backlog. In our guide this year, the mod revenue will be in the teens, certainly 10% plus as the volumes accelerate. That works really what your your your assessment on, you think it's quicker than new equipment. It is when we're doing a volume mod a small mod, certainly a partial mod, but even a a volume full mod, we can do that relatively quickly. But I would tell you that when we go to not just major projects, but even office buildings, commercial locations, hotels, where there is a bank of elevators or multiple elevators or infrastructure. Where there's multiple We only can really take one or two out of service at a time. So even though we we're not held up by a construction cycle or a general contractor because we're the general contractor. It's about interruption in the building. So some of these major projects actually take longer than a new equipment job. As do some of the ones where we have kind of a common bank if you're in a hotel You're only gonna modernize one at a time so that you don't disrupt traffic flow or have a lot of of general work going on. So it's a little different mix than new equipment. On the cash side, it looks good because it's we get the advantage payments, and we we bill as we go. On the revenue side, it's you know, we'll we'll do POC accounting. In terms of how we do the sales, but there's there is this blend. And in the know, we we are pushing hard. Our all of our regional leaders know All of our field leaders know we're pushing hard to convert the volume as quick as should be it should be possible so that we can get ready for more. And it in the teens in terms of 26 and beyond. Christopher Snyder: Thank you, Judith. I very much appreciate that. Operator: Your next question comes from the line of Jeffrey Sprague with Vertical Research Partners. Please go ahead. Jeffrey Sprague: Hey. Thank you. Good morning, everyone. Hey, Judith, I was wondering if you could just dial us in a little bit more precise on China just to sort of level set the base. And what is the actual expectation for 2026, just kind of spoke to it directionally. But maybe just how the market ended in units, what you're actually expecting for the 2026 decline? And is it sort of a decline in the first half and then a stabilization in the back? Any color there would be helpful. Cristina Mendez: Yeah. Happy to, Jeff. So it's it's interesting. This time last year, we sat here and we said, you know, and and I said, that the market would start its stabilization as we got to the second half, and that is indeed what we saw. The market 'twenty five was down 15% for the first half, 10% for the second half. We believe the market ended at about $370,000, if I round up just a little units for 2025. You know we've changed our strategy there, but let me finish on on kinda where we see where we see the market this year. Our view is that as opposed to if you take between the fifteen percent and ten let's say, 2025 was 13% down, we think this year will be about 8% down. We think in the first quarter, maybe second quarter, we'll see that similar minus 10 we think we'll end the year closer in the market being down to minus five. So so you can do the math in terms of it being down about 8% in terms of the segment. In terms of our strategy and what we've done listen, I think the team's done a phenomenal job in the fourth straight year of Duke decline. Our service in the fourth quarter we continued to grow our service business, both maintenance, repair, You heard me talk about mod earlier. ServiceNow, as we exit in the fourth quarter, was 47% of our China sales. Which was 42% in the third quarter And you'll recall at spin, it was in the mid teens. So we have been going through this transformation of our China business to not be as dependent on that. China, in terms of global revenue, China represents 11% for the year of our total Otis revenue. It was at 12% in the fourth quarter. And it's now 19% of our new equipment revenue in the fourth quarter versus 21% in the third quarter. So the rest of the business is growing healthy. Our China team has done an amazing job at being able to stabilize our business and they've added connected units They've continued on productivity. And we're really we're really interested in hearing what's gonna happen in the in the March meetings that are happening after the fifteenth five year plan was announced at the fall plenum. We believe the involution focus will help with competitive pricing hopefully starting to stabilize that. The mod bond will help us, and we believe there will be a continued focus on how do you get consumption started in the property markets. But that's that's that's kind of the China picture for you, Jeff. Jeffrey Sprague: Yeah. No. That's great color. And then could you also just address kinda where OE versus service margins are, you know, way back when, right, used to think of new equipment margins actually higher than service. I think there's some debate of whether or was that was actually the case. But, you did note that China is still your highest margin region overall. So I just wonder if you could give us a little more perspective on that also. Cristina Mendez: Yeah. Jeff, they've remained the highest margin really the the highest region in margin because we have restructured the organization to adapt the cost to the to the new volumes environment. The other side, service margins are expanding over time because things that they are growing very strongly in modernization. Our modernization margins are kind of at the same level. As new equipment. So as modernization goes up, in the case of China, that is going to be a tailwind in the margin rate. So but but yeah. Directionally in line with what we have said before. New equipment high, service lower, but getting better. Jeffrey Sprague: Great. Thank you very much. Appreciate it. Judith Marks: Thanks, Jeff. Operator: Your next question comes from the line of Nigel Coe with Wolfe Research. Please go ahead. Nigel Coe: Good morning. Thanks a lot. Cristina, maybe clarify with you the 1Q guidance, is that flat with 1Q last year? Or is that 4Q? Cristina Mendez: It's flat versus Q1 year. And and, Nigel, let me give you some color about the different segments. So on the one side, sales is going to continue accelerating all the year along, starting in Q1. We are expecting in service 6% sales You may remember that last year, we had a weaker service top line growth, particularly in repair. It was 1% in Q1 last year. It's expected to be around 10%. We also have an easier compare, but we continue accelerating. While modernization will be in a steady growth on the back of the 50% backlog. From a profit standpoint, we expect profit at actual FX to be around flat, with $20,000,000 FX tailwinds. The reason for that is on the new equipment side, we didn't have tariffs last year in Q1. They came into place into Q2. We you have also seen weaker execution in U. S. New equipment in Q4, has been delayed to Q1. We have kind of a compound effect of the compare. Plus tariffs moving into Q1. On the service side, although we continue growing the top line and the acceleration of repair is a tailwind in margin, also have a tougher compare in contribution because of investments. You may recall that last year, we started the Service Excellence investments in Q2. So when you compare to Q1, we don't have that in the baseline. But overall, margin is going to be around 16% in Q1. Nigel Coe: Okay. That's helpful. That's what I was going to clarify that with you there. And then for the full year, you're indicating new equipment margins down probably 100 basis points or so. For the full year. I think your plan is pretty flat margins overall. So should we think about it as, I don't know, a bit of inflation on corporate? Service margins up 20 basis points? Is that how you think about it? Cristina Mendez: Well, you got it right in the sense that margins are going to be around flat. But looking into the segments, as I said before, service is going to expand margins very strongly again in 2026. Total operating profit growth for service is going to be $200,000,000. On the new equipment side, this is indeed a headwind for us. And the reason for that is that the China transformation benefits were mainly captured in 2025, So the run rate is 40,000,000 in total, only 10,000,000 incremental run rate 2026. At the same time, we continue executing the backlog with a more competitive price and volumes are regularly stabilizing, but they are planned to be revenue in new equipment low single digit down to flat. From corporate standpoint, we expect to be at the same level as Q4. So Q4 is a good run rate for you to take, and you need to consider the impact of inflation. And we have some small impact of transactional effects that is related to the hedging of our intercompany activity. It's a technical thing we can cover offline, but it's it's essentially leaving the run rate as Per Q4. Nigel Coe: Okay. So just to clarify, Cristina, it sounds like new equipment margin is close to three. For the full year. Cristina Mendez: Yeah. I would say slightly below four. Nigel Coe: Okay. Great. Thank you. Thank you. Operator: Your next question comes from the line of Julian Mitchell with Barclays. Please go ahead. Julian Mitchell: Hi, good morning. I just wanted to circle back to the service business for a second there. And just trying to understand kind of if we take the total company in service, I think you had 92% retention end of 2024. Where was that sort of ending 2025? And I think Judith, you'd mentioned the 4% portfolio unit growth may be tough to sustain. Just wanted to understand why that's the case as you are investing a lot more in service headcount and so forth. Judith Marks: Yeah. Julian, the 4% is not tough to sustain if we choose to sustain it with more emerging markets and lower contributing units. What we're trying to do is focus on growth and growth in value as well. So the retention rate actually China, which we didn't share last year, but but actually is we say stable, I would say. I was pleased with what we were able to do through the year. We we stopped it from eroding when you think about The Americas, Asia Pacific, and EMEA. And now we're at the point with these investments and with our customer focus where we think that will now actually become stronger but not by a point in 'twenty six, but it should pick up. A little bit. Obviously, China's a little different structural. But please understand, I mean, we could continue to add units to the portfolio. This is a conscious decision we're making and it's not that four is going back to the one we had perennially. But it might be it might start with a three but it's gonna be a three plus percent, but it's going to be units that actually drive more top line in terms of maintenance. Value, in terms of the repair we'll get from it, and the eventual mod. Julian Mitchell: That's helpful. Thank you. And then just wanted to put a finer point on the, how we should think about the EPS sort of phasing for the year. So I think it's up $0.23 for the year as a whole. That that's all coming between the second and fourth quarters because Q1 is flat. EPS year on year. Any help you could give us how to think about the phasing of that $0.23 increase in the remaining nine months, please? Judith Marks: Yeah. And I'll just I'll just remind you. This year, it was, you know, it was $0.3 for the first half and then $09 for Q3 and $0.10 for Q4. So our intent is not to have to depend on the full second half again, but there will be there will be an increase regardless of the compares. But you should start seeing it much more in the second quarter. Than you did last year. Got it. Operator: Your next question comes from the line of Robert Wertheimer with Melius Research. Please go ahead. Robert Wertheimer: Yeah. Hi. Thank you. Judith, you've touched on service and service investments a couple of times. I wonder if you could just, in a general sense, talk about where you feel you are now versus you wanna be. Have you gotten there and you're starting to see results? Is there more investment to come, and maybe there's a margin, you know, kind of a theme attached to that question. And then I wonder if there's any new technology or new tools that are developing throughout the year that might add to your ability to lead that segment? Thank you. Cristina Mendez: Yeah. No, Rob. We anticipate continued productivity from our from our incredible now 45,000 field professionals. They represent us every day in front of customers, and they are, as I always say, the heart and soul of our company. We will be continuing to provide more tools and technology for them. Because the answer for us to continue growing we cannot just instantly create new mechanics. They go through an apprenticeship. These are professionals. This is what they commit to. So whether it's our robot that's doing inspections that we showed in China, other AI tools that let us handle parts identification more efficiently, even our our you know, obviously, the application of Otis one, I'm so excited about where that's going. In 'twenty six to give us better predictive maintenance and to make our mechanics first time fix rate even more efficient. So all of that should help us in terms of of of how we go about the year. The first part of your question I'm sorry. Robert Wertheimer: No. I I answered the that was largely admitted. Have you have you reached kinda max investment in that role over the next two or three years? You know, you you start to lever it, or how do you think about that? Thank you. Judith Marks: Yeah. I think oh, I can tell you the investment the investment's still underway. Especially and it's planned for '26. Which is a little bit part of the EPS bridge that Cristina talk took you through because having been in this business for one hundred and seventy two years, we understand the value of long term customers and we knew we needed to improve our service delivery. So that investment is still underway. It's happening at and basically, what we're doing is we're applying more mechanics and more field professionals in locations where the performance has not been satisfactory even though we may not be billing them, but we're trying to improve that service, retain that customer. It's an investment we think is extremely worthwhile. And it's gonna continue to play out this year. And I and we believe the returns will will be seen for many years to come. Robert Wertheimer: Thank you. Operator: Your next question comes from the line of Kyle Summers with Rothschild and Company. Please go ahead. Kyle Summers: Hi. Good morning, everyone, and thanks for taking my questions. I just wanted to start on the repair side. Could you just go into a bit more detail as to how the investment in service excellence led to the lower than expected repairs, and then why shouldn't we see this reoccur in 2026? Judith Marks: Yeah. Well, all I can tell you is the repair backlog is growing. Which from a financial perspective and how you look at it, you look at it positive From a customer service perspective, don't wanna wait too long for repair. So we need to increase the conversion rates on our repair, and you're gonna see us be more proactive repair. In terms of sending out solutions for our customers before they ever experience the problem. But I'll let Cristina talk to the rates. Cristina Mendez: Yeah. Kyle, and and I will add that, as Judith said, the repair backlog is growing under demand. It's a matter of how we distribute our field colleagues in order to execute all the activities in the quarter that are in in the case of service, maintenance, repair, and modernization. So as we enter the quarter, we knew how many field colleagues we had because the onboarding process is longer than three months, but we also monitor regularly the quality indicators. And as we see the need to put more field colleagues on maintenance in order to better support customer and satisfaction, we calibrate during the quarter resources from the different activities. So it's not a backlog or demand issue. It's a matter of calibrating resources according to the best use of them. And I think we are getting better at that every day and every week at all of our operating territories. Kyle Summers: Thank you. And then just on the retention rates, so obviously good to see it stabilizing. Outside of China, but obviously the total rate has still declined. Can you just provide a bit more color as to what exactly is going on in China and know, how you aim to stabilize the declines there, and then just adding on to that you mentioned slight improvement into 2026. Is that for the total group, or is that still ex China? Judith Marks: It was listen. We expect everyone to participate in continuous improvement in everything we do. So I wouldn't I wouldn't just call out x group for improvement. There's room for everyone to improve. China's pretty simple. Every year, every contract's up for renewal, and there's no ability to have any sort of auto renewal in the in the structure of how China does business for everyone, not unique to Otis. So it is every year continuous. You have to prove yourself. You get repriced. It's just it's a very different structural system. Operator: Your next question comes from the line of C. Stephen Tusa with JPMorgan. Please go ahead. C. Stephen Tusa: Hey. Good morning. Judith Marks: Hey, Steve. C. Stephen Tusa: I'm not sure if we have the numbers right. On the conversion rate in China. It seemed like it was substantially lower than what you guys have been reporting in the past. Just the math on that, if you could confirm that? And then I guess just combining that with the attrition and delving a little bit deeper into Jeff's line of questioning, is there just something now like like structurally different with this China aftermarket that the price pressure is kind of intensified from like you said, you're kind of the OE into the services now. And so that's just something you're walking from, from a value perspective. Is that just higher level? Like, is that the mosaic there? Judith Marks: Yeah. Let me let me answer both. So the China there's two things going on here, Steve. One is we are and and we're kind of in flight. So we've got orders in the backlog. That we won competitively, that we won through our agents and distributors. Some of these are not in the Tier one and Tier two cities where we choose to focus because of the contribution. We get better density there. The contribution makes sense. So so we we've obviously delivered them. New equipment margins are good. But we're you know, we understand if that customer chooses to go with another service provider, and we allow that to happen. Separately, on recaptures, we use that same filter. So it's not we don't wanna recapture everything across the whole country. Recapture the units. So new equipment, we want the units that will give us the lifetime service or certainly a better service stickiness. In service recaptures, We're very targeted now. So I think you're seeing not structural but strategic Otis decisions. That will it might impact the rate but it will give us a healthier portfolio in China. C. Stephen Tusa: Okay. And, again, are we right about the conversion rate being, like, you know It is it is lower. It is lower. And that and that should remain kind of in that in that level, going forward? Judith Marks: Yeah. I would expect a little improvement, but but it'll remain lower. Yeah. C. Stephen Tusa: Okay. And then sorry, one last one just on price cost. What is the kind of thought on that this year? I know steel obviously is been a bit volatile. What are you guys looking for on a kind of on a spread basis this year? Cristina Mendez: I we would expect the same trend as we seen in 2025, Steve. So rest of the world, excluding China, will have positive low single digit price. China will remain challenged around one, two points down sequentially quarter over quarter. Judith Marks: Yeah. I'm not as worried about I'm not as worried about commodities Steve, with how we manage it locally and then how we lock it in. Obviously, we're watching steel, copper, but it's not a significant number for us in terms of a headwind this year. C. Stephen Tusa: Okay. Thanks a lot. Operator: Alright. And that concludes our question and answer session. I will now turn it back over to Judith for closing comments. Judith Marks: Thank you, Krista. 2025 marked another year demonstrating the strength and resiliency of our service-driven strategy. This foundation in service, together with a robust backlog for modernization and new equipment, gives us confidence in driving meaningful growth in 2026 and beyond. Thank you again for joining us today. Please stay safe and well. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.
Operator: Press 0, and a member of our team will be happy to help you. Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help you. Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help you. Please standby. Your meeting is about to begin. Welcome to the Lennox International Inc. Fourth Quarter Earnings Conference Call. All lines are currently in listen-only mode. As a reminder, this call is being recorded. I would now like to turn the call over to Chelsey Pulcheon from Lennox Investor Relations. Chelsey, please go ahead. Chelsey Pulcheon: Thank you, Madison. Good morning, everyone, and thank you for joining us as we share our 2025 fourth quarter and full year results. Joining me today is CEO, Alok Maskara, and CFO, Michael P. Quenzer. Each will share their prepared remarks before we move to the Q&A session. Turning to slide two, a reminder that during today's call, we will be making certain forward-looking statements which are subject to numerous risks and uncertainties as outlined on this page. We may also refer to certain non-GAAP financial measures that management considers an indicator of underlying business performance. Please refer to our SEC filings available on our Investor Relations website for additional details, including a reconciliation of GAAP to non-GAAP measures. Please note that the results being presented today reflect the FIFO accounting adopted by the company as of Q4 2025. The rationale and the financial impact of this change are summarized on slides 15 through 18 in the appendix. The earnings release, today's presentation, and the webcast archive link for today's call are available on our Investor Relations website at lennox.com. Now please turn to slide three as I turn the call over to our CEO, Alok Maskara. Alok Maskara: Thank you, Chelsey. Good morning, everyone. I am pleased with how our team executed throughout 2025, especially given the level of disruption the industry faced. It was a year marked by regulatory changes, software demand, and broad market headwinds. Yet, the team remained resilient and delivered solid results. Most notably, we achieved full-year margins above 20% for the first time in our history. This meaningful milestone reflects the structural improvements we have made in our production company and operational efficiency. I'm grateful for the continued support of our dealers, distributors, and contractors whose partnership played an important role in helping us navigate such a difficult year. Their loyalty, along with our team's commitment to excellence, continues to create value for our shareholders. Let's turn to slide three for an overview of our fourth quarter and full-year financials. Revenue was down 11% in the quarter due to weak residential and commercial end markets. The impact was further amplified by deeper channel destocking and soft residential new construction activity. Our segment margin was 17.7% in the quarter, driven by volume declines and expected absorption headwinds. Operating cash flow was $406 million. Adjusted earnings per share for the quarter was $4.45. Full-year revenue was down 3%, driven by volume headwinds from destocking and softer end markets. However, the team still delivered a record 20.4% segment margin despite tariff impact and other inflationary pressures. Operating cash flow was $758 million, down from last year due to temporarily inflated inventory levels. Overall, 2025 was a complex and challenging year, and I'm proud of the team delivering $23.16 in adjusted earnings per share. This is 2% higher versus last year's comparable $22.70. Now let's turn to slide four for an overview of end market conditions. 2025 was an eventful year for the North American HVAC industry and Lennox International Inc. We safely and timely converted our product portfolio to meet the low GWP requirement. However, the industry volume for residential products declined significantly, primarily impacted by channel destocking. The situation was further complicated with low dealer and consumer confidence and the lack of housing recovery. On the commercial side, we fully ramped our emergency replacement growth initiative in several metro regions while the light commercial HVAC industry declined for the seventeenth consecutive month by December 2025. We are cautiously optimistic that the industry backdrop is going to shift favorably in 2026 as one-step channel destocking is nearly complete and two-step channel destocking is anticipated to be complete in the second quarter of this year. In addition, unique challenges from 2025, such as the canister shortages, have been addressed, and we expect housing to improve given lower mortgage interest rates. Our internal growth initiatives, such as parts and services growth, commercial emergency replacement coverage, and ductless product penetration, are also expected to accelerate our growth this year. Now let us turn to slide five to review our investments that support our strategy of delivering differentiated performance. Our confidence in the outlook is reinforced by the strategic investments made over the past several years. Since 2022, we have deployed an incremental $300 million to broaden our capability, streamline our operation, and strengthen our competitive position. These investments are now embedded in how we run the business and are reflected in our financial statement. At the same time, the benefits they unlock are only beginning to materialize and will continue to build as we move forward. We focus first on elevating front-end excellence to create a more efficient and responsive operating model. As part of this effort, we have expanded and reorganized our sales team to ensure alignment around pricing and improve coordination across the organization. This approach gives our team clearer priorities and strengthens the connection between how we engage with customers and how we generate profitable growth. We also expanded our portfolio through joint ventures that increase our share of wallet and allow us to offer more comprehensive solutions to customers. In addition, our AI-enabled tools and updated e-commerce platform are making it easier to do business with Lennox International Inc. by improving our dealers' code, order, and receive support. Operationally, we have made meaningful progress. Our expanded distribution facilities enable a hub-and-spoke network designed to improve speed, reliability, and fill rates. We enhanced this with new IT systems for warehouse and transport management that reinforce network productivity and efficiency. On the manufacturing side, we doubled the square footage dedicated to our commercial operation, completed a major product redesign to meet regulatory requirements, and continue to advance our heat pump portfolio for long-term electrification trends. Looking ahead, we will continue to invest strategically to support future growth. In 2026, we will add new customer training and engagement centers and build our digital tech stack to enhance customer experience. We will also invest in automation across our existing labs, build new test chambers to in-source certification, and expand our engineering capability through new R&D centers. We anticipate these investments will carry attractive returns, expedite innovation, and improve customer support. In summary, Lennox International Inc. is positioned to respond with agility as demand recovers while continuing to accelerate growth and improve margins well into the future. With that, I will turn it over to Michael to review our 2025 financial results and 2026 guidance. Michael P. Quenzer: Thank you, Alok. Good morning, everyone. Please turn to slide six. As Chelsey mentioned, we updated our 2024 September year-to-date results to reflect the change from LIFO to FIFO inventory accounting. The appendix includes quarterly adjustments for both 2024 and 2025. Overall, adoption of FIFO increased our 2024 full-year EPS by approximately $0.12 and raised EPS for 2025 by approximately $0.55. Full-year 2025 EPS impact was approximately $1. We've also included a page in the appendix outlining the rationale for this change, which is driven by three key benefits. First, FIFO simplifies our accounting processes by eliminating the direct detail held in layers. Second, it aligns cost increases more closely with the timing of price realization. Third, FIFO is the predominant method used by industry peers and better reflects the physical flow of goods. Moving to our quarterly results, overall performance can be attributed to ongoing destocking, softer than expected residential end markets, along with better cost productivity in response to inflation. We continue to execute well on price, cost, and expense management. This helped EBIT declines to 16% despite a 23.3% decrease in revenue. Please turn to slide seven. In all, we noted that market reports were worse than anticipated. Organic volume was down 40% due to continued destocking into the channels. Using warranty registration, we built in all test television. In the one-step channel, all destocking in the two-step channel is expected to continue in Q2. Can utilization and manufacturing, which helps manage all incremental costs, were a $20 headwind through Q1. Disciplined actions resulting in a $19 million SG&A reduction partially offset the higher product costs. Please turn to slide eight for an overview of the Building Climate Solutions segment. BCS delivered another strong quarter with organic sales growth in down markets and continued margin expansion. Revenue grew 8% as favorable mix and pricing actions offset lower organic sales volumes. The completed acquisition contributed approximately 7% revenue growth. Light commercial industry shipments remained below normal levels, but strong execution in emergency replacement and national accounts limited organic volume declines to mid-single digits. Like HCS, product cost headwinds reflected absorption pressure and the timing of inflation expense recognition under FIFO. With that, let's move to slide nine to review the full-year performance for Lennox International Inc. Overall, 2025 was a challenging year from an end market standpoint, with channel destocking, R-454B canister shortages, slowing new system adoption, and tariff-driven inflation. Despite these headwinds, we executed well, expanded profit margins to a record 20.4%, and delivered more than $75 million in cost productivity while continuing to invest in long-term growth. Please turn to slide 10 for cash flow and capital deployment. Free cash flow for 2025 was $640 million, above our prior guidance of $550 million. The team's focus on strong collections and disciplined payments helped partially offset temporary elevated inventory levels. FIFO inventory levels increased by $300 million compared to December 2024, partially to support key growth initiatives in commercial emergency replacement, Samsung ductless products, and improved equipment fulfillment. We also have about $200 million more inventory than seasonally, which will remain slightly elevated in the first quarter but is aligned to meet second-quarter peak demand. This inventory management strategy will create some additional absorption headwinds in the first quarter but minimizes the disruption on our factory employees and suppliers. During 2025, we repurchased $482 million of shares and deployed $545 million on bolt-on acquisitions and joint venture investments. All supported by a strong balance sheet that continues to enable repurchases, disciplined M&A, and a healthy leverage profile. Alongside these actions, we also invested $120 million in capital expenditures during 2025 to advance key strategic priorities. Looking ahead to 2026, we plan to invest $250 million in capital expenditures targeting strong return opportunities across innovation and training centers, digital technology, distribution network optimization, ERP modernization, and AI tools. Please turn to slide seven as I review our 2026 guidance. We are initiating our full-year 2026 guidance, which reflects stabilizing end markets, normalized channel inventories, and contributions from recent acquisitions and joint venture investments. For revenue, we expect total company growth of 6% to 7%. Organic volumes are expected to be down low single digits, net of approximately one point of growth from initiatives across parts and accessories, commercial emergency replacement, as well as Samsung ductless and ducted heat pump products. Sales volumes in the first half, especially the first quarter, are expected to be down more than the full-year decline, followed by growth in the second half. Combined price and mix are expected to contribute mid-single-digit growth driven by our 2026 price increase and carryover benefit from 2025 regulatory mix. M&A is expected to contribute mid-single-digit revenue growth reflecting the full-year benefit of recent acquisitions and joint ventures. At the segment level, expect approximately 2% growth in HCS, reflecting down but improving end markets and a low single-digit contribution from M&A. Alok Maskara: For BCS, we expect approximately 15% growth supported by industry shipments returning to growth, strong emergency replacement and national account performance, and a high single-digit contribution from M&A. On costs, inflation is expected to be up approximately 2.5% reflecting tariff carryovers and moderating price cost pressure. We plan to invest approximately $35 million in additional operating expenses to enhance our customer experience, ERP upgrades for recent acquisitions, and continued expansion of our training and innovation centers. M&A-related amortization is expected to increase by approximately $15 million. Productivity and cost actions are expected to deliver approximately $75 million in savings driven by material and factory initiatives, distribution network efficiencies, and SG&A productivity. Interest expense is expected to be approximately $65 million reflecting the impact of our M&A activity and share repurchases. We expect the tax rate of roughly 20%. Michael P. Quenzer: Based on these assumptions, we expect adjusted EPS of $23.5 to $25. Free cash flow is expected to be between $750 million and $850 million driven by inventory normalization and higher profitability. Overall, we are cautiously optimistic for 2026 as we expect to return to revenue growth and build on our momentum to deliver our fourth consecutive year of EBIT margin expansion. With that, please turn to slide 12, and I'll hand it back to Alok. Alok Maskara: Thanks, Michael. I want to highlight the progress we have made on our self-help transformation plan, which is now entering its final phase. From 2022 through 2024, the team focused on stabilization and consistent execution. During that period, we reinforced pricing discipline, restored commercial margin, and built the organizational and operational foundation for sustainable growth. In 2025, our priority shifted to diversifying the portfolio and strengthening our market position. The Samsung Ariston joint ventures, along with Durodyne and Subco acquisition, broadened our product offering and will increase our share of wallet. The new commercial manufacturing capacity improved product availability, especially for the emergency replacement market. By addressing constraints at our existing Stuttgart factory, we also created an opportunity to grow our commercial national account business. Beginning in 2026, we will move into the expansion phase of our self-help transformation plan. This stage focuses on scaling our footprint, broadening our product portfolio, and extending our reach across residential and commercial end markets. It includes adding training centers, customer experience centers, and new distribution capabilities. From an innovation perspective, we will invest in testing and certification labs, digital and AI solutions, and a heavy pipeline of new products. We remain on track to deliver on our most recent long-term commitments, and we will share updated long-term targets at the 2026 Lennox Investor Day on March 4, where we will also provide deeper visibility into our strategic growth initiatives. Now let's turn to slide 13 for why I believe Lennox International Inc. leads the industry. Lennox International Inc. remains a highly attractive long-term investment. Our market benefits from strong replacement fundamentals, and we operate a direct-to-dealer model that differentiates our customer experience. Our margin profile is resilient, driven by disciplined pricing, operational excellence, and a portfolio aligned to the evolving needs of contractors and consumers. These trends are reinforced by a high-performing culture centered on advanced technology and execution, which positions us well as we embark on the next phase of our strategy. I'm confident in our strategic direction and remain committed to delivering sustained value for our customers, employees, and shareholders. I believe that we are building meaningful momentum and that our best days are still ahead. We will be happy to answer your questions now. Thank you. Madison? Let's go to Q&A. Operator: Thank you. If you'd like to ask a question, please press *1. Our first question comes from Ryan Merkel with William Blair. Please go ahead. Your line is now open. Ryan Merkel: Everyone, thanks for the questions. I wanted to start with HCS revenue in the fourth quarter. Down 21% was a little worse than I was thinking, and clearly, it was hard to call. So two questions. First, how did HCS trend through the quarter? My feeling is November and December were maybe a little worse than October. And then secondly, where was the surprise? Was it more the one-step or the two-step? Alok Maskara: Sure, Ryan. Great to speak with you. Thanks for your question. Yes, November and December were worse than where October was trending, so I think that's a fair assumption. I think the surprise for us was more on the residential new construction side, which I think performed worse than we expected. But I think the one-step channel and two-step channel behaved similarly, both undergoing destocking. So while the two-step impact was more, that was expected. But I think they both went through destocking in Q4. That was more than we expected. Ryan Merkel: Got it. Okay. That's helpful. And then slide four is really helpful. Thanks for that. A few tailwinds in 2026. But Alok, can you square those tailwinds with the guide for HCS, you know, up to because it implies volumes are down maybe 3% plus don't know if there's M&A in there. But just square that up for us, how you're thinking about that. Michael P. Quenzer: Sure. I'll take that. So, yeah, within the HCS guide, we have about a mid-single-digit decline in volume for the full year. Down more in the first half as we're gonna see continued destocking into the first quarter, specifically on the two-step channel, a little bit on the one-step. But we get into late Q2 into Q3 into Q4, that's when we start to see growth that will kind of normalize us and be a positive inflection in the second half of the year by year. But the first quarter, we'll try it down on the full year. Ryan Merkel: Got it. Alright. Thank you. Pass it on. Operator: Thank you. We'll move on to Amit Mehrotra with UBS. Please go ahead. Your line is now open. Amit Mehrotra: Thanks. Good morning, everybody. Hope you're all well. I wanted to ask about inventory levels and obviously, they're up a lot year over year in dollar terms. And trying to understand when you expect those to normalize and maybe you can talk about it from the perspective of both one-step and two-step. Michael P. Quenzer: Yeah. And I mentioned that in the script that we have about $200 million more than seasonally normal at this point. We have another $100 million in there for just investments to get better experience with our customers. Within that $200 million, you'll see some continue to go down a little bit in the first quarter. But we also need to make sure that we have the right level as we hit summer season in the second quarter. And right now, those inventory levels in December approximately align with what we'll need in summer season. A little bit of work to do in the first quarter of the ramp factories down to get some absorption. But overall, we think going to be in a really good spot in the second quarter without having to do a ton of disruption on our factory by ramping it down significantly and then ramping it back up. We found that this is the best approach to mitigate some of these destocking industry issues that we're fighting through. Alok Maskara: And, Amit, if I could just add to this. First of all, welcome to the Lennox International Inc. coverage universe. Great to have you on the call. Amit, your question was answered by Michael on our inventory levels. On the channel perspective, Michael also mentioned, we think one-step is completing the destocking and largely done in Q1. And two-step destocking will be done by Q2. That kind of inventory outside our four walls. Amit Mehrotra: Yeah. Makes sense. Thank you. And then just a follow-up. I know price mix has guided up to mid-single digits this year. Be curious if you just give a little bit of a sense of how much of that is kind of the carryover effect and how much of that is prospective increases. Obviously, you make regular price increases this year. Just trying to understand the bifurcation between those two. Would be helpful. Thank you. Michael P. Quenzer: Yeah. A little bit of a carryover in the first half. So, on the mix benefit of point-ish. Maybe close to two points in the first half of the carryover mix, then the rest is new price initiatives that we're gonna start to launch into this quarter and into Q2. Amit Mehrotra: Thank you very much. Operator: Thank you. We'll now move on to Joseph John O'Dea with Goldman Sachs. Please go ahead. Your line is open. Joseph John O'Dea: Hey, guys. Good morning. Can we just maybe just talk a little bit about seasonality and cadence of EPS and how to think about the first quarter just given all of the moving parts? Just any guidance that you can give us around 1Q would be helpful. Alok Maskara: Sure. You know, obviously, it's been quite cold recently, Joe. So that may impact a few things. But in general, remember on the HCS side, we're gonna be facing pretty tough comps. There was a lot of stocking up going on as some of the 454 items had just been launched, but people are still buying 410A. On the BCS side, we had a tough quarter with our own production move and some of the key account challenges. But net-net, we would expect Q1 to be down. We would expect the first half to be down and the second half to be up overall. But, yeah, we don't expect a great first quarter right now. Joseph John O'Dea: Okay. That's helpful. Thank you, Alok. And then just going back to your assumptions for Resi volume this year. I think you said that you had it down mid-single digits for the full year, down more in the first half. I guess as you're kind of thinking through, like, the swing factors as you progress through the year, like, maybe just talk through some of your key assumptions on the mid-single-digit number as you progress through '26? Alok Maskara: Sure. I mean, I think obviously, like, you know, we got more than eleven months still to go. But from where we are, we're gonna be closely watching consumer confidence, which, like, you know, remains uncertain. Interest rates and housing, both existing home sales and new home sales, something we'll be closely watching. Obviously, be closely watching our dealer confidence as well, which was shaken last year by the transition and the lack of canister shortage. Which I think is improving. So they can only outline on page four. Those are the key things we'll be watching for. You know, from our perspective, Q4 and Q3 were significantly impacted by destocking. And we remain fairly confident that that's going to be behind us in the second half. So that's probably shaping our overall view. On the largest factor on 2025 performance was destocking. And the fact that it's gonna be behind us that's gonna help us get to a better number this year. Michael P. Quenzer: And, Joe, I'll just add to that. I mean, we'll watch the seasonal demand. I mean, if it turns into a hot summer early and there's a lot of, you know, replenishment of inventory that happens, that could happen very quickly. And we're in a really good position for that. So I think that's one thing we'll start to watch the season play out as we get into March and April as well. Joseph John O'Dea: Okay. Thank you, guys. Operator: Thank you. We'll now move on to Thomas Allen Moll with Stephens. Your line is now open. Thomas Allen Moll: Good morning, and thank you for taking my questions. Alok Maskara: Good morning, Tommy. Thomas Allen Moll: Alok, on pricing last quarter, this is specifically to Resi, if I recall correctly. Last quarter, there was conversation about maybe a mid-single lift increase in your deal, something in the low single digits range. Is that still a reasonable bogey to use for this year? Alok Maskara: Yeah. I think for a new pricing, that's still a reasonable bogey. And then Michael mentioned there's a carryover effect. Right? So it can be too precise, I mean, I look at our mid-single digit as a combination of new pricing, which we have announced already across the entire business portfolio. And then carry over. Remember last year, we talked about the mix was gonna be roughly forty percent 410A, sixty percent 454B. So that forty percent 410A is gone, and it's all gonna be 454B. Think the price mix lift from last year used to be overall number of mid-single digits that we have. Put in our guide. Thomas Allen Moll: Great. Thank you. And then, King, on Resi here for volumes. And even more specific on the one-step, it sounds like destocking is nearly entirely in the rearview mirror here. So in the Outlook you've provided for resi volumes, would one-step be implied up for the full year, or are you still assuming even without destocking headwinds that there may be some additional headwinds. Thank you. Alok Maskara: I would say, listen, I mean, 70% of our business is one-step. So I think the way we would look at it, one-step is gonna be flattish to maybe slightly up. Two-step's gonna be down. I think that's as much precision as we have in our forecast at this stage. But, yeah, one-step will do better than two-step, especially given that two-step would be going through destocking or to second quarter. Now at the same time, if something changes, and Michael said, we're landing an early start and a hard start to summer. Then, you know, two-step might come back and start holding more normal level inventory. But current assumption is exactly what you said. Thomas Allen Moll: Okay. Alright. Great. Thank you. I appreciate the insight, and I'll turn it back. Alok Maskara: Thank you. Operator: We'll now move on to Jeffrey David Hammond with KeyBanc Capital Markets. Your line is now open. Jeffrey David Hammond: Hey, good morning. Can you hear me? Alok Maskara: Yeah. Yeah. Maybe just starting with BCS. The 15% growth, if you could unpack similarly like you did for the res business, price volumes, M&A in there. And then just maybe I think you were saying that you know, you thought that would maybe start to turn and, you know, what you're seeing just real-time on the commercial unitary business? Michael P. Quenzer: I'll give some guide points within that. So we expect within the 15 high single-digit growth from the acquisition, most of that M&A kind of leans toward that segment with the DuraDyne business. From a volume perspective, we expect up mid-single digits with recovering end markets share gains, then price mix combined are gonna be kind of more in the low single digits on that side of the business. Alok Maskara: Yeah. And I think from what we are seeing in the market is, it's gone through seventeen straight months of decline per the HRI data by December. So, I think just comps get better, and we are seeing good uptake in quotations and good uptake in the backlog as well. So while it's not boom years, I think it's gonna become less of a bearish as we go into 2026. Jeffrey David Hammond: Okay. And then just on the repair-replace dynamic, how are you building that into your path? As you talk to more of your contractors? You know, the view that the consumer's tight and this persists, or it was mostly a, you know, a tan or issue and, you know, it kinda goes away. Alok Maskara: Sure. I mean, first of all, we look at that dynamic more as deferred replacement. Because anything that you repair will come back for replacement typically in twelve to twenty-four months. So I think that's the way we would look at it. When we speak to our contractors, we find that the dealer confidence on the new product, the dealer confidence on upselling to a replacement, the dealer confidence because of canister shortage was a large part of the impact. Clearly, there's consumer sentiment there as well. Now the fact that the dealer sentiment has turned to more positive going into the year makes a little bit more favorably inclined to what that trend this year. But so far, like, you know, what we have assumed is it's not gonna get any worse. We haven't assumed that's gonna get better either. We think it'll remain at the 2025 level. Which, you know, had heightened repair versus previous replaced. Jeffrey David Hammond: Okay. Appreciate the color. Operator: Thank you. We'll now move on to Noah Duke Kaye with Oppenheimer. Your line is now open. Noah Duke Kaye: Good morning, and thanks for taking the questions. I think Michael, you mentioned a couple of times the absorption factor for 1Q. Can you expand on that? And would that lead decrement on volumes in 1Q to be kind of worse than the typical 30-ish percent decline? Michael P. Quenzer: I think we have some cost actions that we're trying to mitigate within that you saw. We did some really good cost and A cost productivity in the fourth quarter. Some of that's going to repeat into the first quarter. A lot of material cost reduction programs are on tariff mitigation and other things are going to soften it. But Q1 is kind of a light quarter from a volume perspective. So if you think about 10 to 15 million of absorption that can have a pretty big impact within the decremental. But we think as you get through Q1, that absorption goes away and we get back into cost productivity across factory material and our distribution network. But little headwind as we get the inventory to the right spot for Q2. Noah Duke Kaye: Okay. That's helpful. And then I believe I heard you say the CapEx number will be $250 million for the year. Michael P. Quenzer: Correct. Yes. It's normally about $150 million of just normal recurring CapEx, and then we have a $150 million of strategic innovations that we're doing and a good proven track record of ROIs and organic investments. I think we have a good pipeline of these projects that have really strong ROIs for the next several years and gonna keep investing in them and spot the customer experience. And that's where we're focused on both digital and, at our physical, distribution network. Noah Duke Kaye: Yeah. I think the second part of the question was just to ask whether we should view those, you know, growth organic investments in CapEx as something more permanent? Or should we think about kind of reversion more towards the typical maintenance CapEx range? Alok Maskara: No. I would not think of those as permanent. I think our maintenance slash regular CapEx remains in the $125 million range. $125 to $150. You know, three years earlier, we had called out Saltillo estimate, and we had said if any other big investments, we'll call it out. So now we're just calling out that we're gonna be spending like, your additional $100 million or so. And those are really good projects. Many of these projects are deferred because all our engineering and other resources were tied with each web. So but, no, I would say after that, we go back to our usual maintenance type CapEx. Noah Duke Kaye: Very helpful. Thank you. Operator: Thank you. We'll now move on to Christopher M. Snyder with Morgan Stanley. Your line is now open. Christopher M. Snyder: Thank you. I wanted to follow-up on company inventory and the associated absorption headwinds that come from that. It seemed to me that inventory was kind of flattish quarter on quarter in Q4 when normally it would step down, maybe to like the mid-single-digit level. So I guess, you know, has there not been any destocking yet? And maybe that's the first part of the question. And the second part is, you know, why did the absorption headwinds end after Q1? It seems like this $200 million excess inventory will be sold into peak summer demand. But I would think that that means underproduction up in those summer months, and I would expect that I would have thought that the absorption headwind, you know, comes through on a lag as it flows off the balance sheet into the P&L. Michael P. Quenzer: Sure. Because the sales came in much lower than expected in Q4. So now we have to ramp like, you know, even more in which we did towards the end of the quarter. The second question on absorption, Q1 will have the largest impact because this is the time you start ramping up for selling product into Q2. So now the manufacturing for sales into Q2, plan that happening in Q1. Just given the lead time from when the product is manufactured to when it's sold. Hence, we called it up. Will be some impact of absorption in Q2, but most of it will be in Q1. Christopher M. Snyder: Thank you. I appreciate that. And then maybe just following up on the cost inflation. The 2.5%, came in below what I was expecting just kind of based on some of the tariff wrap and then the metal inflation and other cost inflation we're seeing in the market. So can you maybe just kind of help us unpack that number? How much is tariff wrap? How much is new cost inflation? And I think it seems like there's maybe some offsets there in mitigation that's perhaps keeping that number a little bit lower than we would have thought. Thank you. Michael P. Quenzer: Yeah. That's a correct interpretation of the guide. So right now, what we apply is the two and a half percent to our total cost. Would be manufacturing cost, distribution cost, and SG&A cost. Not all are going up the same. We are seeing a little bit more inflation on the commodity side, but we also have a hedging program that delays some of that cost increase. And we've significantly moved away from copper and have more of an aluminum product. So that's softening at least from the metals perspective why it's not as heavy within the guide. Tariffs, there will be kind of some wraparound impact of tariffs. It's about $125 million full year 2025. We'll have a little bit of carryover in the first half of that. Assuming the tariff structure stays the same, which is what we've built within the guide. But overall, we assume that inflation, and then we're gonna drive productivity and investment actions against that inflation number. Alok Maskara: If I could just add to that, we have significant cost reduction that went into effect in 2025. We have a thousand fewer employees than we had before we went into the cost reduction spree. And we are not gonna bring all of that cost back. Some of the benefit that you see is from our perspective, the productivity aspect of it both on materials, manufacturing, and SG&A is something that we have baked in going forward. Christopher M. Snyder: Thank you. I really appreciate all that color. Operator: Thank you. We'll now move on to Julian C.H. Mitchell with Barclays. Please go ahead. Julian C.H. Mitchell: Hi. Good morning. Maybe just wanted to start with overall operating margins. I don't think that's been fleshed out too much yet, but just wondered, is it fair to say the full-year guide is embedding operating margins down slightly maybe year on year. And then you've got between the segments anything you'd flesh out, perhaps BCS up for the year, and anything you could help us around kind of first half versus second half year on year on the margin front, please? Michael P. Quenzer: Yes. So overall, the guide implies EBIT ROS expansion of about 20 basis points. I mentioned that in the script. We're looking at the fourth consecutive year in a row of margin expansion. Within BCS, it's going to be up more. Within HCS, it's going to be flat to slightly down as end markets there are down. So that the volume leverage in BCS, you'll start to really see that within their margin expansion. Within the seasonality, we'll talk a little bit about that. But when you look at 2025, the seasonality first half to second half from a revenue perspective was about fifty-fifty. As we think about next year or 2026, it'll be, you know, three or four points less than 50% in the first half. Three or 4% higher in the second half. Normal incrementals on the volume that we talked about at 35% of the decremental and incremental plus the cost inflation and productivity initiatives. So overall, a little bit more headwind in the first half. But the margin expansion will definitely start to show in the second half. Julian C.H. Mitchell: That's helpful. Thank you. And just wondered kind of any perspectives on the market in HCS. You know, maybe last year, the market was I don't know, seven three seven four million units, and the sellout just under 8 million. Just wondered your thoughts around how we're thinking about those very big moving parts for '26. And what degree of repair normalization you're expecting this year in the industry? Alok Maskara: Yeah. Julian, we get in trouble every time we try and predict the number of units in the market, and I know you guys have pretty sophisticated models just like we do. I think from our perspective, the assumption has been that the sell-in number was heavily impacted by destocking. And the end of destocking leads to automatic improvements. Our assumption is that the repair versus replace activity is stabilized going forward. We're not expecting it to turn back, but we are expecting it to stabilize at least going forward. So net-net, I mean, on a sell-in basis, you will see higher numbers than where we ended the year, as you said. Seven three, seven four. And on a sellout basis, I mean, those numbers are really not that reliable, so we focus less on that. What we have seen in our own one-step channel is that the confidence of the dealer has come back and people are now looking at 2026 as a fresh start with R-454B. That's probably the best news out there, Julian. Given all the other potential headwinds, consumer confidence and numbers that don't seem to be improving. Including yesterday's number where consumer confidence was very, very low. Julian C.H. Mitchell: That's great. Thank you. Operator: Thank you. We'll now move on to Jeffrey Todd Sprague with Vertical Research. Your line is now open. Jeffrey Todd Sprague: Hey, thank you. Good morning, everyone. Hey, look, maybe just coming back to the piece of that last point. Just on repair versus replace, stabilizing, that is sort of a thesis at this point, or do you think there's actual evidence of that? And I guess, maybe a lie to that point is within the mix any evidence that people are trying to mix lower? Obviously, you got the mix carryover on the refrigerant coming through, and I guess it's getting harder to mix lower as all the SEER levels have continued to move up. But, you know, is there any evidence of just consumer distress on, you know, what kind of units they're buying and whether it's a replacement or a repair? Alok Maskara: Yeah. So the first one, it's supported by our own research and data now. We don't have like, your data on all the dealers, but we do serve quite a few of the dealers that have a direct conversation with them. Is it statistically relevant? I mean, that goes down to a geeky road that I won't go to, but I'd say it's more than just a hypothesis. It's definitely something that we have printed out on it stabilizing. On the second part of mix, I mean, remember 70% of the sales are now to the lowest SEER at minimum SEER has gone up. Are they trade downs that are happening? Yes. Are they gonna be meaningful impact to us? Unlikely given that 70% of it's already the minimum SEER numbers. Now it comes down to single stage, variable speed, and some of those things that we are continuously looking to refine and put forward. You will see overall that, you know, from our perspective, mix will improve because 454B were versus 410A. That's a carryover effect. Coming forward. Michael P. Quenzer: Jeff, I'll just add on the repair side. We expect the input cost there to be up significantly more than systems starting this year and into the next few years. The 410A gas is going to be up. The cost of the technician complexity is going to continue to go up. So we expect that equation within the repair, breaks, replace to lean more toward a system replaced over the next year to two as well. Jeffrey Todd Sprague: Yeah. No. Understood. And then maybe just on capital deployment. Obviously, you've become a bit more active on the M&A side here. Is there an active pipeline? Should we anticipate more in 2026? What are your thoughts there? Alok Maskara: Yeah. You know, we maintain a pipeline. Like, we obviously have to digest what we bought and make sure the integration goes well. But if you're bolt-on acquisition, ask for a consistent strategy. Remains a focus. I would say over the next couple of years, you should expect more. Can be definite about anything in this year? But, you know, the style of what we bought is something we like. You know, something we would look at similar size, maybe slightly smaller acquisitions in the pipeline. And I know our focus will remain on things that we can ensure two plus two is gonna be greater than four. So, like, I think that we can apply our stores network, things that they can apply our national account team. And that's where we're very happy with the Durodyne and Subco acquisition. Because it's a net add to us and a significant room for improvement on the margin side as well. Jeffrey Todd Sprague: Mhmm. Okay. Great. Thanks. I'll leave it there. Operator: We'll now move on to Nicole DeBlase with Deutsche Bank. Your line is now open. Nicole DeBlase: Yeah. Thanks. Good morning, guys. Alok Maskara: Hi, Nicole. Nicole DeBlase: Just to circle back on the question about quarterly cadence, I think Michael, you answered that with respect to revenue. When we think about that one half to two half split, is that kind of reflected in EPS as well? Or is it maybe a bit more pronounced because of the under absorption in the first quarter? Michael P. Quenzer: Definitely into the first quarter, you'll start to see that, but there's also gonna be some more cost productivity as we get into the second quarter to mitigate some of that resource. So first quarter is gonna be tougher, but from a revenue perspective, that's the main thing that drives the margins at 35% decrementals then offset with some productivity and or absorption. That's the main driver of our... Nicole DeBlase: Okay. Okay. Understood. And then just coming back on price as well, when you guys kind of look out over the competitive landscape, we've heard some noise around maybe some price competitiveness particularly in the new construction channel recently. I guess, what are you guys seeing out there in the market? And do you think that your competitors are kind of aiming for a similar level of price increase for 2026 as you are? Thank you. Alok Maskara: Yeah. Based on everything we have seen so far, yes, we see our competitors aiming at similar price increases. So not surprised. Yeah. We have seen some of the low-end RNC business get more competitive, and we talked about that earlier. You know, we have chosen some of those not to go down that path. And instead focus on our core dealer network and get the right kind of customer experience there. But nothing is surprising nor is it any major deviation from the past. If I believe on one salesperson in one small territory, they will tell me that they're facing significant price competition. That's probably true for all our competitive scenarios. But if you look at broad-based across US full basis, industry remains very disciplined. Industry remains very focused. And we compete on technology. We compete on availability and service. And that's how we compete. Nicole DeBlase: Thanks a lot. I'll pass it on. Operator: Thank you. We'll now move next to Joseph John O'Dea with Wells Fargo. Your line is now open. Joseph John O'Dea: Hi. Good morning. Can you elaborate a little bit on the price mix trends in HCS over the past few quarters? I think we saw that step down a small amount from Q2 to Q3. Q4 was a few hundred bps below the Q2 level. On similar comps. And so just in terms of what you're seeing on the price side or the mix side that's been contributing to that. Michael P. Quenzer: Yes, Joe. It did step down a little bit in the fourth quarter third quarter. It's mostly related to just the bigger decline in condenser sales where we saw the bigger mix lift up. So we had a bigger proportion of furnace and parts and accessories and things that didn't have that same big mix lift up in the fourth quarter, the same proportion as the third quarter. That's the main driver. Besides that, mix continues to stick within each product channel. Joseph John O'Dea: Makes sense. Thank you. And then, you just talk about, like, what you're doing, with your dealers, to help kind of position them for, you know, posturing toward more selling of replace over repair, you know, understanding that last year and kind of the introduction of a new refrigerant had its challenges along with canisters. But just, you know, entry-level economics and what the message is, as well as any color on what is an entry-level cost today versus what it was five years ago? Because I think that's something that, you know, seems like face value. It's a, there's a little bit of shock value with it, but how the economics are compelling on sort of the replace versus repair side and what your messaging helping on the marketing side with dealers. Alok Maskara: Sure. I'll start by saying contractors and dealers are naturally inclined to focus on replacement versus repair. Because a, it's a higher margin to them, and, b, they are of the clear understanding that repairing is just deferring replacement. They try and communicate that to their own consumers and make sure that they make the smart choices. Remember, repairs are hard to finance. And replacements we help them with financing, we help our dealers with training, help them with the sales collateral and material, and run appropriate promotions with them, when it comes to financing and rebate. To incentivize replacement versus repair. We clearly didn't do a lot of that last year given the transition, I think they're all back to that mode now. That the dealers have good confidence in it. On your price perspective, you know, compared to sort of pre-COVID level up to now, the price from manufacture to the contractor or the channel has definitely gone up. But the price on the channel to the consumer has gone up even more. Some of it reflects the higher and grows across US labor cost as the skilled labor shortage persists. Some of it also reflects the fact that consumers were not getting as many cores. And we see now consumers are getting many more cores. And that's coming more back to normal. So I see any price pressure is gonna play out between the consumer and the channel versus the channel and the manufacturer. And then finally, as we look at this going forward, what I started by saying was true is any repair is simply deferred replacement. So a lot of things that were patched up and then repaired last year may come back again for replacement this year. If not definitely next year. So we feel very good about the long-term trend despite some short-term disconnect that we all saw last year. Michael P. Quenzer: Joe, I'll just add to that. We expect, or if you believe, that electricity costs are going to continue to increase. There's a potential monthly savings in utility bills that homeowners can get with the new system. The minimum system efficiency has increased significantly over the next last few years, and there's a lot of cost savings that a homeowner can get the new system out as well. Joseph John O'Dea: Helpful details. Thank you. Operator: Thank you. We'll now move on to Stephen Tusa with JPMorgan. Your line is now open. Stephen Tusa: Hey, guys. Good morning. Thanks for all the details as usual. Alok Maskara: Morning, Steve. Stephen Tusa: Just on these other items from slide 10 from the last quarter where you had growth in the value tier? I know Jeff touched on the repair versus replace, but the rationalization of low margin RNC accounts. Any change in those? I don't see them on the head tailwinds, you know, headwinds slide. Any change in those dynamics? Alok Maskara: Back in Q4 already. No. No change in those dynamics. And we talked about the RNC. So I think that continues. So move towards trade down, we touched on the Q&A. But, no, nothing changed. What we highlighted on slide four this time was our comparison to what we think things are gonna improve or be different in 2026. Those two factors remain the same, Steve. Stephen Tusa: Okay. And then just lastly on this accounting change. How would that have kind of impacted the shape of the year? And I guess you guys hedge as well on copper, maybe a little more aluminum. Like, what kind of would we have seen in maybe when does that, you know, kind of recouple to, you know, wherever these commodities are moving? Michael P. Quenzer: You mean the 2026 year or a 2025 year? Stephen Tusa: Yeah. '26. I mean, you gave us the differences in '25. So just did how would the shape of '26, I mean, it all normalizes in the end. Right? But, like, would the shape of '26 maybe been a bit different? Michael P. Quenzer: Yeah. I think it leans to that absorption comment and making first quarter where some of that's gonna come into the '26. You're gonna see some variations in the fourth quarter of 2026 go to 2027. Just that's the natural timing of FIFO versus LIFO. But net kind of neutral impact for the change FIFO to LIFO in 2026. Stephen Tusa: Okay. Great. Thanks a lot. Operator: Thank you. We'll now move on to Brett Logan Linzey with Mizuho. Your line is now open. Brett Logan Linzey: Hey. Good morning all. Just wanted to follow-up on the repair replace one more time here. Did you actually see positive parts growth in the fourth quarter? And then are there any regional or efficiency level observations where the trade down might be more pronounced? Alok Maskara: The answer to the second question is no. We don't see any specific regional differences that could, like, drive repair versus replace or trade downs. On the first part, yeah, I mean, parts have been growing more than equipment and pretty much most of 2025. Now you see that in the HRI data. We also see it in our own data. So, yeah, I mean, we do have actual data to support the fact that parts grow more. And we heard that from other conference calls and our distributors as well. Brett Logan Linzey: Got it. And then just a follow-up on NSI in the part strategy. Maybe an update on how NSI is now tracking organically and pulled in the And then as you continue to build out that parts pull-through strategy, do you better throughput, how do we think about incrementals in the context of better branch flow and volumes going forward? Alok Maskara: Sure. So, yeah, I think, and as acquisition overall we remain very pleased with it. We only have sort of like, two months of data from last year. But I think the sales performance is as we expected. It is just like other parts businesses. Growing. I mean, they obviously have some destocking impact too. Going forward, I think this year is obviously gonna be focused on integration, and we have expenses and all that associated with that. And Michael referred to that as part of some of our ERP conversion cost in there. But we would expect both through on an SI to be at or better than our overall margin levels. Going forward. And by 2027, I think you'll definitely be on the better side compared to our usual incremental. Michael P. Quenzer: And I'll just add to that. Yeah. We're really excited about the platform that that brings. It brings culture and experience around partnerships that we didn't have. We had about $500 million of legacy and accessories within our existing business. And joining that with that existing parts and accessory business is going to help us really get that attachment rate into the 2025% of our sales currently. It's only about 15% in the HCS segment. So really excited about the opportunities that we have around that acquisition, helping our existing parts and accessories business as well. Brett Logan Linzey: Appreciate the details. Operator: Thank you. We'll now move on to Nigel Edward Coe with Wolfe Research. Your line is now open. Nigel Edward Coe: Thanks, guys. Good morning. We cut a lot of ground, but I did want to go back to the two-step versus one-step for both the quarter and FY 2026. Obviously, we've got the HRI data through to November. Looks like 4Q was trending down I don't know, 40%, 45%. Is that what you saw in your two-step, which would imply one-step down with 20 to about percent in units. Then in '26, Alok, you mentioned one-step up low singles. Just wanna make sure you're inferring that two steps down probably mid-high single digits. Alok Maskara: Yeah. So I think let me start with the Q4 number. Right? I mean, obviously, December data is still to come. But, yeah, we saw similar behavior. On the two-step, and that gives you the right calculation to interpret what happened on the one-step. For us in Q4. And I'll let Michael answer the right question. Michael P. Quenzer: For look talking to the full-year revenues. If you break the volume down, volume down mid-single digits, slightly less down and indirect. That business will come back a little stronger. And then on the direct, we've got a little bit of headwind in there from RNC as well just being weaker on that side of the channel. Nigel Edward Coe: Okay. But you still think you'll grow low singles with the RNC headwind. Is that fair? Michael P. Quenzer: Correct. Once you take an... Nigel Edward Coe: Okay. And then just a quick one on the $75 million of productivity. In '26. That's a big swing in the bridge. I think you've got some compensation benefits in '25. I'm assuming would impact that number as well. So just unpack the $75 million in a bit more detail. And maybe just if you could just clarify my I think this is Michael. Material productivity is in the 2.5% inflation number. And so that this $75 million would not include that. Michael P. Quenzer: Right. Yeah. So we start with basically cost inflation of two and a half percent, and then from there, we draw activity against it. So we have $75 million of productivity against that overall inflation. It's really across several things. It's within the factory. We're gonna finally start to leverage a lot of the within the VCS factory that's gonna be fully up and running throughout the year. We're gonna see distribution investments we've made on the efficiencies on our network, you saw in the fourth quarter, we recognized a lot of SG&A cost actions, the low talk about the headcount reductions. That'll carry out into 2026. As well as technology and AI investments around systems that will help drive some of that cost productivity. And then finally, it's about tariffs. We've seen a lot of tariff costs within 2025 and we know path to mitigate some of that. But the new cost pool that we can drive productivity against. But we feel real focused on that productivity number and hope to exceed it. Nigel Edward Coe: Great. Okay. Thank you. Operator: And we will move to our last question from Deane Michael Dray with RBC Capital Markets. Your line is now open. Deane Michael Dray: Morning, Dean. Hey. Just a couple of quick ones for Michael. It looks like you all did a really good job at containing your decrementals. Quarter, you know, that benchmark to try to keep it in a down market to know, a decremental 25% looks really well done. I just was curious. Are you managing to that number or is this more of an outcome? Because it looks like you took out a lot of SG&A at the right time to hit that decremental. But just love to hear kind of behind the scenes how you're managing that. Michael P. Quenzer: Yeah. Definitely. We manage two main things within that. First, it's the price cost equation to make sure we're positive on that. So that helps in the decremental. And two, as we saw end markets deteriorate in 2025, both BCS and ACS took some cost actions and you to see those in there to help mitigate the decrementals that we know temporary. And we believe that we've restructured the organization in a way that the volumes come back into Q2, that we'll be able to drive strong incrementals at the 35% with the cost structure in place now. Alok Maskara: Yeah, and I think Dean, we have every year strategic planning process and during that we have ABC cost items that we would pull if markets go down. Last year was a year we had to pull all ABC and maybe some BB items as well. Given how steep the volume decline was. So it's not that we're managing to a number. We just have a strategy and a set of processes that we leverage to make sure that costs flow in line with our growth or revenue. Deane Michael Dray: That's really good to hear. And just a quick one on free cash flow, which was a real strong point in the quarter despite carrying incremental... Alok Maskara: You would say that, Deane. The whole thing was the design of telling my this morning. I hope Dean notices this. Deane Michael Dray: Okay. Well, I noticed. And just the idea, you carried more inventory. So that would've worked against you. But looks like you really came through on the receivable side. Just were there any one-timers in there? Did you pull any, those receivables forward? Just, you know, some color there would be helpful because it was a really standout quarter in free cash flow. Alok Maskara: I would give Michael full credit for it. I think he's done a really good job centralizing our APAR teams, consolidating accounting, moving things to shared services, and driving some really good processes, especially around collection and timely. So there's a lot of process improvement. And you would see there's a good trend of us managing APAR in a more disciplined fashion than we have done in the past. So I wouldn't say there's any one-time there. Deane Michael Dray: Good to hear. Thank you. Operator: Thank you. Thank you for joining us today. Since there are no further questions, this concludes Lennox International Inc.'s 2025 fourth quarter conference call. You may disconnect your lines at this time.
Operator: Please stand by. Good day, and welcome to the Stifel Financial Fourth Quarter 2025 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Joel Jeffrey, Head of Investor Relations. Please go ahead. Joel Jeffrey: Thank you, operator. Good morning, and welcome to Stifel Financial's fourth quarter and full year 2025 earnings call. On behalf of Stifel Financial Corp, I will begin the call with the following information disclaimers. This call is being recorded. During today's presentation, we will refer to our earnings release and financial supplement copies of which are available at stifel.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause the actual results to differ materially. Stifel Financial Corp. does not undertake to update the forward-looking statements in this discussion. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in our earnings release. I will now turn the call over to our Chairman and Chief Executive Officer, Ronald James Kruszewski. Ronald James Kruszewski: Joe, and good morning, everyone. 2025 was another record year for Stifel. Firm-wide revenue of $5.5 billion increased 11% and marked the first time we've surpassed $5 billion in revenue in our 135-year history. Record performance in global wealth management and our second-highest year of institutional revenue drove these results. Given the volatility we experienced throughout the year, this performance highlights the breadth, quality, and resilience of our franchise. Stepping back, 2025 was a strong year for markets, but it was not without its challenges. Economic resilience, healthy balance sheets, and improving capital markets activity supported growth even as volatility, geopolitical risk, and policy uncertainty remained very real. As the environment strengthened during the year, our focus on client service allowed us to capitalize on the improving market trends. That focus is reflected in J.D. Power ranking Stifel number one in employee adviser satisfaction for the third consecutive year and in the fact that 2025 was our strongest financial adviser recruiting year since 2018. On the institutional side, I'd also highlight the performance of our KBW subsidiary. In 2025, we participated in approximately 75% of depository M&A advisory transactions measured by deal volume, underscoring our leadership position in financials and the depth of our client relationships across the sector. Building on that momentum, this morning, we announced another depository M&A transaction representing Stellar in its sale to Prosperity Bank. This reflects the continued level of engagement we're seeing across bank boards and management teams as strategic conversations translate into executed transactions. Before getting into the details of our results, I want to step back and briefly address our business model because it's central to understanding Stifel's competitive position. We do have a $41 billion balance sheet. Approximately 80% of our revenue comes from wealth management, asset management, investment banking, and capital markets, with net interest income representing about 20% of the mix. Our balance sheet exists to serve our clients, not as a standalone business. It allows us to provide individual lending, credit, and treasury capabilities to companies in the innovation ecosystem, and capital solutions to clients. It's client-serving infrastructure that supports our core business. This structure gives us meaningful competitive advantage. Unlike independent wealth managers, we can enhance the full client experience through integrated lending and cash management. Because our model is advice-led, we generate the growth and returns on an advice-based business. That's why you'll hear us focus our commentary on the businesses that drive our growth trajectory: Global Wealth Management and Institutional. The balance sheet enables those businesses, but it is not itself a separate business line. We use our balance sheet to support our clients when it's right to do so while remaining well-capitalized. Our bottom-line results reflect increased scale and operating leverage. Excluding the first quarter legal accrual, we delivered EPS of $7.92, a pretax margin of 21%, and for 2025, a return on tangible common equity of roughly 25%. Strong earnings again generated meaningful excess capital, which allowed us to continue investing in the business, grow our adviser-led client-serving platform, acquire Brian Garnier, and the employee wealth business from B. Riley, and repurchase shares. To put our 2025 performance in proper context, more than two years ago, on our third quarter 2023 earnings call, we discussed our ability to generate at the time, we looked forward, it was our ability to generate $5.2 billion in revenue and $8 a share in a normalized environment. And, look, at the time, those targets were viewed as aspirational. Particularly given that we were on our way to delivering 2023 revenue of $4.3 billion and earnings per share of $4.68. In 2025, we exceeded that revenue target and essentially reached $8 per share in earnings despite market headwinds in the first quarter. That outcome reflects and reinforces both the durability of our model and the operating leverage inherent in the business. Stepping back and taking a longer view of our growth, the trajectory of the firm has been consistent and disciplined. Over the last decade, Stifel's revenues are up 137%, driven by meaningful expansion across both of our operating segments. In Global Wealth Management, revenue has grown 157% over the last ten years, reaching $3.5 billion. That growth has been driven by sustained adviser recruiting, higher adviser productivity, growth in fee-based assets, and the continued build-out of our client-serving platform, which has improved both the growth and consistency of our results. In our institutional business, revenues nearly doubled over that same ten-year period, reaching $1.9 billion. That growth reflects diversification across advisory, capital markets, and public finance, deeper industry coverage, and continued investment in talent. That long-term execution is also reflected in shareholder returns. Since 1997, the S&P 500 is up roughly nine times. Microsoft, one of the most successful growth companies of our generation, is up approximately 45 times. Stifel, over that same period, is up around 76 times. Even over a more recent horizon, the story is consistent. Over the last five years, Stifel stock is up roughly two and a half times, while Microsoft has roughly doubled and the S&P 500 has not quite doubled. Reflecting that performance and the confidence the Board has in the durability of our earnings and cash flows, the Board of Directors authorized an 11% increase in the common stock dividend beginning in 2026. In addition, the Board authorized a three-for-two stock split effective February 26, 2026, for record as of February 12, 2026. This marks the fifth stock split during my tenure. Taken together, these results reinforce what we believed for a long time: that disciplined growth, consistent investment in our people, and a long-term mindset can create significant value for shareholders across market cycles. With that context on our business model and long-term performance, I'll now turn the call over to our CFO, James Marischen, to walk through our quarterly results and outlook in more detail. James Marischen: Thanks, Ron, and good morning, everyone. The fourth quarter capped another strong year for the firm. Revenue was a record $1.56 billion, surpassing last quarter's record by 9%, with both operating segments delivering solid results. Global Wealth Management once again led the quarter, delivering another record result, while institutional revenue increased 28% year over year, marking its second strongest quarter on record. The performance across both segments drove record EPS of $2.63, a pretax margin of more than 22%, and a return on tangible equity of more than 31%. During the quarter, we also announced the sale of Stifel Independent Advisors. Combined with the actions taken earlier in the year, this positions the firm for improved operating leverage going forward. Turning to slide four, I'll walk through our results relative to consensus estimates in the prior year. Total net revenue exceeded consensus by $50 million and increased 14% year over year. Investment banking revenue was the primary upside driver, exceeding expectations by $70 million or 18%. Higher advisory revenue was the main contributor, and we also exceeded expectations for both equity and fixed income capital raising activity. Transactional revenue came in 4% below expectations, primarily due to lower fixed income revenue, which more than offset modestly higher wealth management revenue. Within fixed income, results were slightly below our prior quarter guidance. Asset Management revenue was in line with expectations. Net interest income was at the high end of our guidance but was $2 million below consensus. This was a result of the decline in fee income recognized during the fourth quarter. Expenses were well controlled, with the compensation ratio and total non-compensation expenses generally in line with expectations, allowing for operating leverage on a higher revenue base. The effective tax rate for the quarter was 14.1%, slightly above both guidance and consensus. During the quarter, we recognized the benefit related to stock-based compensation, which was offset by an unfavorable return to provision adjustment on foreign taxes. Turning to slide five, I'll start with Global Wealth Management, which remains the foundation of the firm's earnings, capital generation, and long-term growth. 2025 marked our twenty-third consecutive year of record wealth revenue, with total revenues exceeding $3.5 billion, driven by record asset management and transactional revenue, along with our second-highest year of net interest income. Fourth quarter results were equally strong, with record quarterly revenue of $933 million, again driven by strength in both transactional and asset management activity. We ended the quarter with record total client assets of $552 billion and record fee-based assets of $225 billion, reflecting continued market appreciation and net new asset growth in the low to mid-single digits. Recruiting was a significant contributor to growth in 2025. We added 181 financial advisers, including 92 experienced advisers with trailing twelve-month production of $86 million. This represents more than double the number of experienced advisers added in 2024 and a meaningful increase in trailing production. Our recruiting pipeline entering 2026 remains strong, and we expect another solid year. Our client-driven balance sheet activity continues to enhance both earnings consistency and client engagement. As shown on the slide, economics associated with client-driven balance sheet usage has been relatively unaffected by rate cuts over the past year. Given the floating rate nature of our assets and liabilities, we remain relatively rate agnostic, with growth in net interest income driven primarily by client activity and balance sheet expansion, rather than changes in interest rates. For 2026, we expect net interest income to be in the range of $275 to $285 million. Client cash and funding increased meaningfully during the quarter. Sweep balances increased by $510 million, while non-wealth client funding increased by nearly $1.5 billion. This was the strongest quarter of growth we've seen in our venture activity and reflects continued momentum from investments made in that group. In addition, we saw more than $1.4 billion in third-party money fund balances. As a result, we enter 2026 with significant capacity to support wealth-related and institutional client-driven balance sheet growth while maintaining a conservative credit risk profile. Turning to slide six, I'll discuss our institutional group, which provides meaningful upside as market conditions improve. For the full year, institutional revenue exceeded $1.9 billion, up 20% year over year, marking the second strongest year for the segment. Fourth quarter revenue was $610 million, up 28% year over year, driven primarily by investment banking. Investment banking revenue totaled $456 million, up 50% year over year. Advisory revenue increased 46% to $277 million, continued strength in financials, and improving traction in technology and industrials. Equity capital raising revenue was $95 million, double the prior year, led by health care, financials, and industrials. Fixed income underwriting reached a record $76 million, up 23% year over year, driven by increased public finance activity and higher corporate issuance. We remain the number one negotiated issue manager in public finance by deal count. We're also seeing increased success in larger par value transactions at record levels. Investment banking and advisory pipelines into the quarter provide strong visibility into the first quarter and beyond. Transactional revenue declined 10% year over year due to an 18% decline in fixed income revenue, which more than offset a 6% increase in equity revenue. The fixed income results were impacted by the government shutdown and timing of gains in prior periods. Turning to slide seven, expenses remained well controlled during the quarter. Non-compensation expenses totaled $307 million, up 6% year over year, primarily reflecting increased investment banking gross-up associated with higher advisory and underwriting activity. As a result, our quarterly adjusted non-compensation operating improved by 200 basis points. For the full year, excluding the first quarter legal accrual, our non-compensation operating ratio improved by 140 basis points, reflecting the benefits of increased scale, improved operating leverage, and a more favorable revenue mix. Compensation expense remained well aligned with revenues, coming in at 58% for the quarter and the full year. Despite quarter-to-quarter variability, improvement in our overall expense profile continues to be driven by the combination of scale, growth in net interest income within wealth management, and actions taken to simplify business support. Our capital position remains strong and provides meaningful strategic flexibility. The tier one leverage ratio increased to 11.4% and the Tier one risk-based capital ratio rose to 18.3%. Based on a 10% Tier one leverage target, we ended the quarter with more than $560 million of excess capital. We repurchased 335,000 shares during the quarter and have 7.6 million shares remaining under the current authorization. Assuming no additional repurchases and a stable stock price, our fully diluted share count for the first quarter is expected to be approximately 109.7 million shares. On a pro forma basis, reflecting the recently approved three-for-two stock split, that equates to approximately 165 million shares. And with that, Ron, back to you. Ronald James Kruszewski: Thanks, Jim. As we look ahead to 2026, the setup is constructive. Client engagement remains high. Strategic activity is picking up. And capital is beginning to move more decisively. At the same time, we remain mindful that risks are ever-present and that market conditions can change quickly. Our focus remains on disciplined execution, serving clients, and building durable performance through the cycles. Our adviser-led integrated model continues to differentiate Stifel. We're attracting high-quality advisers, deepening client relationships, and seeing clear evidence that a platform combining wealth management advice, institutional capabilities, and balance sheet support creates value that clients recognize and that advisers appreciate. Before turning to guidance, I want to briefly highlight how our businesses are positioned as we enter the year. Our wealth business enters 2026 with strong momentum. Recruiting engagement and pipeline remain robust. Experienced advisers are attracted to Stifel's platform, tech, and integrated model. Fee-based asset flows remain elevated, with fee-based assets up 17% in 2024. And revenue, as always seems to be true, follows assets. Our venture initiative continues to gain traction, supporting lending activity, deposit flows from venture-backed firms and their stakeholders, and fund lending relationships. Elevated client asset levels continue to represent opportunities, supporting lending initiatives and providing flexibility for future investment alternative allocations and opportunistic deployment by our clients. We're also seeing increased momentum across our institutional business with a record pipeline. A few areas are worth noting. We continue to see strong momentum in advisory, supported by active pipelines and increasing client engagement. Equity capital markets activity is off to a strong start to the year, with issuance active across sectors and products. We continue to see a pull forward in the new issue calendar where possible. Pitch and mandate levels are increasing. While there have been some volatile sessions, markets are functioning well with strong investor engagement. Financial institutions activity is robust across banks, insurance, and financial technology, as evidenced by the Old National Bancorp offering, which we priced on Monday, which was upsized based on demand at attractive spread levels. And, of course, I've already mentioned a recently announced M&A transaction. Health care has experienced one of the strongest January new issues in several years, with a growing backlog of biotech IPOs that are helping drive broader market momentum. Technology and industrial technology remain active, driven by AI and infrastructure investment, with large transactions in energy, infrastructure services, and defense being well received by the market. Our public finance backlog remains strong. And a normalization of the yield curve is a positive development for our fixed income rates and credit businesses compared to the headwinds created by the sustained inversion of the yield curve following the Fed's rate hikes beginning in 2022. Taken together, these trends across wealth and institutional position us well to continue executing our strategy, gaining share, delivering operating leverage, and compounding earnings is disciplined through the cycle. So this brings us to our guidance for 2026. Total net revenue is expected to be in a range of $6 billion to $6.35 billion. I would note that this reflects the impact of the SIA sale and the closing of our European equities business, which together represented $100 million of annual revenue. So our guidance does not include that $100 million of revenue which we had last year. We think that these changes will be offset by improved expenses and improved margins. Net interest income is forecasted to be between $1.1 billion and $1.2 billion, supported by approximately $4 billion of balance sheet growth. We have lowered our expense ratios to reflect increased operating leverage. The compensation ratio is now in a range of 56.5% to 57.5%. And non-compensation operating ratio is 18% to 20%. So what does this mean for Stifel going forward? Simply put, our long-term track record of disciplined execution gives me confidence that we can once again double this business over time. Yes, I still believe we'll reach $10 billion in revenue and $1 trillion in client assets. And, no, I'm not gonna give you a time frame. With that, operator, please open the line for questions. Operator: Thank you. Star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. Again, press 1 to ask a question. We'll pause for a moment to assemble the queue. We will take our first question from Mike Brown with UBS. Mike Brown: Great. Good morning. Good morning. Thanks for taking my question. So, Ron, maybe just to start on recruitment here. So what factors do you think will kind of shape recruitment in 2026? And then you maybe just give an update on how you're approaching recruitment of the high net worth adviser space, you know, specifically. And, maybe just one last follow-up there. How are you thinking about productivity expansion from the experienced advisers that you bring on to the platform? Maybe you could touch on the B. Riley advisers that you brought over. Did you have you noticed a pickup in the productivity from that advisor cohort specifically? Ronald James Kruszewski: Thank you. Yeah. Well, your last question first. I for sure, have noticed productivity increase in B. Riley. I know some of that's market, but a lot of it is just platform technology products. You know, we have a well-developed platform. We have an integrated lending and credit model. All of which helps us deal with clients across a broad spectrum of their financial needs. And that equates to higher productivity. As it relates to recruiting, look. Past is prologue. I get this question all the time. I feel like I'm out of for twenty-eight years, and we continue to recruit. What I would say has changed over the years is the level of teams that come in. I think I've said in previous calls that, you know, a few years ago, we would say, oh, you know, we hired 10 people doing $7 million. And now we're saying, well, we hired one team doing $7 million. And it's really how our focus is. We're recruiting people who do a mix of business. They do advisory, for sure, but they also will do brokerage. They'll also participate in lending activities and in deposits. So it's a broad mix of clients that we like to look at. But to answer your question, recruiting is strong. If anything, I'm thinking about even increasing our allocation to recruiting because I think our platform and where we are allows us to really gain even more market share if we choose. So that's on my mind. Mike Brown: Okay. Great. And just as a follow-up, just change gears a little bit and shift over to the institutional side. So very strong investment banking results this quarter. Clearly, a lot of strength coming through on the financial side and particularly in advisory. As we now move into 2026, are you starting to see the activity really broaden across the platform? And where is maybe the deal momentum accelerating the most in your observation? Ronald James Kruszewski: Well, I think that as you we went into 2025 in the sector, at least on advisory, that picked up first. And that we, you know, we just had a tremendous year was in financial institutions. Primarily depositories, although we've done a lot in fintech. But where we see we see that continuing for one. But we see an increase now in activity in health care. Health care at one point was one of our largest sectors, and we're seeing equity capital markets transactions and other transactions in health care. You know? And if I can sort of say the same story again and again when I talk about industrials, tech, and consumer. I would say that as we looked last year, those businesses started to pick up in the fourth quarter. And now if we, you know, with keep geopolitical risks at bay and let the market function normally. I see a lot of business to be done, not just in big, but in industrials, tech, health care, and consumer. James Marischen: I'd also add to that. Sponsor activity is really not all the way back but is noticeably improving. You know, we still there's still a runway for significant growth related to sponsor activity if markets hold up through the remainder of 2026. So that's definitely an area of growth as well. And, you know, and a lot of people like to use the term the, you know, private equity unlock. You know? And we've been talking about that for years. So, you know, when will private equity begin to unlock some of these companies? And we're seeing signs of that. Certainly, robust market valuations are helping that. But when you think bring all of this together, it's a very conducive environment as we sit here today. Mike Brown: Great. Thank you, Ron and Jim, and good luck to the US ski team. Ronald James Kruszewski: Hey. You got it. Alright. I like that. I'm gonna bring some metal salt. Stifel US ski team. Stifel US ski team, by the way. Let's get the name right. Operator: We will take our next question from Steven Chubak with Wolfe Research. Steven Chubak: Hey, Steven. Good morning. Hey, guys. Good morning. Thanks for taking my questions. So maybe to start just on the ECM outlook. And Ron, everyone recognizes the strength of the advisory franchise, particularly in fin services. If I look at advisory fee share, it kept pace with the bulge bracket peers. DCM fee share was also consistent with the bulges. I'd say the more surprising stat was the magnitude of ETM share gains. Full year revenue growth, I think, outpaced that group by about 40 percentage points. And just want to better understand what's driving some of that share strength in ECM relative to your large peers and your confidence level that ECM fees should continue to build this year given the pipeline commentary and you were alluding to a strong start to '26 as well. Ronald James Kruszewski: Well, Tim, go back to '21 and look at our ECM fees while I answer this question. Give them some look up even while we would do this. But yeah, I think that it's nice for you to point out that we've done that. I view it as the firm. We were talking before we got on the call about some recent deals that we've done in both fixed income and equities where we have been lead left with some rather large firms to our right. The left, which five years ago didn't happen. And as co-managers, and Stifel has been on it just didn't happen. And so on those deals alone, obviously, we're getting market share because we're getting more economics on those deals. And what I see happening is not, you know, some, you know, seismic shift in all this. It's just that we are moving up in our participation levels, and we're doing more deals that go to the just the level of capability that we brought to the firm. You know? And ten years ago, our institutional business was half of what it is today. And we didn't have as many MDs. We didn't have the capabilities. We didn't have the debt. We didn't have the ability to leave left, you know, a $500 million subordinated deal with the large firms to our right. All of those things speak to the fact that we are really achieving our goal, which is to be a premier wealth management and middle market, if you will, investment banking firm. And you're seeing it. So thanks for pointing it out. James Marischen: ECM revenues back in 2021 for the full fiscal year were $230 million. So we were above that and what we produced in 2025. Ronald James Kruszewski: Pretty extraordinary. James Marischen: Easy? We've exceeded 2021, but we don't think in 2021, I think we're running at 105% of capacity. And today, I think we're running at 50% of capacity. And that's an important, you know, don't quote me on those numbers. That's off the top. I have big people always want to know what capacity actually means. But I feel that we have a lot more ability to do things because instead of being a 5% co-manager, we're a book. Same deal. Just higher economics. And that's what you're seeing. Steven Chubak: Alright. Well, rest assured, we won't reflect those numbers you just quoted in the model. Around capacity. But I did want to ask you on the comp guidance. And if I look over the last two years, the revenue guide's come in better than the midpoint of the outlook that you guys have provided. The comp ratio, however, has come at the higher end. And the guidance for 26 contemplates pretty meaningful comp leverage a 50% incremental margin, and just want to better understand how much of the comp improvement in '26 is attributable to the restructuring and business exits versus the, let's call it, improved business as usual comp discipline. And what gives you confidence that this time will be different? And the comp leverage will come through just given continued elevated competition for talent? Ronald James Kruszewski: Well, first of all, I mean, we've been in our range, and albeit we've been at the top end of our range. And I think if you step back a little bit, you know, we don't operate a vacuum when it comes to talent. Right? It's very easy to say, oh, our model's x and what we're gonna do. And if you run just pure numbers, you will see comp leverage as productivity goes up. Is that just sort of to be expected. And as you bring new recruits, you might be paying recruiting, you're gonna bring those people online. And what I would say, Steven, if you go to most of the street, what you've seen is an uptick in the comp ratio. Over time. You look at your own universe, and we've remained very consistent. And what that is is it's us trying to manage our growth while not giving up our margins. We've had if steady state people stayed here and we weren't recruiting, we'd be driving our comp ratio lower. Now that's because of a lot of the investments we've made since 2020 across the board. We've recruited a lot of people. You know, growth in recruiting puts upward pressure on the comp ratio. We've managed it very well. All that said, I'll let Jim talk about it. We're doing a couple things with the sale of SIA and the European restructuring, which alone left in a vacuum drive comp ratio lower. James Marischen: So again, yeah, I'll focus on the sale of SIA and the European reorg here. And Ron talked about in his prepared remarks as well as we noted in slides, you're talking about $100 million of revenue here. In terms of compensation expense, you know, both of those groups were well north of our consolidated 58% comp to revenue total. Yeah. I would say most people understand generally where the comp ratio hovers around for an independent FA model. That ratio was probably a little bit lower for European equities, particularly since we have retained some US distribution capabilities there. Kind of in the after reorg. But when you think through those that can give you a ballpark idea of where those comp savings are. Now I'll just touch on the non-comp related to those two entities as well. You know, the independent channel is obviously gonna be more heavily weighted towards comp. So there's not a whole lot of non-comp savings there. You back off related to the SIA sale. But when you look at that in combination with the European reorg, that could take a good 20 plus million dollars out of non when you look at 26 compared to 2025. And then I just kinda highlight that, you know, when you look at our expense guide, as Ron kind of reiterated, both of those things then do contemplate additional investment across our existing businesses but it can give you somewhat of a decent understanding of how we came up with those new ranges absent the normal course of just higher net interest income or the normal operating environment, but specific to these two transactions. Ronald James Kruszewski: I think it's a great question. Very helpful, man. I'm comfortable with our comp ratio. We also take opportunities just like every firm does. We take opportunities to recruit and build our capabilities. And that goes the other way on the comp ratio. So we tend to be conservative. But you got to admit, we at least deliver within our range. Steven Chubak: Fair enough. And usually towards the higher end of the guidance. I appreciate that. And thanks for taking my questions. James Marischen: Thanks. Operator: We will take our next question from Devin Ryan with Citizens Bank. Devin Ryan: Great. Good morning, Ron. Good morning, Jim. Good morning. Stay on financial adviser recruiting. Obviously, coming off of a good year. Ron, it should be good to get your perspective around kind of the future of adviser mix in the industry between kind of employee independent RIA? Obviously, a lot of discussion over the last, you know, decade plus around tailwinds towards independent. But recently, we've seen pretty healthy and maybe accelerating or reaccelerating net new assets within some of the leading employee firms. So just love to kind of hear what you think about maybe whether we're getting to an equilibrium of how many people wanna be independent. Obviously, you have your trip on the employee channel, but at the same time, I also appreciate that you're taking advisors from the wirehouses as well, so maybe you grow independent of what the wirehouses are doing. So just wanted to get a thought on kind of broader kind of remixing potential of advisers. Ronald James Kruszewski: Yeah. It's a tough question. I'm you know, in terms of remixing. What I would say is that the initial competitive landscape of private equity. Remember, a lot of this gasoline to get this done was provided by private equity dollars. And I would say that, you know, they started with a bang on, you know, being able to pay less in transition and sell the way you can be independent and all of that. And you got a lot of initial flows. And then it got quite competitive. And so now I think that, you know, that plus rates coming down are double kind of whammy. A lot of the economics in the independent channels on the rate is, you know, on the cash side. And as that comes down, that's pressure on that. So what I see is the overall in the competition, I see the ability to, you know, to recruit at significantly higher levels. These PE firms are, you know, they want 20% IRRs. The math just doesn't work as many people think. And then the concept of trading paper. You know, we'll pay cash and many private firms say, well, wait. We just value debt this. We'll give you paper. That's slowed down. That's all I can say. Now the independent channel is absolutely it's like the do-it-yourself channel and investors. Some people are just gonna use discounters, some are gonna use advice. Some people, advisers really like the employee model. They don't have to worry about a number of things. Their profit margins are 60%. So I see, to answer your question, I see a general slowing of what, you know, get 100 people in I'm making up 70 were going independent, and 30 were going employee. I would see those numbers going seventy's lower. And more will come to employee for all the dynamics I just said. Now that's my view of the world. You know, some other people may have a different view. Devin Ryan: Yep. I appreciate that, Ron. Just good to get your perspective there. So thank you. A follow-up probably more for Jim here just on kind of the net interest income guide. Some of the underlying assumptions we'd just like to unpack a bit. So the $4 billion of loan growth, can you just talk about kind of where you see that coming from? What are some of the buckets that you expect to see kind of the net growth? And then just talk about some of the differentials in yields that you're seeing across different loan categories today. And then as you think about kind of that $4 billion could there be upside obviously $600 million or so of excess capital today that's going to grow or you're going to create a lot of excess capital over the next year? So just how we should think about potential upside cases to the four? And then the liability side as well, if you could just touch on that kind of in terms of what you're expecting. You've seen kind of a couple of quarters of nice growth in sweep cash. So I'd love to get some sense there as well. James Marischen: I think that was about four questions, but I'll start taking them one at a time here. The first of which is the $4 billion in growth. I'd say, you know, you look back at what we've done historically, think fund banking will be a large portion of what you see in our balance sheet growth here. You know, that's probably 130 to 160 basis points in yield higher than what you see on the average loan portfolio. We'll continue to add mortgage. We'll, you know, we'll do what we can at securities-based lending. We'll do selective commercial lending, and, obviously, we're supporting our venture group as well. But those yields, you know, I think you can look at the yield table and kind of see where those are coming out. But if you take a step back and think about the guidance general, you know, we're talking about $275 to $285 million of NII. In the first quarter and then a billion one to billion two for the full year. I think when, you know, we make comments about being relatively rate neutral, the key assumption here then is that $4 billion balance sheet growth, which I touched on kind of what the mix could look like there. But we're, you know, we're generally assuming linear growth. So you can basically plug, call it, $2 billion of average interest-earning assets into your model. And I would also say when you touch on the liability side, we're assuming that all that growth will be funded with treasury deposits. Rather than, you know, sweep or smart rate. So, you know, we're talking about a cost of funds slightly better than where we see smart rate today. We're not really modeling in any changes in interest rates even though, you know, I just said we're agnostic to interest rates. And so you bake that all together, we're somewhere around a 320 basis point, net interest margin for the year. And so, again, the key is gonna be the mix of those assets and being able to deliver on that growth. And so we provide a range. It's a large range, but can kind of annualize the first quarter and think about that $2 billion of average interest-earning asset growth. And the fact that we're really not baking any other kind of fee income related to our assumptions here. That, you know, we feel like we're being, you know, fairly conservative in the guide there. Devin Ryan: Let's see. James Marischen: Other questions were liquidity and capital. Is that right? Devin Ryan: I didn't go there, but if so you could you could always expand. But, no, I think we're good. James Marischen: Alright. We have plenty. Devin Ryan: Yeah. Good. I did see that you have excess capital here, beyond the, you know, it's kind of fun the $4 billion, I guess, is the point. So just like the upside case to potentially growing loans even more. James Marischen: Right. Operator: We will take our next question from Brennan Hawken with BMO Capital Markets. Brennan Hawken: Hey, good morning. Thanks for taking my question. You just touched on this a little bit in the questions from Devin. But the C&I loan growth that we saw here this quarter seemed to come on in the back end of the quarter. And it also seemed to come on the asset beta was a little bit greater than we would have expected. Of course, there's some front-end sensitivity, but it seems like the spreads are coming on a little tighter. Could you speak to how much of that was new loans versus like a remix in the portfolio? And how should we be thinking about spreads in that book? Here as we go forward? James Marischen: So the asset beta, you gotta remember the commentary we gave on fee income. We really didn't have any of those fees showing up. Which, you know, obviously can distort some of your yield calculations. The yield calculation annualizes that, you know, one-off type fee over the entire year. And, again, it distorts the yield a little bit. We just we went from, you know, last quarter, we had a handful of million dollars of fees to, you know, not a whole lot of those, you know, less than, you know, maybe $100,000 or so in the quarter. So it was a pretty big change there. We had a reclass of loans, out of held for sale back into the retained portfolio. That was probably a couple $100 million, but not overly material, but that was driving some of that growth as well. But, again, I would just kind of focus on our commentary related to fee income is the biggest driver as a delta between your expectations and the beta on the asset yields? Brennan Hawken: Got it. Okay. Thanks for that. And then there's, you know, what justified or no, there seems to be a decent amount of concern around private credit markets. I'm curious what you're seeing within your COO book. You know, how are you thinking about that? I know you guys buy it high quality. You got a lot of subordination. But, you know, can you speak to any trends that you're seeing there? Thanks. Ronald James Kruszewski: Look, the minuscule? I mean, none. I just really none. Some of our CLO book had very, very little exposure to some of the names. But as we look at it, and I've always been very comfortable with both the subordination and what goes on in that book. And a lot of our sponsored finance loan book. You know, we sold. So just to answer your question directly, really no, we don't see any issues there. James Marischen: I think one thing I would add to that is, you know, we've actually seen a fair amount of refinance and redemption activity across the CLO book. You know, the structure is the credit subordination and diversion of cash flows and whatnot. If there are any credit issues here, we end up getting paid off. And so the structure works as intended. We're not seeing any material change. Any of our key metrics and really no concerns. Brennan Hawken: Thanks for taking my questions. Operator: We will take our next question from Bill Katz with TD Cowen. Bill Katz: Great. Thank you very much for the expanded commentary and taking the questions this morning. Maybe big picture down. You mentioned sort of the loan growth thing that's pretty straightforward. Ron, how are you thinking about maybe strategic use of capital, fair amount of M&A going on around you, just obviously from the banking side. Also, some of your peers have been sort of been pretty active. Maybe just update us on your thinking of where you might be interested versus maybe returning that capital to investors? Thank you. Ronald James Kruszewski: Well, you know, we increased the dividend. Right? So the dividend's up eleven. As I've said in every call, you know, the breakeven analysis, if you will, between stock buybacks and deploying capital, whether on the balance sheet or acquisition, moves around, and we're always looking at that. Broadly speaking, you know, we've said that we see balance sheet growth of about $4 billion. And so round numbers, that's $400 million of capital plus the dividend. It still leaves us a lot of capital. To do some things with. And I would say that while we see almost everything, a lot of everything seems pretty richly valued. Not just at the point in time, but frankly, forward projections. On things that, you know, may have me usually take pause. And I'm pretty conservative, and if you know our history, we generally do not participate in, you know, really good markets. Okay? That's just not our style, and we'll be there. And if the right deal comes along and it makes you money as a shareholder, and builds our client relevance and is accretive to our new people and to the existing people in the firm. That has been a formula that has worked for us for twenty-eight years. And done a lot of deals. The fact to just go out and do a deal to become larger and maybe dilute that return on tangible equity, return on equity, it's just not in our mindset. So plenty of opportunity. I tend to not answer the phone as much when the markets are at these levels. Bill Katz: Alright. That's helpful. Just as a follow-up, maybe two-part to keep up with my peers here. First one is just in terms of the margin, how much of the margin if you separate maybe sort of the repositioning of SIA and the European footprint, as you look forward, how much of the incremental margin comes from the investment banking opportunity versus the wealth management looking particularly at the wealth management business, and that seemed to be a little sticky on the margins again. I don't know how much of the merger charge was in there. Or the prospective impact. And then unrelatedly, the second question is, you give us a sense of any activity levels into the new quarter just in terms of client cash dynamics? Thank you. Ronald James Kruszewski: I'm not quite sure I understood the I generally say that I think for the year, for instance, institutional margins combined came in around 17%. And, you know, when we look at what we're doing, there was a drag in our European operations. You know, I'd like to think that those margins are in the low twenties. Right. So that's maybe five points more. On, you know, $2 billion of revenues, round number last year. So that'll give you some sense of what we see as we're, you know, making sure that we're optimizing that business. Okay? And I think that business can I think those can even be higher? But we've had a lot of new hires, a lot of invest. So we're 17. We've talked when we gave our $8 number, I think that we said that if we got to 18%, that would be one of the triggers of helping us recover to where, you know, our interim target was. As it so, you know, that'll give you a sense. Wealth is a very profitable business, you know, margins of 35, 36, 37% is just a very good business that's been consistent over time. So I'm not sure I see anything diminishing that. Jim, on cash, James Marischen: Yep. So in terms of liquidity, we saw a total sweep in smart rate balance increase at as of year-end, it was about $26.6 billion. I look back over the last week, and that number has been relatively steady to say down $200 million. Most of that fluctuation we've seen has been in sweep. It is somewhat hard to say exactly where those balances will move on a day-to-day basis, and a lot of that's just gonna depend on client activity. Generally speaking, I will say we expect to see some outflow of cash through tax season and then a build in the latter half of the year as we've historically seen. But I would also highlight, you know, within venture and other treasury deposits, we had a record quarter of growth in April. It's $1.5 billion. Not sure if that's exactly the right run rate to model going forward. I'd say at this point, it'd probably be reasonable to expect around, call it, $750 million to a billion dollars of incremental deposits on a quarterly basis. And, lastly, I'll just highlight, you know, we just had recently made some new hires within kind of the health care, life sciences group, as well as in energy tech. Those folks are just getting started, and, you know, they're gonna continue to add your capabilities here. Bill Katz: Thank you. Operator: We will take our next question from Michael Cho with JPMorgan. Michael Cho: Hi, good morning. Thanks for taking my question. I just wanted to touch on bank M&A. You highlighted it a few times on the call, and clearly, an uptick in kind of nice momentum looking into '26. I mean, if we think about the bank M&A runway and maybe beyond '26, I was wondering if you could maybe remind us how we might frame the multiyear tailwind and maybe in terms of sizing and maybe pace of that opportunity for Stifel ahead? Ronald James Kruszewski: Yeah. I think look, I don't think there's really any question at the broad not I don't want to talk about any specific banks or anything like that. That's not appropriate. But generally speaking, there you know, there's a lot of banks that are going to need to combine for scale, profitability, you know, the technology investments, the challenges on deposits, and loan origination. And you have there's just a lot of institutions that are probably thinking, you know, how are we gonna compete? And they're gonna wanna do it through scale. And you got valuations that are allowing conversation to occur. And on the converse side, the buyers are thinking the same thing. You know? They're thinking they need to acquire or be acquired on many fronts. So I think that the banking is in a period of consolidation. And maybe driven as much by the fact that it was very hard to do any consolidation from the period 2020 to 2024 in the previous administration. They did, you know, you can remember all those transactions. It would take years to get approved. And that put a damper on boards talking. So I look. I think there's a lot to do. What I like from my perspective is that we've been, you know, we merged with KBW back in 2013. And, you know, virtually all of the MDs that were calling and have relationships with clients are still with us. We have that core group of bankers that have deep, deep relationships not only with management but in the boardrooms. And we're in a good position as a trusted adviser on getting these deals done. So I'm not gonna predict how many banks what the volume's going to be because I really don't know. I would say the trends are that you'll see more than average. And most importantly, we're just in a really good spot, with the consistency the fact we have a separate sales force that we trade, everything that we've done has put us in a good position. You saw it last year, and we're starting this year off. With a nice transaction. So I'm confident about this. Michael Cho: Great. I appreciate all the color. If I could just switch to the wealth side, Ron, I think you made a comment earlier in the call touched on maybe increasing allocation to recruiting. I was hoping maybe you could just flesh that out a little bit. You mean in terms of more recruiting dollars or higher incentives? And is that something that's already in the guide? In, you know, in the twenty-sixth guide? And is that something that should actually accelerate? NNA into '26? Ronald James Kruszewski: Thanks. I mean, it's a great question. I'm looking at these numbers. I'm looking at what drives our results. I'm looking at the number of hires that we've hired, the number of teams that we have hired, the mix of business they bring in, how some of these teams come in, and then we immediately see it in lending and in cash balances and in fee-based business. And I just, you know, made the general comment that as I sit here, I think I said that maybe after this call, I'll sit down with Mr. Zemlock, and just say, look. Everyone's asking me about, you know, utilization of capital and where do we wanna put our dollars. You know, we can buy back stock. We've already increased our dividend. Look at acquisitions, do a number of things. But one the other one increased the balance sheet. The other one is to get after recruiting a little bit more. We have been generally a shop where we want people to come to us. We don't make a huge amount of outgoing phone calls. Advisors join us because they want to. That's very effective, by the way. You get people who wanna be with us. But we might be able to pick up the phone here and there, and that's what I'm thinking about, because we have a great platform. We are a traditional wealth management firm that people love it here, and we need to press that advantage. A little bit. Michael Cho: Great. Thanks, Ron. Operator: We will take our next question from Alex Blostein with Goldman Sachs. Ronald James Kruszewski: Alex, you made it, I think. Michael Cho: Hey, guys. You actually have Michael on for Alex this morning. Just one question from us. Ronald James Kruszewski: Tell Alex I said hello to you. Jeez. Michael Cho: Appreciate the color on the expense outlook from here. We spent some time talking about it. But on the non I think the guide implies something like 10% year over year growth next year. Can you walk us through the incremental areas of growth embedded in there? It sounded like there might be some wiggle room on that depending on how top line results come in over the course of the year. James Marischen: So, you know, first, I would say we are taking our guide down. We're taking it down a full percentage point down to 18% to 20%. On an adjusted basis for, you know, as a percentage of revenues. Obviously, there are some timing things associated with the sale of SIA. There are some things that take time to recognize some of the cost saves associated with the European reorg. There are certain things we've talked about in the past. Things like, you know, we're running kind of our cloud migration and data center process at the same time now. We do see some potential cost savings related to that, but that's probably more of a 2027 event. So there's a number of things related to that or that are coming into that guide. But when you look at kind of where we've come in at, from a margin perspective, it's, you know, you take comp and non-time together, you're seeing a pretty nice increase in overall pretax margins. We've gotten a few questions related to the non-comp or seen a few questions so far this morning. But, you know, our guide is implying already higher margins for 2026. Michael Cho: Great. Thank you. Operator: And gentlemen, there are no further questions at this time. I will now turn the conference back to Mr. Kruszewski for any additional or closing remarks. Ronald James Kruszewski: No, I would say that thank you, everyone, for joining. As we embark on 2026. I feel that the firm and its capabilities and our ability to grow from here, frankly, have never been better. We have a better platform, broader product mix, and increasing profiles, doing detracting larger teams, doing larger transactions. It feels that the way what we've done to build out the capabilities of the firm through talented people is continuing to work, and I expect 2026 to be a continuation of the same. So look forward to reporting back to everyone. At for the first quarter. And I'll end with while some I'm gonna end with two things. One, I'm gonna say that the Indiana Hoosiers are the national champions and go Stifel US ski team. But I've not been able to brag about Indiana in my sixty-plus years of being alive, so I'm taking it right now. So go Hoosiers. Congratulations, everyone. Thanks for your time. Take care. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the M/I Homes Fourth Quarter and Year End Earnings Conference Call. At this time, all lines Following the presentation, we will conduct a question and answer session. If at any time during this call you need assistance, please press 0 for the operator. This call is being recorded on Wednesday, 01/28/2026. I would now like to turn the conference over to Phil Creek. Please go ahead. Phil Creek: Thank you, and thank you for joining us today. On the call with me is Bob Schottenstein, our CEO and president, and Derek Klutch, president of our mortgage company. First, to address regulation fair disclosure, we encourage you to ask any questions regarding issues that you consider material during this call. Because we are prohibited from discussing significant nonpublic items with you directly. And as to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also, be advised that the company undertakes no obligation to update any forward-looking statements made during this call. With that, I'll turn it over to Bob. Bob Schottenstein: Thanks, Phil, and good morning, and thank you for joining us today. As I begin, I'd like to take a brief moment to acknowledge an important milestone for M/I Homes. 2026 marks our fiftieth year in business. Over the past five decades, our company has grown to become one of the nation's largest and most respected homebuilders. Looking back, we've been through a lot. We've experienced disciplined growth, and certainly our fair share of successes navigating through multiple housing cycles. Through it all, we have maintained an unwavering focus on quality, customer service, and operating at a high standard. As we look ahead to celebrating this milestone, we're proud to report that we are in the best financial condition in our history, have a group of leadership teams that are as strong as we've ever had, and that we are well positioned in our 17 markets. With that, we'll turn to our 2025 performance. Our full year 2025 results reflect the economic conditions that we and, frankly, our entire industry experienced throughout the year. Despite choppy demand, affordability challenges, economic uncertainty, and other macroeconomic pressures, our performance remained very solid. Though new contracts were down slightly for the full year, we were pleased that our monthly new contracts during the fourth quarter showed a 9% year-over-year increase and that we successfully increased our 2025 average community count by 6% versus our guide of about 5%. In 2025, we delivered 8,921 homes, recorded revenue of $4.4 billion, and excluding charges of $59 million related to inventory and warranty items, we generated pretax income of nearly $590 million, which was down 20% compared to last year's record $734 million. Our pretax income percentage was a very solid 13% before the charges, and 12% after all charges. Our financial services segment had a record capture rate of 93%, record volume levels, and a very strong year achieving pretax income for the year of $56 million. Our full year gross margins excluding the above-mentioned inventory and warranty charges were 24.4%, 220 basis points lower than 2024, and down primarily due to higher incentives and higher lot costs versus the same period a year ago. As you all know, our primary incentives were and continue to be mortgage rate buy down. And we will continue to use these incentives as necessary on a community-by-community basis. Our net income was $403 million or $14.74 per share, but a very strong return on equity of 13.1%. Our shareholders' equity increased 8% year-over-year and reached an all-time record of $3.2 billion with a record book value per share of $123. The quality of our buyers in terms of creditworthiness continues to be strong with average credit scores of 747 and average down payments of almost 17% or just over $90,000 per home. Our Smart Series, which is our most affordably priced product, continues to have a very positive and meaningful impact not just on our sales, but our overall performance. Smart Series sales comprised 49% of total company sales in the fourth quarter compared to 52% a year ago. And as I previously noted, we ended the year with community count growth with 232 active communities, which was an increase of 5% compared to the '4, and on average, an increase of 6%. In terms of our various markets, our division income contributions in 2025 were led by Columbus, Dallas, Chicago, Orlando, and Minneapolis. Our new contracts for the fourth quarter in our southern region increased by 13% year-over-year and by 4% in the northern region. For the year, new contracts decreased 1% in the southern region and 9% in our northern region. Deliveries increased 1% over last year's fourth quarter in the 57% of the company-wide total. The northern region contributed 981 deliveries, which was a decrease of 8% over last year's fourth quarter. For the year, homes delivered slightly increased in the southern region but decreased slightly in the northern region. Our owned and controlled lot position in the southern region decreased by 11% compared to a year ago, increased by 9% compared to a year ago in the northern region. We have a tremendous land position. Company-wide, we own approximately 26,000 lots, which is slightly less than a three-year supply. Of this total, 30% of our own lots are in the northern region, with a balance of 70% in the southern region. On top of the lots that we own, we control via option contracts an additional 24,000 lots. So in total, we own and control approximately 50,000 single-family lots, which is down 2,000 lots from a year ago, and this equates to roughly a five to six-year supply. Most importantly, 49% of our lots are controlled pursuant to option contracts, which gives us continued flexibility and important flexibility to react to changes in demand or individual market conditions. With respect to our balance sheet, we ended the year in excellent condition. With cash of $689 million and zero borrowings under our $900 million unsecured revolving credit facility. This resulted in a very strong debt to capital ratio of 18% and a net debt to cap ratio of zero. Before I conclude, let me again state that we are in the best financial condition in our fifty-year history. Despite the current challenging conditions, we feel very good about our business, remain very confident in the long-term fundamentals of our industry, and are well positioned as we begin 2026. I'll now turn it over to Phil to provide more specifics on our results. Phil Creek: Thanks, Bob. Our new contracts were up 18% in October, up 9% excuse me, up 6% in November, and up 4% in December, for a 9% improvement in the quarter compared to last year's fourth quarter. Our sales pace was 2.8 in the fourth quarter, compared to 2.7 in February fourth quarter. And our cancellation rate for the fourth quarter was 10%. As to our buyer profile, 48% of our fourth quarter sales were to first-time buyers, compared to 50% a year ago. In addition, 79% of our fourth quarter sales were inventory homes, compared to 67% in last year's fourth quarter. Our community count was 232 at the end of 2025, compared to 220 at the end of last year. During the quarter, we opened 17 new communities while closing 18. And for the year, we opened 81 new communities. We currently estimate that our average 2026 community count will be about 5% higher than 2025. We delivered 2,301 homes in the fourth quarter, and about 40% of our quarter deliveries came from inventory homes that were both sold and delivered within the quarter. As of December 31, we had 4,500 homes in the field, versus 4,700 homes in the field a year ago. Revenue decreased 5% in 2025 to $1.1 billion and our average closing price for the fourth quarter was $484,000, a 1% decrease when compared to last year's fourth quarter average closing price of $490,000. Our gross margin was 18.1% for the quarter, including $51 million of charges which consisted of $40 million of inventory charges and $11 million of warranty charges. Excluding these charges, our gross margin was 22.6%. The breakdown of the inventory charges is $30 million of impairments and $10 million of lot deposit due diligence costs written off. The majority of our impairments in the quarter were in entry-level communities, with average selling prices below $375,000. And the warranty charges were due to two communities in our Florida market. For the full year, our gross margins were 23%. Excluding our $59 million of charges, our full year gross margin was 24.4%. And our fourth quarter SG&A expenses were flat compared to a year ago, and were 11.6% of revenue compared to 11% last year. Interest income, net of interest expense for the quarter was $6 million. Our interest incurred was $9.5 million. We had solid returns given the challenges facing our industry. Our pretax income was 12% for the year, and our return on equity was 13%. During the fourth quarter, we generated $129 billion of EBITDA, and for the full year, we generated $608 million of EBITDA. Our effective tax rate was 21% in the fourth quarter, compared to 22% in last year's fourth quarter, and our annual effective rate for this year was 23.5%. We expect 2026 effective tax rate to be around 23.5%. Our earnings per diluted share for the quarter decreased to $2.39 per share from $4.71 per share in last year's fourth quarter and decreased 25% for the year to $14.74 per share from $19.71 per share last year. During the fourth quarter, we spent $50 million repurchasing our shares, and for the year, we spent $200 million. We currently have $220 million available under our repurchase authority, and in the last three years, we have purchased 13% of our outstanding shares. Now Derek Klutch will address our mortgage company results. Derek Klutch: Thanks, Phil. In the fourth quarter, our mortgage and title operations achieved pretax income of $8.5 million, down $1.6 million from 2024. Revenue of $27.8 million, down 2% from last year. Primarily as a result of lower margins on loans closed and sold and partially offset by higher average loan amounts and more loans closed. For the year, pretax income was $56 million and revenue was $126 million. The loan to value on our first mortgages for the quarter was 83% in 2025 compared to 82% in 2024's fourth quarter. 65% of the loans closed in the quarter were conventional, and 35% were FHA or VA. Compared to 59% and 41%, respectively, for February same period. Our average mortgage amount increased to $414,000 in 2025's fourth quarter compared to $409,000 in 2024. Loans originated in the quarter increased 1% from 1,862 to 1,874 and the volume of loans sold decreased by 1%. Our mortgage operation captured 94% of our business in the quarter, an increase from 91% in 2024's fourth quarter. Phil Creek: Thanks, Derek. As far as the balance sheet, we ended the fourth quarter with a cash balance of $689 million and no borrowings under our unsecured credit facility. We continue to have one of the lowest debt levels of the public homebuilders. And are well positioned with our maturities. Our bank loan matures in 2030 and our public debt matures in 2028 and 2030. Total homebuilding inventory at year-end was $3.4 billion, an increase of 9% from prior year levels. And during 2025, we spent $524 million on land purchases and $646 million on land development. For a total spend of $1.2 billion. This was up from $1.1 billion in 2024. And at 12/31/2025, we had $900 million of raw land, the land under development, and $1.1 billion of finished unsold lots. We own 10,500 unsold finished lots. And at the end of the year, we had 1,030 completed inventory homes about four per community, and 2,779 total inventory homes. And of the total inventory, 1,116 are in the Northern Region and 1,663 in the Southern Region. And at December 31, 2024, we had 706 completed inventory homes and 2,502 total inventory homes. This completes our presentation. We'll now open the call for any questions or comments. Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press star followed by 2. And if you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Ken Zener at Seaport Research Partners. Please go ahead. Ken Zener: Good morning, everybody. Good morning. Positive order growth. Pretty impressive. And can you address the 13% growth you had in the South? Can you bifurcate that into Texas and Florida? Because I think, Ted, last time, you found that Texas is a little bit more of the volume. We've been seeing that Florida is actually doing a little better than Texas. Could you address the split in that those mark that region? You know, in general, we had pretty solid sales everywhere. Our Carolina markets, Charlotte and Raleigh have done, very well. You know, in Florida, our Orlando market, has actually held up pretty well. And Tampa also has improved as we've gone through the quarter. When you look at Texas, you know, Dallas is state pretty solid for us along with Houston. Weaker markets have been Austin and San Antonio. So with been spread around a little bit. But like you say, we were very pleased that our southern region was up 13%. And our northern region was also up 4%. You know, the the only other thing I'll mention, Ken, and it's a good call out, just to build on what Phil said, is as we're getting now some traction in our newer markets in the southern region, specifically Nashville and Fort Myers Naples. That will put us that that will slightly skew upwards some of the percentages. But but we felt very good about our fourth quarter sales. And I would simply add that as we begin 2026, you know, we we certainly have seen and I think some of it's clearly seasonal. We're beginning a selling season right now with opposed to leaving the slowest time of the year in the fourth quarter. But we've certainly seen a an important improvement in traffic. I appreciate those comments. It's and they are reported too today, and it's our margins are under pressure. The demand seems to be there. Could you comment, given the intra quarter orders and closing, could you comment on the margin differential between your intra quarter closings and your backlog or spread, if you will, as well as are the majority of those quarter closings, I assume they're coming from the lower priced Smart Series. It you could address those two questions. You very much. Well, it I'm not sure I completely understood the question. And you may have to ask it again. Operator: Okay. Ken Zener: Orders and closings per unit that were intra quarter So what I call spec. How are those margins compared to the homes that came out of backlog? And I'm assuming most of those intra quarter orders, which were closings, were the Smart Series. Well, yes and no. The Smart Series point. The the the one thing I'll say is over the last twelve to twenty four months, our business has changed quite noticeably. In terms of the the the the significant contribution of spec sales month in, month out. About you know, two thirds to three fourths of our sales are now coming from specs. And if you go back five years ago, that would have been less than 50%. Some cases less than forty. So that's been a pretty significant change. And it's likely here to stay as long as Operator: is Ken Zener: you know, we're in this this situation where we're needing to use rate buy downs to promote sales, because as you well know, the ability to provide a favorable rate buy down at any kind of a reasonable or at least acceptable cost it is one of the conditions is that you can get the home closed you know, within sixty to ninety days of of the purchase of the buy down money, which means that only been really worth respects. So having said all that, the the the majority of of know, 60 to 75% of the closings quarter to quarter to quarter all coming from spec sales. Bill, don't know if you wanna add anything to that. Yeah. I mean, you know, our closing GPs in the fourth quarter you know, were twenty two six, you know, forgetting the charges. We were, you know, pretty pleased with that. Are there continued pressures? Yes. We do feel good that our construction cost last year, came down about 2%. We were also pleased last year that our cycle time improved by about 5% So we're making some progress on some of those key areas. SPAC margins in general are lower than to be built homes. But the last couple of months, we have seen a slight pickup in our to be built business. But, you know, we just continue, focusing, you know, every day everything we can do to hold those sales prices stable or increase them. And also keep margins as high as we can. Thank you very much. Thanks, Kim. Operator: Thank you. The next question comes from Alan Ratner at Zelman. Please go ahead. Alan Ratner: Hey, Bob. Hey, Phil. Good morning. Nice quarter and Good morning, fiftieth anniversary. Good morning. Happy New Year. Yep. We don't feel we don't feel that old. I I hear you. Well, I it's it's very impressive impressive, and I'm sure we got 50 more out ahead of us. So looking forward to it. My first question is on the order strength in the quarter. I was looking and your fourth quarter, obviously, up year over year, but your fourth quarter orders were actually sequential basis as well, which, as far as I can tell, that's the first time that's happened since 2001. So I was hoping you could just talk a little bit about, you know, kinda your incentive and pricing strategy through the quarter. Would you say that order strength at least kind of seasonally, is a reflection of improving demand? Or was it more of a concerted effort by you guys to kind of clear through some inventory ahead of year end, maybe with some higher incentive incentive? Well, that's a great question. It's it's actually probably one of the most important questions that you know, as we as we look week to week and look at it in terms of our sales activity, I feel like it's a little bit of both. I think we, you know, we wanted to push to get as many completed specs you know, off the you know, out to the buyers as we could. I feel like demand is slightly picking up. Bob Schottenstein: And it you know, I felt like, you know, not every market but in many of our markets, we were you know, we were somewhat pleased with the level of traffic through the fourth quarter. And that is and that is continuing. It you know, it's I think it's too early to to make a call. But look, we've, you know, we've all been whining for the last number of years about all the pent up demand and under and and, you know, housing is underperforming and on and on and on and on, and more articles have been written about that almost than anything other than affordability. But but it's it feels like you know, we may be starting to see a slight improvement in demand. And I also think and and, you know, we'll know when we know. We expect our margins to drop at least 200 basis points last year. And, of course, they did that and then some. And the margins are likely to remain under pressure, but it's not clear to me at this point that the pressure in '26 will be as much as it was in '25. So hopefully, things are starting to level off a bit Again, we'll we'll know when we know. But you know, all things considered, you know, pre charges, made almost $590 million last year, brought 13% the bottom line. By historical standards, that's pretty good performance. And you know, just putting things in context, we've all seen a whole lot worse And you know, I think that you know, I'm optimistic about, you know, the first four or five months of this year in terms of demand and the selling season. So we'll see. You know, Alan, one thing I'll add is that we we talked about, you know, the impairments came primarily from entry-level communities with an ASP under $3.75. You know, it was led by, you know, our more challenging markets in Austin and San Antonio So in general, we've seen a little more pressure on prices and margins on the real entry-level lower price for us. Hopefully, that is gonna get a little bit better know, we tend to play at a little higher price point. But, that's kinda where things are. Alan Ratner: Got it. No. I appreciate all that detail. And and and, Phil, you you kinda touched on the second question I had, which was on those impairments. I guess the first one is a little bit of an accounting nuance, but I'm just curious. If I look at historically when you've taken charges, they're they're almost entirely in in your fourth quarters. I mean, you maybe have some minimal charges for the year, but it looks like fourth quarter is kind of where you generally take larger charges. So I'm curious if there's any accounting reason why that is, at least compared to other builders. And b, I don't know if you disclosed like a watch list of communities that are have maybe potential indicators of impairments, but is there any indication that impairment should continue here over the next handful of quarters just based on where some of your margins are trending in your lower price point communities? Phil Creek: Yeah. Alan, I appreciate that. And I'll I'll try to get all those points. You know, to to us, it's a business issue. Mean, if you look at our business goals, you know, we're in the subdivision That's what really matters to us. That's how we operate the business. And if we're not getting you know, we try to get a pace of three plus We try to get margins at 22 plus. And we try to make sure we're focused on all the items. Product, presentation, salespeople, make sure all those levers are working at all times. But when we're not getting acceptable pace, over a certain period of time, you know, we make the business decision oftentimes to go to price. Course, the way the accounting accounting rules are based basically is that once you get down to about a 10% GP, know, you kinda get to the point where, you know, carry cost, disposal cost exceed that. So they accounting rules you know, kinda force you to do an impairment. But, again, to us, it's a business decision. You know, we do look harder at things toward the end of the year for sure. So that's why the majority of those charges in the past have been that way. Although this year, we did a, like, you know, a small impairment also. I think it was in the third quarter. But, you know, if you look at us today, you know, we own about 25,000 unsold lots You always have a couple of problems subdivisions. Our impairment covered about a thousand lots. So about a thousand of the 25 lots. And, again, it was in the most affordable stuff. You know, we could have continued grinding through these communities. It may be one one and a half, two or a month. You know, maybe at 10, 12% margins. But, you know, our view is when you look at the landscape of the business, and the difficulty, at those lower price points, you know, we decided to go to that last lever of dropping price. And that's what, you know, triggered those impairments. But, again, we think that's a really good business decision. We expect that pace to pick up. We expect the margin to get back to closer to normal levels. And and that's why we did it. The other thing I'll say because I've I've been to the movie it was a long time ago, but back during the great recession, when every quarter you know, you were sort of holding your breath as the builders reported because many more impairments are coming And we also felt like there was more coming. This is very different. I'm not gonna say there's no more coming because no one knows that. But what I will say is is it is it as as we got towards the end of last year, it was sort of let's let's start 2026 you know, with all cylinders. You know, as strong as they can possibly be. Whatever thing we think might be a problem, let's deal with it now, and let's end at 2026. You know, with with with as many items controlled and behind us as possible. Alan Ratner: And, Alan, really appreciate that detail. Thank you. Phil Creek: 10,000,010 million was a combination of lot deposit write offs prepaid, like due diligence write offs on deals we're not pursuing. Anymore. Because we think to do those deals, it would take, you know, a pretty significant cost reduction other changes in terms. So we walked away from those deals. But, again, you know, on average, when you take a, you know, a $30,000,000 charge on a thousand lots, you're looking at 30,000 per lot, which is pretty significant. And, hopefully, that's gonna increase our pace and margins as we go into this year. Alan Ratner: Makes sense. Thanks a lot. I Thanks, Alan. Operator: Thank you. The next question comes from Buck Horne at Raymond James. Please go ahead. Buck Horne: Congrats on navigating a challenging environment and appreciate those the color on all the charges as well. Thanks, buddy. I was also yeah, very welcome. I was kinda curious about the acceleration in land purchase activity and some the lot development spend in the fourth quarter. It was up both sequentially and year over year. I guess, first, kind of wondering if any particular markets or regions are getting the bulk of that new spend that you're targeting? And, you know, is should we read into that that acceleration if there's is that a indication of your confidence levels of kind of the demand that's out there and your growth trajectory? Or how should we interpret that pickup in the land spend? Phil Creek: No. Nothing really special. You know? Again, some of our markets are impacted by you know, weather when we get black topping done and those type of things. I mean, we owed about 25,000 lots, as Bob said. We try to have about a one year supply of finished lots. That way, we don't go dark, etcetera. And we ended the year with a little over 10,000 finished lots. And, again, with our current run rate at 9,000, we feel good about that. So, no, nothing really special. You know, we're continuing to do a a lot of land development. You know, we self develop about 80% of our own land. But as far as any strategy or direction, that just kind of was the way the dollars were. We did spend a little bit more money you know, last year toward the end, but, you know, just the way it kinda fell. Buck Horne: Okay. That's helpful. Always curious about your your Florida trends in in particular. I was just wondering because we've seen some signs that resale inventory to start the year in Florida here. Seems to have flipped negative year over year. I think you mentioned that Tampa started to improve a little bit. Orlando seems to be steady. Are you sensing that that we may have I don't know. Is there any signs of improving traffic demand? Any signs that stabilization of the resale inventory is helping? Bob Schottenstein: When we look at the four Florida markets that we operate in, Orlando, Tampa, Sarasota, Fort Myers, Naples, Fort Myers, Naples is really new for us. We're we're very bullish about it. And you know, there we had significant growth because we went from almost zero to you know, over a 100 and some units, you know, last year. But and we're expecting pretty meaningful growth there over the next several years. As far as the other three where we've been a while, Orlando's clearly held up the best. And and and over the last I would say, you know, 30 to a 120, a hundred and fifty days, demand in Orlando has been stronger than Tampa and Sarasota. Tampa was the toughest market for a while. Had probably, whatever reason, the hardest hit for us in Florida clearly. Tampa business has picked up. Very importantly. It's not as strong as Orlando at this point. But but we're we're we're encouraged by what we're seeing. That's for sure. And and Sarasota is just sort of, you know, so so. You know, I I I think that mark market is it's a very good market but it's you know, it's sort of trending along and, you know, maybe c plus b minus, that kind of thing. So look, we're we're very invested in Florida. Very committed to Florida, It's a huge part of our business. Candidly, we have some of the best leadership teams in our company. In Florida. And it's, you know, so you know, we we've been there a long time and I mean, this this this was noted where we've been in business fifty years. The first market outside of Columbus, Ohio that we expanded to was Tampa. And the second one after that was Orlando. So we've been in Florida for a long time, since 1981 in Tampa and 1985 in Orlando. And we're not, you know, we're you know, we've we've we've had a very strong leadership position in those markets. We'll continue to. As well as the operation in Sarasota and Fort Myers Naples. Buck Horne: Outstanding. That's great to hear. Last one, if I can sneak one in. I was curious about just how you're structuring the mortgage rate buy downs right now in terms of what type of program or structure seems to be resonating in getting consumers over the hump Is there kind of a sweet spot target mortgage rate that seems to work best with those buy downs? Derek Klutch: I guess, this is this is Derek. We we've been going with a four and seven eights thirty year fix. And we think getting a sub five is the key. And that that's what really seems to attract the buyers. And then on top of that, in some divisions, we offer a temporary buy down so we can get buyers with the first year payment in the 2.875 range. We've we've run that for quite a while, that seems to be successful for us. So just that sub 5% note rate. That's clearly been our most successful recently. We've been tinkering with the the $7.01 arm that other builders have been using a lot. You know, it's everybody has their own experiences. To Derek's point, what seems to work best for us is the very straightforward thirty year fixed four and seven eights FHA, VA, or conventional. And you know, that's and and in many instances, it's supplemented with the two one buy down that Derek mentioned. And one thing I'll stress also is that, you know, our mortgage and title operations is very important to us. They only serve on my home customers. We're able to deal individually with customers. And depending on if it's a first time buyer, there may be a real big need for closing cost assistance. There's some people out there that do wanna do to build home to be built homes. That do want a longer term rate program, So we're able to customize whatever we need to do with an individual customer as opposed to throwing all kind of money to every customer that may or may not need that. So being able to individually deal with customers, we think it's very important to our business. Buck Horne: Awesome. Very helpful color. Appreciate it, guys. Good luck. Bob Schottenstein: Thanks. Phil Creek: Thanks. Operator: Thank you. The next question comes from Alex Barron at Housing Research Center. Please go ahead. Alex Barron: Hey. Good morning, guys. Good morning. I wanted to I wasn't sure if I missed it, but did you guys give any guidance or outlook for margins for next quarter Do you feel like they're going go down sequentially, or is these impairments you took this quarter gonna help stabilize margins? Phil Creek: Alex, you know us. We don't we don't give guidance on things like that. We were you know, pretty pleased with our margins in the fourth quarter. We did deal with problem communities that we thought we needed to with the impairments. Don't give any guidance. You know, we are working hard on construction costs and cycle time and all those things. We are opening a number of new stores this year. We did give guidance. We expect average community count to be up 5% this year. But, no. We did not give any guidance as far as margins. Alex Barron: Okay. Did your incentive levels or go up in the quarter versus the previous quarter? For new orders? Phil Creek: I mean, our margins were down a little bit. So you know, are we doing a little bit more on closings in the fourth quarter? Yes. We did. Again, that's reflected in our margins. Trying to do the best job we can opening all these new stores. We opened 80 stores last year, and anticipate open more than that this year. So that's a big opportunity for us. But, hopefully, spring selling season will be a little better than it has been. Alex Barron: Okay. And also, any shift in your strategy as far as what percentage of spec homes you guys are starting versus you know, going back towards hill to order? Bob Schottenstein: No. It it it'll likely it's Bob Schottenstein, Alex. It it'll likely remain about what it's been, which is about, like I said earlier, two thirds to three fourths of our business. Our spec sales And and I I don't see I don't see things changing there or on the rate buy down side to incent sales, I don't see any of that changing anytime soon. You know, obviously, you know, we're all reacting to know, to on a daily basis to what's happening in the market. Is we did mention we've been encouraged by by early traffic improvements here that we've seen through through the latter part of the fourth quarter and certainly as we begin 2026. Alex Barron: Alright, guys. Well, best of luck. Thank you. Phil Creek: Thanks a lot. Thanks, Alex. Operator: Thank you. And the next question comes from Jay McCanless at Citizens. Please go ahead. Jay McCanless: Hey. Good morning, everyone. Just to kind of follow on that point, Bob. Jay, congratulations on your new position. Thank you, sir. I really appreciate it. Appreciate y'all's time this morning as well. Just to kinda follow on what you were saying there Bob, Are you all seeing similar traffic pickup in both the North and the South, or is it a stronger in one region versus the other? You know, I in I think that it's not every single one of our 17 markets but certainly most. And I and I would not say it's it's particularly regional. Now the last five days, things aren't very good anywhere because you know, most people are frozen solid or they're, you know, they're they're snowed in, including know, here in Columbus, it's been pretty rough. But but in general, we've seen traffic you know, start to pick up. It's it always does this time of year. Feels a little better than even a year ago, though, to me. Okay. That's great. And then Phil, could you talk about in the fourth quarter, your ending gross margin in the backlog, how that compares to what you reported closings in 4Q? You know, right now, what we're doing, as Bob said, 75, 80% specs. You know, in general, the margins in the backlog are higher, you know, than than specs. Are the margins that you're in a little higher you're in a year ago? The answer is yes. You know, that's about a 100 basis points difference. But, hopefully, we're getting a little better We continue to focus on how we can improve the margins on the specs. So, we're doing all we can. You know, we did that twenty two six margins in the fourth quarter. So we're hoping margins hold up pretty good. That's great. And then the next question I had, just thinking about the sales pace for these newer communities you're opening. Are you all trying to push a similar sales pace as what you got in '25? Or are you trying to be a little more cautious and not wanting to give away too much margin at the beginning of these communities? Well, we always try to focus on getting that pace, you know, at 35%. But, you know, again, you gotta be a little more careful opening new stores you know, as far as if you're super aggressive on price and margin, again, you can feel that benefit for a while. So there is a lot of opportunity with these new stores. Hopefully, we've got the the right product and the right price to move through there. But, you know, we are focusing on trying to keep this pace, you know, at hopefully around three or a little better. Okay. That's great. Thanks. And then the last one for me. And and thank you for the detail on the specs. I guess, how how are you feeling about MHO's inventory right now and and maybe some broader commentary on what you're seeing in the industry. Does it feel like some of the the excess spec inventory is being drawn down? Or or how what are you hearing from the divisions on that? I think we feel really good about where we are. Not not to be, you know, silly. I mean, if we didn't, we'd change. But you know, we going into this year, again, a lot of it's community specific. But we wanna be very aggressive in making certain that we have the product standing product in the field, the in inventory, if you will, you know, so that we can, you know, take advantage of what should be a a, you know, hopefully a decent selling environment here over the next you know, three to four or five months. And and so I I think we feel we feel our strategy is the right strategy. We don't feel we need to do any significant shifts. You know, and and you know, other than community by community specific things, in general, I think we're we're we're we're very well positioned. That's great. And and just any industry commentary you've been hearing from the field In relating to what issue? Relating to inventory. Tech inventory specifically. You mean, are people like, you know, deep discounting just to move specs or have discounts slowed down. Or more incentives being paid to third party realtors or mean, things like that. Yeah. Things like that. That'd be great. Yeah. You you know, you hear a crazy story now and then about once every two days. So it it you know, I don't think that's anything new. I mean, people do what they need to do. Look, you know, I think that that knowing on a look back, knowing what 2025 was, if you just said to me, we're gonna bring 12 to 13% to the bottom line for the full year, I'd say I'll take it. Well, that's what we did. Understood. Jay, we pay a lot of attention to our inventory levels. We do have about a thousand finished specs which is a little higher than last year's 800 We do have 5% more stores. You know, we have a few less houses in the field today than we did a year ago. But, again, we benefit by better cycle time, We're just trying to be very focused A lot you know, a lot of times, execution doesn't get discussed. But, you know, now execution really matters. We're trying to be careful not to put too much inventory in the field, too many finished specs. You know, again, it depends on is it an attached townhouse community, is it a higher price community, every community is a little bit different. But, you know, again, I mean, doing 70, 75% specs I mean, I'll I'll we're relying on sales every week, every month, and that's what we have to stay focused on. We were very pleased. If you look at it last year, we closed almost the same number of houses that we did the year before, which was our record 9,000 homes. And, obviously, our our hopes and plans are, you know, we hope to close a few more houses this year than last year. We have more stores. But, again, we're staying focused. You know, we try to run a conservative business. We're not trying to put inventory out there too far ahead of ourselves. But, you know, again, we feel pretty good about our results. Absolutely. And and one question I forgot. Could you talk or or did can you if you talked about it, maybe repeat the commentary on what the margins on new community profit margins on new communities look like. As far as what the margins are on new communities we're opening versus older communities. Is that your question? Correct. Yeah. That's it. You know, again, that that's really a hard question. You know, last year, we opened, you know, 80 stores. I would say in general, they're they're pretty close. You know, we have some new stores that are doing really well and, you know, some that aren't doing so hot. It's a pace it's an individual situation. But, you know, overall, we feel pretty good about, you know, the new stores we're opening. We're trying to make sure we have the the right product and the right price and all those things open the right way. But, yeah, that's just a really hard question, Jay. Understood. Well, thank you guys for all the time. And that's all the questions I have. Thank you. Bob Schottenstein: Thanks, Jay. Operator: Thank you. The next question is a follow-up from Ken Zener at Seaport Research Partners. Please go ahead. Ken Zener: Hello again. Thank you. I wonder if you could comment on the flexibility of the business. So obviously, mortgage buydowns for let's say, two thirds of the communities at you know, you have product, you're trying to protect the community, price voids, etcetera. But for new communities, given that, you know, communities that opened last year and conversely are opening this year, how much of a change to the product type or you know, how you open it up at what price points. Can you talk to the dynamics that you employ when making those choices on new communities in terms of resetting the let's say, home size or you know, the specs that you're building are I I don't wanna use the word despec, but, you know, they're more simpler in terms of price points. Much flexibility do you really have there when you're coming into opening a community six to nine months out vis a vis the product structure Probably. Yeah. Type. Bob Schottenstein: I I think a lot more flexibility, I think, than most people might realize. Look, so much of it's determined by zoning. And so, you know, you're you're you have to stay within the confines of the zone of the permissible zoning parameters. Having said that, usually those parameters give you a fair amount of flexibility The the amount of internal debate, discussion, analysis, strategy, if you will, that goes into each community planning from the very earliest stages when we think there's a site and I'll use this as an example, in Charlotte, that we're looking to tie up from the moment that we think that site might be available the the the debate occurs within the division. Sometimes it springs all the way up to corporate conversations. About what what are we gonna do with that if we get that deal done and that becomes a new store for us. What is that store gonna look like? What are we gonna merchandise in that store? What is what who is the buyer? And you know, there's that's a lot more art than science I'm not saying it's rocket, you know, like building a rocket ship to the moon, but it is a lot more art than science. And you do have some flexibility And we're, you know, there's there there is a fair amount of tinkering that takes place We have projects, many of them, that will be coming on this year that when we first started planning them, we might have planned to do you know, larger homes. And now we're looking to do smaller homes. That's a very simple example. But or we may be replanning in a way that the density stays neutral but we've now we're now gonna develop it with smaller size lots. Or perhaps the opposite, larger sized lots to take advantage of maybe lot premiums. So that's a huge part of what goes on. And, of course, every new land deal in this company before we are in a position where we've made a firm commitment must get approved at the corporate level through, you know, our land committee process. Evaluation process which is a discussion involving the specific division of course, a few of us here at corporate. And even in that, after this thing this thing has been batted back and forth at the division level, will quite often have questions about the product and the product line. Are we really trying to do here. And and, you know, should we should we should we adjust this or that? And and certainly on larger deals where there's multiple product lines or they have a long tail, we may have two or three land committee calls along the way. What are we thinking? How does it look now? Let's reconvene in ninety days. So there's a whole lot that goes into that. You know, we're as good as our stores. We're a retailer. You know, we're we're a very unusual retailer because reinvent ourselves about every three years. The stores that we have out there today three years from now, 90% of them will be completely different. And because we'll sell through and replace with new. And as Phil mentioned, you know, we're poised to open a whole lot of new stores this year. And we'll be closing out of a number of them too. So what those stores look like and what we choose to sell hopefully meeting the market where it is, who is the buyer, what are we targeting, That's a huge part of the business. Huge part of the business. And, you know, we've we've made our fair share of mistakes. So hopefully, we've learned from some of them. And and there's times when we've absolutely, you know, shifted to a strategy that has turned something that might have just been average into something really good. And, you know, so when we see something that works in one market, you know, we that maybe it's a little bit, you know, off the wall thinking. You know, we'll also try to apply to that, you know, in other markets if it makes sense to do so. So it's a very, very big part of the business. Doesn't often get a lot of conversation. But you know, it's it's a it's a terrific question. Thank you. Operator: Thank you. There are no further questions at this time. I will turn the call back over to Phil Creek for closing comments. Phil Creek: Thank you for joining us. Look forward to talking to you next quarter. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.
Operator: Good day, and welcome to the Brinker International, Inc.'s Q2 2026 earnings call. At this time, all participants have been placed on a listen-only mode. The floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Kim Sanders, Vice President of Investor Relations. Ma'am, the floor is yours. Kim Sanders: Thank you, Holly, and good morning, everyone. And thank you for joining us on today's call. Here with me today are Kevin Hochman, Chief Executive Officer and President of Brinker International, Inc. and President of Chili's, and Mika Ware, Chief Financial Officer. Results for our second quarter were released earlier this morning and are available on our website at brinker.com. As usual, Kevin and Mika will first make prepared comments related to our strategic initiatives and operating performance. Then we will open the call for your questions. Before beginning our comments, I would like to remind everyone of our safe harbor regarding forward-looking statements. During our call, management may discuss certain items which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated. Such risks and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC. And, of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations. And with that said, I will turn the call over to Kevin. Kevin Hochman: Thank you, Kim, and good morning, everyone. Thank you for joining us as we discuss our financial and operating performance for the second quarter as well as our outlook on the remainder of fiscal 2026. Q2 Chili's same-store sales were plus 8.6%, outpacing the casual dining industry by 680 basis points. This strong result was rolling at plus 31% from last year, for a two-year cumulative comp of 43%. This was our nineteenth consecutive quarter of same-store sales growth with a three-year cumulative comp of 50% and a four-year comp of 62%. The Chili's turnaround is real. It is sustaining, and we have no intentions of taking our foot off the gas, which means we will continue to be focused on improving our food service and atmosphere, as well as continue making Chili's more fun, easier, and more rewarding for our team members. Q2 results were driven by our world-class marketing and brand building, that brought guests in and continued improvements in food service and atmosphere that brought guests back. Now I'll give some updates on the Chili's business. We talked last quarter about the need to bring back our skillet queso, based on guest feedback. That reintroduction has been successful. We are now selling 20% more stop less queso and the original skillet queso versus the prior two queso lineup. In addition, our relaunched nachos featuring our signature chicken bacon and house-made ranch is now 170% bigger business than the previous nachos with guests loving our new nachos. We have also completed our bacon upgrade to thicker bacon strips and our bacon cheeseburger upgrade which now features triple the bacon in the prior burger. That bacon burger upgrade is doing 30-43% more sales than the prior bacon burger. What's important to take away from these examples is as we upgrade the menu offerings, while attracting a new generation of guests, to continue to build bigger, sustainable sales layers in the business. Over the past three years, we have had success with these menu renovations. Crispers, margaritas, burgers, ribs, frozen margs, and now queso and nachos with more segments still ahead of us to upgrade. Next on our list is our super premium chicken sandwich lineup, which will launch chain-wide in April with a substantial advertising campaign. Chicken sandwiches is a very large market with over 80% of people buying them at least once a year. And is by far the biggest segment of all restaurant chicken serving. It has the potential to drive customer traffic both with new and existing guests. We believe our new chicken sandwich lineup is superior, distinctly on brand, and highly differentiated than what is in the market today. Mold's signature flavor is unique to Chili's, terrific value with abundance, and a traffic-driving opening price point within a three-tier lineup. We'll also be advertising in a big way leveraging that sharp price point to drive awareness and traffic. The sandwich lineup has done exceptionally well from a mixed-in merchandising-only test in 200 restaurants, and we expect even bigger numbers when we launch nationally in April with advertising and earned media attention. From an operations perspective, we've also made great progress in Q2. We successfully eliminated a net total of six menu items which will continue to make it easier for our teams to serve hot, delicious food more consistently. One of the keys to our success has been staying disciplined on food innovation which means avoiding launching food limited-time offerings. This allows us to focus our efforts to improve our core offerings, simplify operations, and keep field leader attention on ops fundamentals like hospitality and great food. Avoiding limited-time offer distractions to maintain efforts on the core business, has continued to drive guest scores. Daily metric we measure, guests with a problem or GWAP, improved to 2.1% versus 2.9% for Q2 last year. For perspective, when we started the turnaround journey, over three years ago, we were at about 5% it's been consistently getting better every quarter as we keep hitting on different fundamentals in the business. We are also now seeing real movement in syndicated external guest perception metrics which allow us to track not just progress against ourselves, but even more importantly, how we are improving versus our competitive set. When we started this turnaround, third-party syndicated data places at the bottom or near the bottom of our competitive set in all seven of their key metrics. That correlate to future sales growth. In the last quarterly snapshot of these metrics, Chili's is now in the top three of all those metrics. Quality, value, service, atmosphere, taste, cleanliness, and overall experience. Yes. There's still room for meaningful gains, but our guest experience progress through our operational improvements is very encouraging. The other important takeaway from this data is where we have repositioned ourselves on value which allows us a long runway for growth. In the past three years, we have captured value leadership in casual dining and the broader restaurant industry. And while we earn that leadership value position, we were also able to improve restaurant operating margins from 11 to 18% while baking in hundreds of millions of dollars of guest experience investments into the going four-wall economic. The brand repositioning and operational improvements have delivered big results. Chili's was the number one traffic brand in casual dining for the entire 2025 year. And what's even more encouraging is Black Box data is telling us our per person check average is still more than $3 less than our direct casual dining competitors and more than $4 less than casual dining as a whole. Simply put, Chili's has been repositioned to win for the long term, and that's exactly what this team is going to do. On the Maggiano's business, we are making progress on the turnaround pillars of food and atmosphere. I talked about last quarter. Based on guest feedback, we brought back Gigi's butter cake, eggplant Parmesan, baked ziti, and classic meat sauce. On the value front, we've also increased pasta portions by 20%, and have up portions on select other dishes that had opportunities including our meatball dishes, salads, stuffed shells, and crispy mozzarella. As a result of bigger portions, value scores have improved in the past few months. We did see some sequential improvement in the business during the quarter, and sales beat our internal expectations for the first time in a while. Still lots of work ahead of us on service atmosphere, and team culture, but these are encouraging green shoots and small wins. Maggiano's is now only 8% of our company sales and 3% of our profit contribution, but it can be a source of growth in the future given the white space opportunities. This is why improving for all economics of the brand and getting momentum back into the business is important. Q2 marked another exceptionally strong quarter Chili's with continued progress in food service and atmosphere, guest experience improvements, world-class marketing, a repositioned relevant and distinctive Chili's brand, and our value leadership sets us up for a continued market share gain and a long run of profitable growth. We rolled big results from Q2 last year with more big results this year, and that's proof that the strategy is working and that it's sustainable. Lastly, I wanna recognize our restaurant teams and our home office teams quickly responding to winter storm Fern I know many of us on this call view the storm through a lens of what we'll do to sales or earnings, but on the ground, it's a whole lot more than that. Our restaurant teams have done an excellent job overcoming the challenges of the storm to reopen safely and quickly, Our field facility teams are working tirelessly on restaurant repairs that are needed, and our restaurant support center has been incredibly responsive getting restaurants what they need. Hats off to our BPOs our directors of operations, our managers, our team members, and our restaurant support center for all that you do to overcome challenges like these. Now I'll hand the call over to Mika to walk you through fiscal 2026 second quarter numbers. Go ahead, Mika. Mika Ware: Thank you, Kevin, and good morning. Brinker International, Inc. successfully comped the comp. Delivering another quarter of positive same-store sales growth led by 8.6% growth at Chili's, lapping a 31.4% increase from the prior year. With fiscal 2026 more than halfway complete, we expect to achieve our fifth consecutive year of same-store sales growth and second consecutive year of traffic gains demonstrating our continued momentum and sustained growth. We have grown our customer base by leaning into our everyday industry-leading value, core menu improvement, and marketing initiatives to position us well in a competitive and challenging environment. And by focusing on the fundamentals of food, service, and atmosphere, we continue to improve operations bring guests back, and deliver consistent positive growth. For the second quarter, Brinker International, Inc. reported total revenues of $1.45 billion, an increase of 7% over the prior year. Consolidated comp sales of positive 7.5%. Our adjusted diluted EPS for the quarter was $2.87, up from $2.80 last year. Chili's top-line sales growth was driven by price of 4.4%, positive traffic of 2.7%, and positive mix of 1.5%. These results were bolstered by the continued success of our margarita of the month program, which performed well during all months of the quarter. Notably, we exceeded our expectations in November, with what guests and the media coined the wicked margaritas which sold approximately 1.5 million more drinks than a typical margarita of the month. Another call up for the quarter Christmas day traded out of the second quarter into the third quarter, resulting in a favorable comp sales impact of 1.2%. Turning to Maggiano's, the brand reported comp sales for the quarter of negative 2.4%. As Kevin mentioned, we saw some encouraging progress as the team executes on its back to Maggiano's strategy, which is designed to improve our value proposition, optimize our service model, and ensure atmosphere is clean and well maintained. At the Brinker International, Inc. level, restaurant operating margin was 18.8% compared to 19.1% in the prior year. A 30 basis points decrease year over year, mainly due to Maggiano's sales deleverage and the additional investments needed to help improve that business. However, at Chili's, we saw a 40 basis point increase in restaurant operating margin year over year mainly due to sales leverage partially offset by incremental investments in labor and advertising, and higher health and workers' compensation insurance costs due to increased restaurant headcount. Food and beverage for the quarter were unfavorable by 20 basis points year over year due to unfavorable menu mix with 0.8% commodity inflation offset by price. Labor for the quarter was favorable 30 basis points year over year. Top-line sales growth offset additional investments in labor higher health insurance costs, and wage rate inflation of approximately 3.3%. Advertising expenses for the quarter were 2.9% of sales and increased 40 basis points year over year due to additional weeks on TV. G and A for the quarter came in at 4.1% of total revenues, 20 basis points higher than prior year due to increased restaurant support restaurant center support resources, partially offset by sales leverage. Depreciation and amortization for the quarter came in at 3.8% of total revenues and increased 30 basis points year over year due to an increase in our asset base from equipment purchases partially offset by sales leverage. Second quarter adjusted EBITDA was approximately $223.5 million, a 3.6% increase from prior year. The adjusted tax rate for the quarter increased to 18.8%, mainly driven by higher profits, which increased at a greater rate than the offset generated by the FICA tax tip credit. Capital expenditures for the quarter were approximately $63.7 million driven by capital maintenance spend. As discussed, in 2026, we started our reimage program for Chili's. We just completed our first four reimages and will use the learnings inform our long-term reimage and new unit growth strategy. We expect to complete another eight to 10 reimages during the balance of this fiscal year before ramping up to 60 to 80 reimages in fiscal 2027. We expect to fully roll out both our reimage and new unit growth programs during fiscal 2028. At Maggiano's, our main focus areas will be guest-facing repairs and maintenance, and a smaller scope reimage program. Our strong free cash flow provides sufficient liquidity to maintain our disciplined capital allocation strategy, allowing us to invest in our restaurants and return excess cash to shareholders. In the second quarter, we also repurchased an additional $100 million of common stock under our share repurchase program to support our ongoing commitment to returning capital to shareholders. In terms of our expectations for the balance of the year, as noted in this morning's press release, we're raising our fiscal 2026 guidance, which includes annual revenues in the range of $5.76 billion to $5.83 billion adjusted diluted EPS in the range of $10.45 to $10.85. Capital expenditures in the range of $250 million to $260 million and weighted average shares in the range of 44.7 million to 45.2 million. This guidance also includes the negative impact from closures caused by winter storm burn through Tuesday, January 27, which includes approximately $20 million in reduced revenues and a decrease of 15¢ in adjusted diluted EPS. Prior to the storm, Chili's comps, including the negative holiday flip, were running solidly in the mid-single-digit range. Giving us a good glimpse into the health of the base business. Once we get through the negative impacts of the weather, we expect Chili's same-store sales to return to the mid-single-digit range. Additional assumptions underlying our guidance largely remain unchanged. We still anticipate wage inflation in the low single digits and our tax rate to be approximately 19%, Our commodity inflation is now anticipated to be in the low single digits for the fiscal year due to the removal of Brazil-based ground beef tariffs this past quarter and better than expected poultry and dairy commodity prices. However, due to rising beef prices, we still expect mid-single-digit inflation for the back half of the year. We remain confident our plans will enable us to lap the upcoming quarters and continue to significantly outperform the industry on sales and traffic at Chili's. In summary, our second quarter results reflect the continued strength of our strategy. Chili's industry-leading everyday value continues to deliver for the guest, not only on overall price, but also on overall experience. As we look ahead, we remain focused on delivering sustainable long-term growth Our continued momentum and plan to the remainder of this fiscal year give me confidence in our ability to deliver on expectations and our strong financial position will allow us to continue to invest in the business and return cash to shareholders. Unlocking future growth potential. With our comments now complete, I will turn the call back over to Holly to moderate questions. Holly? Operator: Certainly. The floor is now open for questions. If you have any questions or comments, please press 1 on your phone at this time. We ask that while posing your question, you please pick up your handset. If listening on speaker phone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is from Dennis Geiger with UBS. Dennis Geiger: Great. Thanks, guys, and congrats on the strong results. First, I just wanted to ask a little bit more on contributors to the strong traffic and sales growth in the quarter. You gave a lot of color. Beyond the margarita campaign, just curious if any other notable shifts in contributors as we think about three for me and where that was mixing, triple dipper mix, etcetera. Anything to call out there? Mika Ware: You know, I'll start having a Kevin Hochman: Oh, go ahead. Go ahead. Go ahead, Mika. Sorry. We're in different we're in different locations because of the ice Mika Ware: I'll start with some of some of the things. And, Kevin, you can fill in some color. So you know, as as we've talked and we've got it all year, you know, our pricing has been very stable, kinda right in the middle of that three to 5% range. What I will say on mix is, yes, we were very, very happy with the performance of the Margaret of the month. But overall, you know, our mix was still positive. That was driven not only by the margaritas, but, you know, continued success in triple dippers. They were up still year over year even lapping the big numbers from prior year, and some appetizer sales. You know, with the new quesos out. So, we're not seeing any huge changes. We're, you know, we're still really happy, with how our menu is performing. How our sales are going. And, again, our traffic, we were very pleased with the traffic throughout the quarter. Had positive traffic, you know, that before the storm. Was continuing on. So, you know, nothing huge, Dennis, that changed Kevin, if you wanna add in some color to that. Kevin Hochman: Yeah. I was gonna say the same thing with a little bit different angle of the it's just more of the same. So we continue to know, streamline the menu. We continue to improve operations. And make the needed investments to improve the overall guest experience. And then we see that in the internal metrics, and then that allows us to both attract new guests with things like the three for me and and, you know, the margarita of the month program that we that did really well in November and December. But then also, allow us to, retain existing guests. So we don't see any frequency changes we don't see frequency changes in existing guests. When we keep bringing new guests in and they start looking like existing guests pretty quickly in terms of frequency, that's how you sustainably grow over time. So, like, you know, I shared the GWAP, metric. Guess what? The problem you know, continue to hit record lows. You know, our food grade scores went from 68% last year in Q2 to 74% this year. Also saw quarter on quarter improvements in food grade and same thing with intent to return. With 72% last year. It's, almost 78% this year. So you just look across the board, the internal metrics continue to get better, and this is what I keep saying. As long as you keep focusing on the fundamentals of casual dining, and we are honestly looking in the mirror saying, we gonna be better this year than last year? And we continue to have this world-class marketing. There's no reason why the comp will continue to grow. So just gonna it's gonna be kind of a boring quarter when you say there are new drivers, and it's like, well, they're not new drivers, they're new things we're doing. To drive those drivers. And couldn't be more proud of the team. Great. Appreciate it, guys. And just one more. You guys both gave good color on sort of back half of the year revenue and comp expectations. And I think talked about a a strong quarter to date even even with a a calendar shift pressure, I believe. Anything else on kind of the back half of the year? As it relates to top line expectations? Anything embedded from a stimulus tax rebate perspective or or, Kevin, anything else to share on on some of those, you know, big levers which sound exciting for the back half of the year? Thank you. Mika Ware: Yeah. Dennis, so let me kinda talk about that. So we, like Kevin said, expect more of the same. So we're forecasting for Chili's you know, mid sing solid mid single digit comps for the back half of the year. We've talked about pricing. I think, again, you know, mix may moderate a little bit in the back half of the year just as we continue to lap those really big triple dipper numbers. And then traffic, what I would say is, you know, prior to the storm, we would've expected traffic positive in both two three and two four. You know, we may have a little pressure with the storm and the holiday flip on, you know, traffic just because of those two events. If be flat to slightly negative traffic in Q3, but we expect you know, positive traffic in Q4. So, really, it's more of a same, but that's some of the, you know, detailed color into what we expect the same store sales to do. Over time. Dennis Geiger: Great. Helpful. Thank you, guys. Mika Ware: Thanks, Dennis. Operator: Your next question is from Chris O'Cull with Stifel. Chris O'Cull: Yes. Thanks. Good morning, guys. Mike, I just wanna follow-up on that last question. Can you just maybe elaborate on or level set us on the comp cadence that's embedded into the back half of the year guidance? Mika Ware: Yeah. No. It's gonna be pretty steady as we go. So you know, January did we'll have the storm and the holiday flip. But after that, the quarters will be very I expect it to be very steady mid single digit. There's not a lot of flips in and out in very similar to each other is what we expect. Chris O'Cull: Okay. Perfect. And then, Kevin, you guys have successfully used a ten ninety nine anchor to drive the 43% to your comp, but the barbell strategy relies on guests eventually, I would think, trading up to premium items like the Triple Dipper and then maybe the new ribs. But as you as you lap these massive traffic gains, how do you prevent the ten ninety nine price point from becoming a structural ceiling on the pricing power? Is there any long term risk that you're training, you're most loyal new guest or your new guest, I guess, to never leave that price point? Kevin Hochman: Yeah. Well, it's something we've talked about for several years now. It's very important for our team to have offerings for all guests because if too much mix gets in the $10.99 price point, obviously, the the math doesn't doesn't continue the math. So one of the first thing that we do is we have we call the barbell strategy, which we talked about, which is we have good, better, best price tiers. Because not every guest wants the cheapest thing on the menu. Some some want different benefits or different features in the things that they buy. So, like, when we when we launched the chicken sandwich when we launched the chicken sandwich, it's not just gonna be hot opening price point that we advertise on TV. We're gonna have a chicken sandwich with benefits. We're gonna have more premium chicken sandwiches that can take you all the way up to the to the highest tiers. And then we're gonna continue to manage that. So the the outcome when you do this is that you keep the $10.99, sales mix constant. You don't let it grow too much. Because that's when the margins can get out of whack. So as long as we continue to bring innovation, not just at the $10.99 price point, but at other price points that we keep other parts of the menu interesting and we hold the mix on all those parts of the menu, we shouldn't have any issue continuing to advertise $10.99. Now five years from now, I know we might be in a different position. It's, you know, it's hard to predict how what will happen with COGS inflation, etcetera. But because we have such a varied menu and we've done a really good job merchandising and we continue to innovate on higher tiers like ribs and margaritas, etcetera. We're continuing to drive people into that mix. We don't see we don't have, like, specific detail. We don't see in general a lot of training up and down the menu, so people kinda gravitate to what they wanna gravitate to, and they stick with it. So, like, the three for me, consumer tends to come more often. They actually spend more over the course of the year because they come more often. Versus a higher priced, guest. They don't come as often, but they're worth a lot to us because they spend more when they're there. So but, like, like, I get asked a lot of questions about our people. People bounce all over the menu, and you know, you just don't see that much of that. Chris O'Cull: Makes sense. Congrats on a great quarter, guys. Operator: Your next question for today is from David Palmer with Evercore ISI. David Palmer: Thanks. Good morning. I had a question on the reimaging. Are is there any one of the prototypes that you're testing that is emerging as the most exciting, the the the you know, perhaps the one that you feel like has a very good odds of being the go to market option and that that can be rolled out quickly and with significant sales. Lifts? And if so, what what can you tell us about the learnings from the reimaging? Kevin Hochman: Yeah. Good morning, David. Thanks for the questions. So there's two reasons why we're doing these first four. One is to understand the levels of investment and which ones make the most sense. And then the second is to have get operational learning so that we don't make this if there's any mistakes in the first word, we don't make them as we roll them out to the balance of the system. And, obviously, we'll continue to learn beyond just these first four. The first thing I would tell you is the guests and the team members absolutely love all all four of the reimaging. Units. And there's a lot of clearing in our system to get that across the system. And so that's good. It's too early to, you know, declare victory on sales lifts. The initial results look pretty pretty good. We're pretty excited about that. But it's nothing that we would publish and that you could take to the bank. You know, obviously, wanna understand more and look at test versus control and all that good stuff. So overall, the first thing is they look like completely different restaurants, and when all you guys are here for our investor day later in the year, you'll be able tour them. So we'll make sure we spend time where you can see them firsthand, those first four. And get, you know, get your eyes on them to see that there's a a market difference. I mean, the basically, the comment I typically hear from the managers is, like, we have a new restaurant, which is really cool to hear because these are really old restaurants. Restaurants that haven't been touched in a while. The second thing that we've learned is that that so each of the four have different elements to them. And the good news is the one that has actually the lowest cost is the one that everybody's gravitating towards is the best. So some of the ones that cost a little bit more, they had a little too much done, on the inside, and they're a little too busy. So we're learning, like, hey. Less is more in some of the interior units. But things like the bar part of the reimage has been phenomenal. I mean, it literally just makes the whole building feel different. Not just the bar area that creates an energy and a vibe. And it is distinctly chilly. I mean, you go in and you're like, wow. It feels like I'm back in Chili's when it first started, but in a modern way. So so that's the second thing we're learning is that we probably don't need all the bells and whistles. Like, for example, a couple of the restaurants have these oversized margarita shakers that we actually pulled from old the old old Chili's. And it's something that just feels like it's clutter. It's not really adding versus some of the tile tables that we've added some of the the cheaper, fills actually make a bigger impact. So we're gonna be obviously focused on the things that make the biggest impact for the lowest cost, so that's a good learning. And then lastly, we're learning a lot about the operational opportunities with rolling them out. So, for example, we're learning there's just a lot of extra dust and a lot of extra work that's coming in that construction, so we gotta do a better of, like, masking and taping and tarping, and those are important things to know as we roll out further. We're learning about some of the tile work that we're putting by the bar is actually not needed, and it adds additional expense that's not needed. So just using the tiles on the tabletops, on the exterior, and on the sides of the bar, but not the floor of the bar. Is making the maximum impact. And then we're also learning about some of the operational So, like, for example, we're bringing back tile tables but we're doing it in a smart way where they're much easier to clean. So like, the old tile tables that were so cool, are really difficult to clean the grout in between the tiles. So we're basically doing is a is a printed tile table that looks three-dimensional, but then has an acrylic top on top of it. We're finding that those are a little hard to clean, not the tile, but because that's just printed unit, but the actual plastic is starting to buckle under the heat of skillets. So an example where we're just gonna spend a little bit more time getting the right tabletop on that. So that's what we're learning from it. It's both operationally, how do we make sure that sound? And then two, what is the right investments? But I will you, we are extremely bullish about this, and we can't wait for you guys to see what we've done. David Palmer: Great. Thank you. Operator: Your next question is from John Ivankoe with JPMorgan. John Ivankoe: Oh, hi. Thank you. So much. It's actually a follow-up on the previous question. In terms of remodels, which obviously you're planning to accelerate into 'twenty, '7. I think you said '60 to '80, but correct me on that. With potential further acceleration into '20 Operator: John, you're cutting out. Looks like his line dropped. We'll take our next question from Jeff Farmer. Jeff Farmer: Yes. Just cutting to the weather and all the calendar shifts that the the industry is facing, what is your read on casual dining segment trends in December and January? So ultimately, I'm trying to ask you guys if you think the demand backdrop is stable Is it is it softening? Is it improving? Any color there would would be helpful. Kevin Hochman: Well, it's just like what you guys are seeing. It's mixed. Right? Like, you know, December was tougher for the industry, but then January looked really good, and then the weather hit. So kind of stopped that trend. So, I mean, candidly, it's a lot of mixed signals. You know, what I told our team just continuing to focus on the things that we can control, which is food service and atmosphere. Whether the economy gets better and the consumer gets better or worse, having a better experience is gonna win trips, which is what's happened in the last couple years for our business. So you know, if the macro gets better, that'll be more tailwind for us. The macro doesn't get better, we're gonna continue to steal market share from those that aren't improving their food service and atmosphere. So but but to answer your question directly, we you know, December didn't look great. January looked better. Weather stopped everything. We'll see what happens when when, you know, the we get out of fully out of the weather, whether the strength that we saw in January restarts. So it's similar to what you're seeing. Jeff Farmer: Okay. And then, Michael, would the updated guidance can you just sort of level set us on the restaurant level margin and G and A as a percent of revenue ex expectation for fiscal twenty twenty six? Mika Ware: Sure. So so, you know, looking out into the the back half of the year, what I would say is, you know, our restaurant level margin will probably decrease a little bit in the back half, versus what we posted in t two. And, really, it's the the line I think everyone should look at is, you know, make sure the cost of sales line is is gonna be pretty similar to what you saw in in in Q2, maybe a little bit higher. I talked about the the kind of influx in commodity pricing in the back half. That also that mid single digit includes some of those investments we've made in things like bacon and ribs and some, you know, better cut chicken. You know? But that being said, they're gonna be phenomenal margins in the back half, very steady. You know, similar what to what to what you saw in in q, maybe just, you know, wash through some of those laps year over year. a a little bit less as some as we kinda Kevin Hochman: And then g and a real quick? Mika Ware: Oh, g and a is gonna be very similar to you know, what you saw. We are 4.1% of total revenues in Q2. I expect similar numbers as you move through the fiscal year. Alright. Thank you. Similar to what you saw in Q2. Jeff Farmer: Thank you. Operator: Your next question is from John Ivankoe with JPMorgan. John Ivankoe: Hi. Thank you so much. Can you hear me? Operator: We can now. John Ivankoe: Alright. Super. You're talking about travel to disruptions. I'm doing this from the airport, I asked this big, long question. And so it's literally just talking to myself. So thank you for the patience on this. So the question is actually a follow-up to the remodel question. Obviously, remodel is an important part of Achilles' business. And I think I heard you say, correct me if I'm wrong, that you're planning sixty to eighty remodels in '27 with a further Operator: Looks like we lost his line again. I will move on to John Tower with Citi. John Tower: Hey. Good morning. Thanks for taking the questions. I appreciate it. Just a couple, if I may. Maybe starting off, I know obviously you're on the chicken from in April with advertising. I believe there's a soft soft launch now or soon in stores. But curious if you're attacking the marketing side of the equation any bit differently than what you've done with the previous two product launches on three for me the two burgers. You know? I know it's you don't wanna if it's not broke, you might not want but is there a different tact you might be taking this go around? Kevin Hochman: Well, we think that that high prices are more relevant than ever. So, you know, every time we think we're gonna the consumer is gonna get bored of our messaging, like, this this keeps coming back up in social media and in the zeitgeist. So and I think you guys see it all the time that consumers are really frustrated with high pricing. You know, in lots of different areas, not just restaurants. And so the idea of continuing to attack that head on with unbeatable value and abundance continues to win for us, so there's no reason why we would change that. John Tower: Got it. And and then just maybe the you have a fairly store level employees and and specifically thinking about incentives over time. Obviously, ambitious goal to get to roughly $6,000,000 AUVs across the the Chile store base over time. I'm just curious how you're thinking about store level incentives for the managers and where they sit today versus where you might optimally see them going over time? Kevin Hochman: Yeah. It's something we talk about a lot. You know, we look at, like, the best in class competitor, and they are masters at ownership at the general manager level. And part of that is their incentive structure. They do other things too. That we're obviously studying. And, you know, right now, we're in the camp of let's get our managers trained so they can be true owners of the business. For years, we started pulling things off of their p and l in effort to make their bonuses more and more fair and control more of what happens in the rest restaurant and we've gotta unravel some of that so that they actually understand the p and l, understand the areas that they can improve their their bottom line and their top line. And then start rewarding for them once they're trained and have the tools to do that. So the first step has been number one, what we're launching a new P and L tool. As part of our overall Oracle upgrade. That's done, and they've been trained on that. Secondly, we're teaching the principles of extreme ownership to our managers. We started with our directors of operation and above, and now we've been rolling that out over to the general managers. And the management team inside the restaurants. We're gonna do that for at least a year, maybe even a little bit longer before we actually change the incentive structure. Structure. I do anticipate that we will change the some of the long term or I'm sorry. Some of the bonus structure for the directors and above before that. So we'll we'll try to roll that out to the directors first. And make sure that we got their bite and their understanding before we would ever go to the manager level. But we're at least one to two years out from actually changing the incentive structure of the managers. John Tower: Got it. Thanks for taking the questions. Operator: Your next question is from John Ivankoe Your line is live. John Ivankoe: Okay, guys. Thank you so much for the patience. We're blaming this on the ice storm. So I'm in the airport, and this one's not gonna drop. So the question was on remodels. Remodel is obviously a very important part. Of your story in 2728. I think I heard you say 60 to 80 remodels in '27, followed by a greater in '28. So just confirm that, And secondly, you know, as we think about new unit development, you know, into '28 and beyond, I mean, that is something that you're planning to accelerate Achilles business in '28 And I'm not going to ask you for TAM at this point on this conference call, but what are we thinking in terms of percent unit growth that's kind of right for the Chili's brand at this part of the brand's life cycle. In '28, that maybe can be established for a long term and you know, Micah, you know where I'm getting with this question is how we should just think about broad capital intensity of the business in 'twenty seven and 'twenty eight. Is this such an important part of our model. And thank you guys so much for the patience. Mika Ware: Yep. So, John, let me start by a lot of pieces to your question. First, yes, I'll confirm. We want to ramp up in '27, fiscal twenty seven with 60 to 80 as our current plan. And then the goal in '28 is to get to about 10% of the system, which would get us a little bit over a 100. So you did hear that right, and we're very excited about it. Okay. On the new unit growth. And so what I would say is next year, you know, this year has been pretty flat with what we've opened versus what we've, you know, some of the leases expiring, etcetera, what we've closed. Next year, you're not gonna see that much of a bump because remember, it's an eighteen to twenty four month cycle. So that's from two years ago when we weren't really leaning into new units. But what I can tell you with all the progress we've made on building the team and all of the sites that we have at front end of the funnel that we're putting in, I do feel like you're gonna see a significant difference in f '28 in the new units that we're able to post, for that year. So, that is correct. You know, we haven't communicated an exact target of new unit growth you know, but you know, it it will be in the the low single digits, I would say, if that could be in the realm of expectations for what we can do. Again, that'll be something that we go into more detail on when we get to that investor day in talk about what we think the universe of Chili's could be, you know, what we think that new unit growth cadence will be over time. But we do know that we can build more Chili's, and we're really excited about it, especially with the change in the business. The areas of opportunities have opened up for us because our business is so much stronger on where we can build, in different areas, different locations. We've learned a ton, so we're really excited about it. As we move forward. So I hope that's helpful. John Ivankoe: It it it is. And I guess as we're thinking this point, I mean, do do we think that there might be an opportunity long long term to maybe double the Chili's brand relative to what it is? Or you know, am I maybe getting ahead of myself, you know, kind of the question of just thinking about what this brand could be now that it has, the returns the permission, the capital to once again start to expand this footprint again. Mika Ware: Yeah. Again, no. I don't I don't know that we're ready to say the numbers. Think double quite aggressive, but, yes, we think we can build, you know, more Chili's and, again, more to come. The great news is the company has plenty of capital available to do it too. So know, that's not a constraint, for us to continue to invest in the business and return to the shareholders. So, we feel really good about our capital allocation strategy over time and our ability to invest back in the new unit growth and grow some profitable Chili's. John Ivankoe: Alright. Well, I'm really looking forward to the event you guys to highlight all of your opportunities. So look forward to that. Thanks again for the patience. Operator: Thanks, John. Your next question is from Brian Harbour with Morgan Stanley. Brian Harbour: Yes, thanks. Good morning, guys. Micah, just so I'm clear on the food cost comments Yeah. Are are you saying sort of, you know, tariffs is helpful, but look. There's some other things that sort of offset that. So you're not really changing your outlook for commodities. Mika Ware: Yes. No. My outlook for commodities you know, we did have favorability in the tariffs. So it is more favorable than it was last quarter. But what I'm saying is I'm reiterating that the back half of the year is gonna be in that mid single digits. That does include some of the investments we've made in things such as ribs, and bacon. Made some investments in poultry. And so we're I'm just trying to level set everybody on, you know, commodities that look pretty favorable in the front half. In the back half, it will be that mid single digit. And then to help guide people on what does that mean, I was just trying to say, hey. The you've seen our food and beverage cost in quarter two. I think we'll have a similar number in quarter three as we move forward. So just trying to to help people kinda understand you know, what would that, turn into within, you know, 10 to 20 basis points. Brian Harbour: Okay. Got it. Thanks. And, with, sir, the chicken sandwich revamp, did you did you change any of the timing at all on on sort of the soft launches that still as expected? Are you is it fair to say you're not kind of giving yourselves credit for that in your your revenue comments or, you know, you sort of just view it as one of of the drivers that have been ongoing. Kevin Hochman: Yeah. That's the Go ahead, Micah. Mika Ware: I'll just say the chicken sandwich, what's what's in the guidance is we have it in over 200 restaurants now where we're getting all the learnings The real launch will be late in April. And that's when we'll go on TV. And that's really critical for the the chicken sandwich because this is about driving traffic with a very appealing product that we have. And so that that's the timing that's built into the guidance that we gave. Kevin, you can give more color on that. Kevin Hochman: Yeah. I mean, the thing to understand is in the 200 restaurants, when you when you don't advertise it, you're just basically gonna be moving mix You might get a little bit of repeat, but it's only a three or four month period, it's not gonna be a ton of repeat that you get. So you're really just trying to test for you know, what are consumers saying about the sandwich? Can we can we execute it with excellence given it's gonna drive a lot of mix, the way you merchandise it? What is the feedback that we're getting on the sandwich? But you're really you're really not gonna see a major change in the business other than some mixed shifts until you launch the the TV advertising and start bringing people in with sandwich. So I wouldn't read too much in the, the restaurants that we put in other than it's encouraging. When you see something mixed significantly more and the feedback's really good, that's always a good sign that it's gonna do even better when you go on TV. Operator: Thank you. Your next question for today is from Brian Vaccaro with Raymond James. Brian Vaccaro: Kevin, just back to chicken sandwich. Could you remind us just the changes that you've made to quality and the flavor profile? Maybe level set us on on where your existing chicken sandwich mix is and and just kinda how how you frame that potential opportunity? And then more broadly, just what's your latest thinking on the timing for other menu upgrades? Are you still thinking about steaks and salads, maybe moving into fiscal twenty seven? Just just curious there. Kevin Hochman: Yeah. So I'll let, Micah answer the exact mix question while I give you the, update on the platform. So the, the first thing is the base sandwich, and we had we had fixed the recipe on that. About a about a year ago where we went to a very focused build, that you see in kind of the most popular or the biggest innovation in, I I would say, in fast food history or modern history, which is the Popeyes chicken sandwich, is a very basic build. And we wanted to look at that and learn from that. And so what we did about a year ago. We basically have, you know, a brioche bun, semi cured pickle, mayonnaise, and a and a very large hand breaded chicken breast that we think is incredibly abundant in in the category. And we I don't have the exact data to say it's the biggest, but when you eat it, you're you you might you might think it's the biggest. And so that was done. And then we're gonna start bringing in some flavor updates to it which I can't go into the details of, but there'll be a variety of sandwiches in different benefit spaces based on some of the signature flavors that we have as well as a new flavor that we don't have in the in the restaurant today that mixed really well when Popeyes launched the sandwich, And then, and then we're gonna have a good, better, best, tiering of those sandwiches. So we'll have a base sandwich at a hot price point. We'll have a sandwich with benefits at a at a medium price point, and then we'll have a super premium that it will have, you know, like bacon and produce and things that you'd expect with a super premium sandwich at the super premium tier. And then we're also gonna bring some additional sides innovation and and, and dip cup innovation to that lineup to make it even more exciting and more distinctly chilly. So it really will look like a completely new lineup to the guests. And it's in areas that we know that consumers are excited about chicken sandwiches. But done in a very unique Chili's way, not just in the flavor profiles, but the abundance and value that we think that you're gonna get. Mika Ware: And so I'll talk about the next slide. Right right now, the mix is very low, Brian, because we aren't merchandising it on the menu. It's not on TV. So it's a it's just one item on the menu in our handheld section. So very low. But there are big plans for how we merchandise it, how gonna be on TV. So we do know that there is, you know, big room for Mix to grow there. And we do think, again, that the chicken sandwich is designed to be a traffic driver. Brian Vaccaro: Alright. That's that's very helpful. Was gonna ask one on the balance sheet as well. Micah, you only have $20,000,000 left on the revolver, I think, and you the 350,000,000 notes. At 8.25%. Just how are you thinking about the refi opportunity on the notes through calendar '26? And there an opportunity to maybe move those notes onto the revolver '26 and maybe, shave off a few 100 bps on the interest rate? Mika Ware: You know, Brian, right now, we don't have that in the works, but we are watching it closely. So if the opportunity arises where we can take out you know, the bonds early and it makes sense for an enrolled revolver and save us some money, we'd absolutely do that. Remember, you know, it's just different aspects of when you do it and the fees you have to pay upfront, but is something we're watching. So right now, I would say we don't have that planned, but we're gonna continue to watch it. Brian Vaccaro: Alright. Thank you very much. Operator: Your next question is from Eric Gonzalez with KeyBanc. Eric Gonzalez: Hi, thanks for taking the question and congrats on the strong results. I'm just curious about the timing of marketing investments this year. I know there was an uptick in spend in the second quarter. So if you could just confirm that you stayed in that range of 9,000,000 to $10,000,000 in incremental advertising? And then how does that look as you get into 3Q and 4Q? Particularly around the chicken sandwich launch? Mika Ware: Yeah. No. We did stay in that, Eric, So we had the biggest increase year over year in Q2. So that that did happen, and we said that was about 2.9% of sales. I think the percent of sales will say know, fairly stable as we move forward. The year over year increase is an f much in three and four, But exactly what we said, you know, did happen in Q2. Eric Gonzalez: Okay. And then just quickly just regards regarding the winter storm. I mean, how quickly do you expect to bounce back there? And and what are your expectations in terms of how long the effects could linger? Mika Ware: Yeah. No. That is the big question. So it was quite a challenge to be we had to quantify the impact of the storm while the storm is still happening and, unfolding. And so that is why I was pretty purposeful in saying, you know, this is what we know as of Tuesday. You know, and what the impacts are. So that is what we have built into that guidance. You know? We'll see there. Historically, we have had some bounce back. You know, when people get a little bit cabin fever. Now, you know, on the flip side, little caution, we lost a Friday, Saturday, Sunday. We're in a Monday, Tuesday, Wednesday when it bounces back. So there could could be some upside, but what I will say is we don't have a ton of upside built in that we just kinda have all systems go from Wednesday on. So upside or downside on the storm could could still be you know, kinda playing out a little bit. But we think we got the bulk of the impact captured with what I communicated earlier. In the 20,000,000, decrease in revenue and the the 15¢ to EPS. Eric Gonzalez: Yeah. Fair enough. Thank you so much. Operator: Your next question is from Christine Cho with Goldman Sachs. Christine Cho: Congrats on the quarter and thanks for taking my question. In the last call, you mentioned that the under $60,000 income cohort is your fastest growing group. Contrary to kind of the broader industry trends. Have these trends continued into to this quarter? And are there any other observations on spending across various consumer cohorts? And additionally, are you concerned at all that the QSR pricing growth continues to track below the casual dining average and how that would impact the overall category value perception? Thank you. Kevin Hochman: Yeah. So from an income cohort standpoint, we we didn't see much shifting in the quarter. Like, the the low income cohort is no longer the fastest growing there was a little bit of shift down and a little bit of shift to the higher income cohorts, but it wasn't anything like that was so obvious that I'd be willing you know, we we should proactively highlight to you guys on the call. So but just a little bit. We haven't seen any kind of trade down. Like, mix has been pretty healthy. So know, I would say not really made any major shifts or changes versus last quarter. Know that's a little bit of bucking the trend from what you see in the industry, but I also think we do have industry leading value, which is helping insulate us. To some extent. You know, as far as the QSR question that you the second part of your question, You know, I'd say we still have industry leading value on TV. You know, we still have when you look at casual dining's having a renaissance and you look at our I mentioned on my prepared comments, when you look at the PPA, or per person average, versus our casual dining, competitive set, direct competitive set, $3 under them or $4 under the broader casual dining. So we don't really we feel like we're really positioned to win because of what happens with the macro. Between the operational improvements that we've made, where we've positioned ourselves and then our everyday value, which looks pretty darn good. So know, I'm not particularly concerned. You know, I think we get asked that every time, you know, a competitor from Chicago decides to put a $5 meal out there, and we just keep chugging along. And I think it's because when you look at the overall value for what you pay for what you get, it does feel superior to what's out there, and we're gonna continue to deliver that. Operator: Your next question for today is from Sara Senatore with Bank of America. Sara Senatore: Oh, thank you. Just, I guess, maybe a couple of clarifications. One, Micah, you pointed out that you had positive mix in terms of the check impact, I think negative in terms of margins. You just talk about that? Mean, it didn't sound like there was a lot of shift in terms of consumption or or guest kinda choice. But, you know, I don't know if that was maybe a little bit more on the value side. And then also, I sorry if I missed it, but you lowered the CapEx guide. I don't think that's because of the lower kind of cost of remodels. Sounds like those are still in in test, but just wanted to maybe understand that too. Mika Ware: Okay. Yeah. Great, Sarah. So, you know, the first of all, we'll start with the mix. Yes. Mix is positive and a little less positive. One reason that margins went down year over year was, if you remember, last year, it's really about the lapping of last year when we accelerated our business, took a huge step change in the business, We weren't able to staff our labor as quickly as we needed to, you know, a year ago, October. We kinda over earned in quarter two, which I caution people about as we were lapping that even coming into this year. So I think that's probably what's in play with the margins more than just the overall health of the margins and the health of the business and the flow through. So, again, that's kinda the what kinda was built in the run rate. The same with the the restaurant expense. As our our as our restaurants got busier, it took us a little bit to ramp up and get those expenses caught up with kind of the new traffic level. And, you know, we've continued to invest in the business, and now we're lapping some of that. So I feel really good about the flow through and the mojo margin profile overall. So, you know, it it's really strong and really healthy. If I take a step back and just look at the full year, you know, I got it that I think we can improve restaurant level margins 30 to 40 basis points, even with the impacts of this this storm, that could put a little pressure on us. I still feel very confident in that number on growing the margins over time. So I feel like if there's any variability in the quarter to quarter, it's, you know, really back to some timing of expenses or investments. And a little bit of seasonality, but I feel really good about margins overall. Great question about CapEx. Really just taking a look at it at the midpoint of the year. You know, we realized it's not necessarily because reimages are less expensive. We're still finalizing the scope of that. We are doing a few less than we originally planned. I think the bigger nugget in is there is we had a placeholder for maybe a potential new equipment rollout. But now, you know, after the teams have have moved down a little bit further on that, we realized we aren't gonna a new big equipment rollout. So we went ahead and updated that in our forecast and just tightened it up a little bit. So, you know, plenty of capital out there. We're just tightening up the forecast. Sara Senatore: Okay. Thank you. That's helpful. And then just on the margin, I guess I was referring to COGS specifically. You had said it was, I think, 20 basis points. Unfavorable because of menu okay. Thank you. Mika Ware: Okay. So that is really, you know, what we're saying is there's a lot of investments into the quality of the food. That we're lacking. So ribs is is very material investment. We talked about you know, we were serving one third ribs and two third. We did the big shift from, you know, imported ribs to domestic ribs. So that's just an example of know, we put a lot more of quantity and quality into the cost of sales line. And so that's where I'm just saying, hey. You see kind of a new run rate in cost of sales. It's a combination of we have you know, we do have some more we we still have commodity inflation in there, but then the investments we're making into that cost line. And so that that's kinda what what's hitting there. Any you do mix into some more expensive items, you know, which is fine, puts a little pressure there. You always have higher penny profit, but you know, if you're selling more of the more expensive one, there's some more cost of sales associated with that too. Sara Senatore: Great. Thank you so much. Mika Ware: Thank you, Sarah. Operator: Your next question is from Jeff Bernstein with Barclays. Jeff Bernstein: Great. Thank you. Kevin, I was intrigued by your your prior comments on the restaurant level leadership model. I think you mentioned that you have a peer that successfully operates with a a market partner of a market partner ownership model, more akin to maybe a franchise model, which you know well from past days. So I'm wondering if you could just any more color conceptually about the the pros and cons versus the more traditional company operated manager model that most of the industry uses. It does sound like maybe you're considering a shift I know others have talked about the potential to benefit retention, engagement, compensation. Just wondering if there's any more color in terms of how you would implement it would seem like that will be a material change to your economic model, but presumably, more of an ownership structure for for long term further improvements. So incremental color would be great. Thank you. Kevin Hochman: Yeah. Hey. Good morning, Jeff. So the I think conceptually, all of the stakeholders online that we wanna do something here. Like, we believe that when we hear it from the managers, they wanna have more of a stake and ownership in the company especially when they see with how the company's performed. We believe that it would be a good thing for them to have more ownership over the results in terms of their personal compensation as well as just how they run the run the restaurants. So don't think anybody's really debating, like, should we do it? It's really the how. And the challenge for us is that when you when you benchmark the model that you were talking about earlier, that they tend to pay lower base salaries and then they put more into the variable comp. And that puts in a difficult position because we're not gonna lower base salaries and put it in the variable comp. That's not gonna be received very well. So we've really gotta figure out what's the how to do this in a way that is gonna work for everybody and not just, you know, hope that in the year that we make the change that people aren't upset about it because they would be because they're they're moving you know, comp that you can be confident into something that's more variable. So we've gotta figure out a way that wins for everybody and not just on one or two items. That's what we're gonna have to work through. At the same time, we still got a couple of years where we just gotta continue to build skill and capability and the ability to own own to own the restaurant. So that means building the best team, holding people accountable, making sure that you really are owning your to do in a while. restaurant and the facility. These are new muscles that especially, you haven't asked these guys That we've gotta build up over time before we did change any incentive structure. So and and I wish it was more simple, and we could just flip a switch and and kinda replicate the models that we see that work. But we're just we're starting from a different place. Operator: Your next question is from Andrew Strelzik with BMO. Andrew Strelzik: Hey, good morning. Thanks for taking the questions. Was wondering if you're seeing the mix of traffic growth shift between new customers and increasing frequency. And I guess what I'm trying to think through is know, as you brought back all these new customers over the last couple of years, as you kinda work through the the brand repositioning, kind of how you You know, is is the opportunity mix between those two buckets evolving and potentially evolve the strategy to to address the two buckets as you as you move forward? Kevin Hochman: Yeah. Hey, Andrew. It's Kevin. You know, I we don't see really a change in what how we're doing this. The the it's pretty simple. It's like, number one, continue to have a great, experience so that you don't leak gas. And so that's what we see on the frequency of existing guests that's not changing. And then and then use our world class marketing and great value offer and great new positioning to drive new guests in. And so if you're not leaking guests, and you're bringing new gas in and then they quickly are starting to look like existing guests in terms of their frequency pattern, that's a recipe for sustainable growth. So know, what I lean on my team is don't change that strategy. But you better have ideas every quarter to get better and better on the experience because that's the flywheel. We know the marketing guys can do it. They're doing it right now. They're continuing to just you know, really really reinvent the industry and what can be done with our advertising and marketing. Hats off to them. So as long as we continue to improve our experience over time, there's no reason why this road won't stop. So I don't anticipate changing the strategy. It's just making sure that we continue to execute it quarter after quarter so we continue that. Because the key to this whole thing having a great experience because that's gonna both retain existing guests and stop the leak. And be able to attract new guests because of the things that people are saying about our brand. And we're just gonna continue to do that. Andrew Strelzik: Okay. That that's helpful. And one clarification. Last quarter, you talked about the earnings drag from Maggiano's. Can you share what that looks like through the back half of the year? Mika Ware: Andrew, that's me. So, really, just what I would say is in the guidance that I gave, we haven't changed the expectations for Maggiano's very much. And so what we're expecting is their their same store sales will probably be in the negative mid single digit range. For the back half of the year. So probably just, you know, more of the same on that. So if we get some more green shoots out of Maggiano's, then I think we can start you know, improving that. But they're still gonna have a drag year over year in their margins. Andrew Strelzik: Okay. Thank you very much. Mika Ware: Okay. Thank you. Operator: We have reached the end of the question and answer session, and I will now turn floor back over to Kim Sanders for closing comments. Kim Sanders: And that concludes our call for today. We appreciate everyone joining us and look forward to updating you on our third quarter fiscal 2026 results in April. Have a wonderful day. Thank you. Bye, everyone. Operator: Thank you. This concludes today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
Operator: Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce Mr. Joey Rein, Director of Corporate Strategy at Trustmark. F. Joseph Rein: Good morning. I'd like to remind everyone that a copy of our fourth quarter earnings release and the presentation that will be discussed this morning are available on the Investor Relations section of our website at trustmark.com. During our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and we'd like to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties, which are outlined in our earnings release and in our other filings with the Securities and Exchange Commission. At this time, I'd like to introduce Duane Dewey, President and CEO of Trustmark Corporation. Duane Dewey: Thank you, Joey, and good morning, everyone. Thank you for joining us again this morning. With me are Tom Owens, our Chief Financial Officer; Barry Harvey, our Chief Credit and Operations Officer; and Tom Chambers, our Chief Accounting Officer. Trustmark's momentum continued to build throughout the year, resulting in record earnings in 2025. Our traditional Banking business drove continued loan and deposit growth, a strong net interest margin and solid credit quality. Our Mortgage Banking business achieved increased production and significant improvement in profitability, while revenue in our Wealth Management business reached an all-time high. In our presentation this morning, I will provide a summary of our performance and discuss forward guidance before moving to your questions. Now turning to Slide 3, our financial highlights. Our fourth quarter results reflected continued significant progress across the organization. Net income totaled $57.9 million, representing diluted EPS of $0.97 a share, up 3.2% linked-quarter and 5.4% year-over-year. For the full year, Trustmark achieved a record net income of $224.1 million, representing diluted earnings per share of $3.70. Net income from adjusted continuing operations increased $37.8 million or 20.3% in 2025. This level of earnings resulted in a return on average assets of 1.21% and a return on average tangible equity of 12.97%. From the balance sheet perspective, loans held for investment increased $126 million or 0.9% linked-quarter and $584 million or 4.5% year-over-year. Our loan portfolio remains well diversified by loan type and geography. Our deposit base declined $131 million or 0.8% linked-quarter, driven in part by a decrease in public fund deposits of $219 million. Year-over-year, deposits increased $392 million or 2.6%, driven by growth in commercial and personal balances of $568 million. The cost of total deposits in the fourth quarter was 1.72%, a decrease of 12 basis points linked-quarter. Our strong cost-effective core deposit base is a continuing strength of Trustmark. During the fourth quarter, we repurchased $43 million or 1.1 million shares of our common stock. For the year, we repurchased $80 million or 2.2 million shares, which represented 3.5% of outstanding shares at year-end 2024. As previously announced, we have authorization to repurchase up to $100 million of Trustmark common shares during 2026. This program continues to be subject to market conditions and management discretion. Revenue in the fourth quarter totaled $204 million, while revenue for the full year totaled $800 million, a record year at Trustmark. Net interest income in the fourth quarter totaled $166 million, which produced a net interest margin of 3.81%. For the full year, net interest income totaled $647 million, up 8.4% from the prior year. Noninterest income in the fourth quarter totaled $41 million, up 3.3% linked-quarter. In 2025, noninterest income totaled $164 million, representing 20.5% of total revenue. Noninterest expense increased $1.2 million or 0.9% linked-quarter. For the year, noninterest expense totaled $512 million, an increase of 5.5% from the prior year. Diligent expense management continues to be a focus of our organization. From a credit perspective, net charge-offs in the fourth quarter were $7.6 million and included 1 individually analyzed loan, totaling $5.9 million, which was reserved for in prior periods. Net charge-offs represented 0.22% of average loans in the fourth quarter. For the full year, net charge-offs were 13 basis points of average loans. The provision for credit losses in the fourth quarter totaled $1.2 million. The provision for both loans held for investment and off-balance sheet credit exposure were impacted by positive credit migration, loan and unfunded commitment growth, and the macroeconomic forecast. In 2025, the provision for credit losses was $12.9 million. At year-end, the allowance for credit losses represented 1.15% loans held for investment. Again, very solid credit performance. We've been active on the capital management front, issuing $170 million of 6% fixed-to-floating sub debt in the fourth quarter, the proceeds of which were used to repay $125 million of existing sub debt and for general corporate purposes. This action further strengthens our regulatory capital position. At year-end, the CET1 ratio was 11.72% while our total risk-based capital ratio was 14.41%. Additionally, the Board announced a 4.2% increase in Trustmark's regular quarterly dividend to $0.25 per share from $0.24 per share. This dividend is payable March 15, 2026, to shareholders of record on March 1 and takes our full year dividend to $1 per share. As previously mentioned, we repurchased $80 million of Trustmark common stock during the year, including $43 million in the fourth quarter. At year-end, tangible book value per share was $30.28, an increase of 2.3% from the prior quarter and 13.5% from the prior year. I'm very pleased to report that through share repurchase activity and quarterly dividends, Trustmark returned approximately 61.8% of net income to 2025 shareholders. Now let's focus on forward guidance, which is on Page 15 of the deck. We're providing full year guidance for '26 as well as the 2025 benchmarks upon which the guidance is based. We expect loans held for investment to increase mid-single digits for the full year 2026, and deposits, excluding brokered deposits, to increase mid-single digits as well. Securities balances are expected to remain stable as we continue to reinvest cash flows. We anticipate the net interest margin will be in the range of 3.8% to 3.85% for the full year, while we expect net interest income to increase mid-single digits. From a credit perspective, total provision for credit losses, including off-balance sheet credit exposure, is expected to normalize. Noninterest income for full year 2026 is expected to increase mid-single digits, as is noninterest expense. We will continue our disciplined approach to capital deployment with a preference for organic loan growth, potential market expansion, M&A or other general corporate purposes depending on market conditions. I would point you to pages 17 and 18, showing Trustmark has made significant improvement in its financial performance over the last several years. We're committed to maintaining that momentum into 2026. And with that, I would like to open the floor up for questions. Operator: [Operator Instructions] The first question comes from Stephen Scouten with Piper Sandler. Stephen Scouten: I guess, this morning, obviously, we've got another transaction that kind of impacts some of your larger markets, along with a lot of recent activity. And I know we talked about maybe 21 production hires back in the third quarter. Curious how many new hires maybe you had in fourth quarter, if any, and if these deals kind of accelerate any of your thoughts around talent acquisition in '26? Duane Dewey: Stephen, in the fourth quarter -- I think in the third quarter, we announced 29 total new hires, 21 of them production oriented. In the fourth quarter, that number was in the range of 13 new production hires for the quarter. They're in all markets and several different disciplines throughout the company. So we continue to focus on organic expansion and bringing in new talent into the organization. As we talk and we'll go through the rest of the question-and-answer session here, we'll talk about loan growth and seeing some of the diversified loan growth that, through these new hires, we're starting to see C&I, our equipment finance team and so on, they all continue to now show improved performance and improved growth. So we're very pleased with that effort. As it relates to the M&A activity, that does create some opportunity. I mean with each transaction, both in our home core markets as well as in a market like Houston and so on, it does create some disruption, both clients and personnel. And so we continue to monitor that and stay in touch in the markets and continue to recruit actively. So we see it generally as a positive and look forward to that continuing throughout 2026. Stephen Scouten: Okay. Great. And maybe just -- my other question would be kind of around the guidance for 2026, around credit in particular, just this idea of normalizing, I guess, credit costs. Can you frame that up at all potentially or kind of give some color on what that means to you all just kind of within the context maybe of net charge-offs for '25 were around 13 basis points, if I'm looking at that correctly? So just kind of wondering how to frame up what you might expect within that normalizing from a charge-off and a reserve perspective. Robert Harvey: Stephen, this is Barry. I guess, starting with the charge-off piece of it. I would think that 13 to 15 basis points of average loans is kind of where we would expect to see ourselves on an ongoing basis. We don't really see anything that unusual about 2025. We probably did have a few credit -- a few larger commercial credits than we do today that we got resolved during 2025, and that did result in a little bit of loss in some of those credits. And we really don't have, today, we don't have those credits that we're dealing with or ones of similar size. So I would think 13 to 15 basis points of average loans for net charge-offs would be a good range for us, what we might expect to see. And then as it relates to provisioning, to us, 14 to 18 basis points of average loans would seem like a range we might fall inside of. A lot of that is going to be predicated upon how much more improvement we see from a credit quality standpoint. We've had substantial improvement in credit quality during 2025. For example, criticized for the year down $181 million, classified were down $57 million for the year. So as we work through some of these credits, some of those upgrades and some of those are going to be paydowns as well as moving out of the bank. As we continue to experience that, then that obviously will help our provisioning. And that is obviously what helped our provisioning quite a bit this quarter as well as it did in Q3. And so as -- if that trend continues, which we don't know if they will or won't, but we do expect some improvement, but if that trend continues at that pace, then we might expect a little lower provisioning cost than we're anticipating right now. But right now, 14 to 18 basis points of average loans feels about right. Stephen Scouten: Fantastic. That's great color. Congrats on all the progress in 2025. Operator: The next question comes from Gary Tenner with D.A. Davidson. Gary Tenner: Great color on the provision question. I just wonder, on the other guidance areas, I mean, it looks like the guidance is -- really falls well within expectations kind of exiting '25, into 2026. Can you talk about just the lever points that you see as it impacts the guidance, whether it's growth, fees, expenses, kind of where you see the most sensitivity and leverage potentially as we work through the year? Thomas Owens: Well, Gary, I'll start. This is Tom Owens. As you said, our guidance is pretty consistent with the range of analyst estimates coming into '26. With respect to levers in terms of how it falls to the bottom line and EPS, obviously, loan growth is going to be a key driver. We've talked a little bit also about capital deployment during the year and I think those things are related. We've been pleased with our ability to continue to drive capital accretion at the same time that we've been supporting solid loan growth and deploying capital via share repurchase. So probably the biggest levers are probably going to be that relationship between loan growth and capital deployment. Duane Dewey: Yes. I would add to the response there. So we're seeing improving conditions in the mortgage market. And we saw it in '25 starting to take shape. Things that impact that business, some of the MSR hedging and those sorts of things showed significant improvement. And so that reflects in our noninterest income category. As mentioned in the prior comments, in 2025, we had record net income in our Wealth Management businesses -- excuse me, at least record revenue in those businesses. And so I think we've invested there. We continue -- and when we talk about production talent, we're adding talent in those businesses as well across our footprint. So we see potential for some improvement, at least as we've guided mid-single digits, if not better, in some of the noninterest income categories. Expense management is going to be a continued focus for us. We'll see where that leads in the year, but at this point, we're good at mid-single digits. So really it's a continuing improving position across the whole both income statement, and as Tom noted, the balance sheet plays a critical role in that, obviously. Gary Tenner: I appreciate the color there. And then just a follow-up, specific to Wealth Management. In the fourth quarter, the pickup in revenue there sequentially, what the driver was? Duane Dewey: It's just general improvement in asset values. Asset values drive fee revenue. But it's a combination -- asset value improvement, I think, is a positive in that business, but also new account acquisition. We've invested -- like I said, we invested in the business. We have new talent, we have great leadership in that business, and a really focused effort across the organization on cross sales, on cross-pollination across our commercial businesses and the like. So it's all starting to really take hold and take shape and show improvement. I would also note, part of that business, we do have a brokerage team also that we converted from one brokerage platform to another in the third and fourth quarters. That new platform on the brokerage side is also generating new revenues and new opportunities for us. So we're optimistic on that front as well. Gary Tenner: So to be clear, there's nothing unusual on that line in the fourth quarter, more just kind of increase on... Duane Dewey: Nothing unusual. Gary Tenner: And equity value. Okay. Duane Dewey: That's accurate, yes. Operator: The next question comes from Feddie Strickland with Hovde Group. Feddie Strickland: I wanted to start on the expense guidance. Curious to see what the cadence of expense growth throughout the year, is it relatively steady as you make these investments in new talent? Or is there any particular quarter that's higher? F. Joseph Rein: He's asking about the timing of the timing of increases in noninterest expense. George Chambers: Throughout the year? F. Joseph Rein: Throughout the year. And was it chunky? George Chambers: Yes. Well, what we -- what you see is -- this is Tom Chambers. What you see is, yes, the last half of the year, we end up having our annual merit increases across the company. So you're going to have a natural increase starting on July 1 of that quarter. And then really there's nothing else unusual, unless it's mortgage commissions and revenue-generating business. Duane Dewey: Yes. I would just say, yes, the second half year, we do tend to -- merit increases go into effect July 1 each year, and so that hits in the second half of the year. Assuming performance is sufficient and so on, sometimes in the second half of the year we true up for year-end bonuses, production, commissions, those sorts of things. And so yes, I would say the second half of the year typically is a bit more -- a bit higher level of increase than in the first half of the year. And across our overall organization, we continue to look at and make technology investments and other things that are just the normal course of expense increase that impacts us every year. But I would say going into 2026, that's pretty much it. Feddie Strickland: Got it. That makes sense. And just wanted to ask conversations on M&A. I mean, would you say a deal is any more or less likely in '26? And just a quick refresher on preferred geographies, what you're looking for in terms of partners. Just curious in general on M&A. Duane Dewey: Yes. I would say, first and foremost, I mean, the increase in discussion and consideration, there probably is a fairly significant increase across our markets and the markets we serve and where we have interest. That has not changed really as we've talked for some time between Houston up to Dallas, Arkansas, Louisiana, Tennessee. I mean we cover such a large geographic footprint that are very attractive markets, and we have interest in those markets. We've talked about size ranges of $1 billion up to $10 billion. But it's all opportunistic. We have to see the opportunity. We have to see a good cultural fit. And we continue to create relationships and build rapport, but we are not going to be focused on doing a deal. We're focused on our organic strategy at this point. And if an M&A opportunity presents itself in a good market, that provides talent, that provides market opportunity and so on, then we will take advantage of that. We do feel from an overall operating profitability, capital, et cetera, perspective, we're in the best position we've been in to do that in quite a while. But we're going to be cautious and selective in that process. And we have felt that the buyback has been a good route to utilize capital to this point, and we'll continue to consider that as we move forward as well. Operator: The next question comes from Christopher Marinac with Janney. Christopher Marinac: Just to continue on the M&A question from Feddie. Do you think that there's a scenario where you don't do an M&A deal because there's too much happening around you? Stephen mentioned the Texas deal this morning. Obviously, you have a much bigger merger in your backyard that's happening this year with a competitor going away. Is there a scenario where you don't do anything on M&A, you simply focus organically just to take advantage of opportunities in people exclusively? Duane Dewey: I think that's a great point, and that's, again, there is a good amount of disruption and good companies all moving their organizations forward. But at the end of the day, it creates opportunities sometimes for those of us in the marketplace. And so that is absolutely a very accurate consideration for us. And as we have talked about our organic strategy, if you look at markets, like Synovus, Pinnacle, Cadence, Stellar, I mean, they're all in markets we serve, they all create some opportunity. And we're looking forward to considering what options we have for that organic strategy and we see it as significant. So I think that's a very good point. And I think it is a strong enough consideration that, yes, you may see us not do a deal. Christopher Marinac: Great. And then just to follow up on sort of the deposit success that you talked about in the prepared remarks. So are you doing anything to incent deposits differently than you had in past years? Thomas Owens: So Chris, this is Tom Owens. And so I'm guessing with your question, you're talking about internal incentivization. And the answer there is yes. That has been an increasing area of focus for us, obviously, is deposit customer acquisition and balance acquisition. And so when you look at, for example, our CRM bonus templates and the drivers in the templates, we've increased our emphasis on deposit growth there. And I'll just say, I mean, we've been pleased with, when you look at our competitive stance on deposits and where we rank in terms of deposit costs, we've been pleased with our ability to grow balances cost-effectively. You look at personal and commercial balances are up 4.4% year-over-year. And I think on an average balance basis in the fourth quarter, over year-ago quarter, they're up 4% plus. So we've been very pleased with our ability to do that to continue to fund solid loan growth. Operator: The next question comes from Catherine Mealor with KBW. Catherine Mealor: All right. One little nitty question on the margin. Tom, can you -- do you have any color you can give us on where deposit maybe ended the quarter or exiting the quarter just to kind of get a sense as to where we're going to start '26 just as we factor in the full impact of the recent rate cut? Thomas Owens: Yes. It's a little difficult to hear you there, Catherine, but I think I got the question. This is Tom Owens. And so before I answer that specifically, Catherine, I also want to make a point, because when I looked at the pre-call notes from the various analysts, I'm not sure everyone picked up on it. But our net interest margin, that 2 basis point linked-quarter decline of -- from 3.83% in the third quarter to 3.81% in the fourth quarter was essentially a function of the accelerated recognition of capitalized costs from the 2020 sub debt issue, which, as you know, we refinanced during the quarter. So that was about $1.1 million that we took through the income statement, through net interest income specifically. And so adjusted for that, we would have been at 3.83%, which would have been our second consecutive quarter at that level. And so now this gets back to your question, because it's also the jumping-off point for our guidance for NIM in 2026. But the range we put out there of 3.80% to 3.85% is pretty tight relative to the ranges that you see from some other banks. But we're running right in the middle of that range right now at 3.83%. And then with respect to your question about deposit costs in our guidance, is for a decline from 1.72% to 1.61% here in the first quarter. And I think if you looked at month-to-date in January, we're running at about 1.63%. And so of course, we -- our CD book continues to reprice here during the quarter, and so that should drive us 1 basis point or 2 lower for the full quarter, all other things equal. Catherine Mealor: That's super helpful, and thank you for pointing out that other $1 million cost that you mentioned. And then my last question is just on the buyback. Is it fair -- I mean, I know growth is improving and you've got M&A out there, and your stock is inexpensive and you've got a lot of capital. I mean, is it fair to put your entire authorization in our expectations? For the year, do you think you have enough capital where you could really lean into the buyback today but still have enough capital for a future deal? Or is it -- or are you a little bit more price-sensitive on that? Just trying to kind of put a range on buyback opportunity. Thomas Owens: Okay. Well, there's a lot there, but I'll start with giving you the range and the way to think about it. So you've heard us talk in the past about a continued accretion in our regulatory capital ratios and talk about 12%, for example, as a ceiling on CET1 in terms of where we would want to operate. We ended 2025 at 11.72% in our CET1, and without any deployment via share repurchase. Even with funding very solid, even robust loan growth in 2026, we -- our internal projections are that we would be -- we would end '26 slightly above 12%. So as Duane said, we've got the $100 million authorization. I mean a way to think about it is if we did no deployment via capital, assuming very solid loan growth, we would end the year '26 slightly above 12%. If we did every $0.01 of the authorization of $100 million, that would take us down to about 11.5%. So somewhere in between there, call it a range of $60 million to $70 million, is what would essentially keep our capital ratios where they are. And again at 11.72%, that's kind of mid-range between 11.5% and 12% in terms of CET1. So to your question of is it fair to put all $100 million in your model, I think that is -- I would probably guide you probably more to a range of $60 million to $70 million in all likelihood. And that range is based on trying to manage our capital levels where they are today, assuming the solid loan growth that we have in our projections. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Duane Dewey for any closing remarks. Duane Dewey: Well, thank you for joining us today on the call. Again, 2025 was a record year for Trustmark. We're very pleased and proud and look forward to keeping that momentum into 2026. We look forward to joining back up with you for our first quarter call at the end of April. You all have a great rest of the week. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen. Welcome to KPN's Fourth Quarter Earnings Webcast and Conference Call. Please note that this event is being recorded. [Operator Instructions] I will now turn the call over to your host for today, Matthijs van Leijenhorst, Head of Investor Relations. You may now begin. Matthijs van Leijenhorst: Yes. Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us today. Welcome to KPN's Fourth Quarter and Full Year 2025 Results Webcast. With me today are Joost Farwerck, our CEO; and Chris Figee, our CFO. As usual, before we begin our presentation, I would like to remind you of the safe harbor on Page 2 of the slides, which applies to any statements made during this presentation. In particular, today's presentation may include forward-looking statements, including KPN's expectations regarding its outlook and ambitions, which were also included in the press release published this morning. All such statements are subject to the safe harbor. Now, let me hand over to our CEO, Joost Farwerck. Joost Farwerck: Thank you, Matthijs. Welcome, everyone. Let's start with some highlights of the fourth quarter and full year. We delivered on our 2025 outlook and group service revenues increased by 2.7% with all segments contributing. Adjusted EBITDA and free cash flow exceeded guidance. We maintained strict cost control across the organization. Indirect costs were EUR 10 million lower than last year, marking a clear turning point in indirect OpEx. In the fourth quarter, we saw Consumer delivering another quarter of strong commercial momentum, especially in Broadband with record net additions for the full year. Business growth was mainly driven by SME and Wholesale continued to grow mainly driven by sponsored roaming. Last year, we expanded our footprint by adding 440,000 fiber homes and around 400,000 homes connected. And we strengthened our mobile network with the launch of our tower company, Althio. And through ongoing investments in cybersecurity, we ensured a resilient network that protects all users. For 2026, we expect service revenue growth of 2% to 2.5%, EBITDA AL of approximately EUR 2.67 billion, CapEx of about EUR 1.25 billion and free cash flow of more than EUR 950 million. Our dividend per share is expected to grow by 10%, and we intend a new share buyback of EUR 250 million in 2026. All in all, we closed the year in a good way, and we are well positioned to sustain healthy service revenue growth in the coming years, supported by our leading positions in consumer and business markets and continued growth in Wholesale. At the same time, we are accelerating our transformation to deliver around EUR 100 million in annual net indirect OpEx savings by 2030. And reducing CapEx below EUR 1 billion by 2027 next year will drive strong cash generation and deliver attractive shareholder returns. Later, Chris will give you more details on our financials and 2026 outlook. We delivered on our 2025 outlook. Service revenues grew by around 3%. EBITDA slightly exceeded guidance. Free cash flow was strong at EUR 952 million ahead of the upgraded outlook we gave at the half year results despite slightly higher CapEx. We reiterate our dividend commitment, and we will pay a regular dividend per share of EUR 0.182 over 2025 following AGM approval in mid-April. At our strategy update in November, we reaffirmed that we are well on track to achieving our Connect, Activate and Grow strategy, which is supported by 3 key pillars: one, we continue to invest in the leading networks; two, we continue to grow and protect our customer base; and three, we further modernize and simplify our operating model. And together, these priorities support our ambition to grow service revenues and EBITDA by approximately 3% on average and free cash flow by approximately 7% over the entire strategic period. Let me now walk you through the operational performance in more detail. We hold a clear lead in the Dutch fiber market, both in homes passed and connected and in business parks through our joint venture in Glaspoort. And together with Glaspoort, we now cover nearly 6 million Dutch homes or around 70% of the country. And to maintain our network leadership, we further optimized our rollout process and shifted focus from passing homes to connecting and activating the households. And this approach is paying off with a record number of homes connected in Q4 and continued growth in fiber Broadband net adds. Consumer Service revenues continue to grow, driven by consistent Fiber and Mobile service revenue growth. And commercial momentum remained strong across both fixed and mobile with subscriber growth exceeding our fair share. Throughout the year, our Net Promoter Score improved, supported by operational excellence, our Combivoordeel offer and initiatives launched to strengthen digital engagement. Now let's take a closer look at our fourth quarter KPIs. Thanks to a strong execution and proactive base management, we delivered double-digit Broadband net adds growth for the third quarter in a row, supported by a healthy inflow of new fiber customers. Our fixed ARPU held firm despite continued investments in our base and the competitive markets. Together, these achievements drove service revenues growth of 0.4%. In Mobile, we added 24,000 postpaid subscribers and postpaid ARPU increased year-on-year, supported by the price increase in October, partly offset by the ongoing promotional activity in the no-frill segment. Combined, these factors led to 2.9% growth in Mobile Service revenue. Now let's turn to B2B. Business service revenues increased by 2.3% year-on-year, mainly driven by SME. And also here, Net Promoter Score improved throughout the year, reflecting the continued trust from our B2B customers for stability, reliability and the quality of our networks and services. SME remains B2B's main growth engine driven by Broadband, Mobile and Cloud and Workspace. LCE service revenue growth trend remained relatively stable, supported by continued growth in Unified Communications, CPaaS, IoT and a growing customer base, partially offset by continued price pressure in mobile. And finally, Tailored Solutions service revenue decreased, reflecting a focus on value steering. Wholesale continued to grow, mainly driven by the strong performance in Mobile. Broadband service revenues increased driven by fiber and the growth trend leveled off compared to previous quarters, driven by the decline in the wholesale copper base. Mobile remained strong, driven by continued growth in International sponsored roaming and other service revenues increased mainly due to an uptake in visitor roaming. ESG remains a core element of our strategy. And on this slide, we show you the progress on carbon reduction, circularity and diversity. To further reduce our carbon footprint across the value chain, we increased our green energy sourcing in 2025, supported by a solar energy partnership with Eneco. And our Scope 2 emissions have further decreased by 70% year-on-year, while Scope 3 emissions slightly increased, but this was due to an expanded scope. Next to this, we, of course, remain committed to improving our diversity targets. Although achieving gender balance and recruitment remains challenging, diversity and inclusion continue to be a top priority for us. And to summarize, we ended 2025 in a strong position, and we carry that momentum into 2026. With strong commercial execution, a healthy base inflow and improving ARPUs, we are well positioned and confident in delivering on our 2026 outlook. Now let me hand over to Chris to give you more details on the financials. Hans Figee: Thank you, Joost. Let me now take you through our financial performance. First, let me summarize some key figures for the fourth quarter and the full year. First, the adjusted revenues were up 2.7% year-on-year in Q4, driven by service revenue growth across all segments and also higher non-service revenues. Second, our adjusted EBITDA after leases grew by 5.1% compared to last year, supported by higher revenues and lower indirect costs. Underlying EBITDA growth, excluding LTO was 3.7% in Q4 and our EBITDA margin improved by 100 basis points to 44.6% of total adjusted revenues. Third, our net profit increased 12% year-on-year, supported by a one-off tax gain of about EUR 20 million from the recognition of a deferred tax asset. Finally, for the full year, our free cash flow increased by 5.8% year-on-year to EUR 952 million, mainly driven by EBITDA growth. Also, our free cash flow margin over total adjusted revenues grew by nearly 40 basis points. And with our ongoing share buybacks, reducing the number of shares outstanding, our free cash flow per share growth is even stronger at 7% year-on-year. I will share more detail on the underlying cash developments later in the presentation. In the fourth quarter, group service revenues grew by 1.8% year-on-year, supported by growth in all segments. In this mix, we saw Consumer Revenue -- Service revenues increased by 1.2%, driven by continued solid commercial momentum in both Fixed and Mobile. For 2026, we expect Consumer Service revenue growth about 1.5% year-on-year, supported by base growth and commercial improvements. Business Service revenue growth was 2.3% year-on-year, mainly driven by SME. Tailored Solutions remain negative, reflecting our focus on margins and contract quality. For 2026, we expect B2B to grow about 3% year-on-year with growth weighted towards the second half of the year, given the segment's strong performance in the first half of 2025 and therefore, the comps that will weigh against Tailored Solutions revenue growth. Our higher-margin SME business will continue to show growth in the 5% region throughout the year. And finally, Wholesale Service revenues increased by 3.9% year-on-year, driven by ongoing growth in international sponsored roaming business. For '26, Wholesale is expected to grow by about 3%, supported by Mobile. For the full year and on a like-for-like basis, so excluding IPR benefits and the contribution from Althio, our adjusted EBITDA grew by 3.1%, exceeding our 3% CFD hurdle. This growth was driven by higher service revenues and supported by strict cost control. Direct costs or cost of goods sold increased mainly due to the Service Revenue mix effects in B2B and higher third-party access costs within Glaspoort. In 2025, we reduced indirect costs by about EUR 10 million, marking a clear inflection point after 2 years of inflationary pressure. The savings came from disciplined cost management, automation, digitalization, lease portfolio optimization and workforce reductions of over 300 FTEs year-on-year or more than 500 if we include contingent external staff. As shared at our strategy update, we are targeting EUR 100 million in net indirect OpEx savings over the next 5 years under our transformation programs. In 2026, we expect about EUR 15 million to EUR 20 million in additional savings driven by fast digital transformation, AI-enabled process improvements and continued cost base optimization. Our cost reduction program clearly builds momentum and will show gradually accelerating benefits over the coming years. Our operational free cash flow continues to show healthy growth of nearly 10% or about 6%, excluding IPR benefits in LTO. The growth was driven by EBITDA, while CapEx was marginally higher than last year, primarily due to a noncash accounting reassessment relating to cable damages. For 2026 and on a like-for-like basis, so excluding IPR benefits and excluding IP sales, we expect to deliver a mid- to high single-digit growth in operational free cash flow, in line with our CFD guidance. This underlying growth in operational free cash flow will be driven by EBITDA growth and effectively stable CapEx. In 2026, after completing the heavy lifting phase of our fiber rollout, we expect and confirm a significant step down in CapEx of about EUR 250 million, bringing total CapEx to below EUR 1 billion. With EBITDA growth and this CapEx step-down in 2027, operating free cash flow is set to grow by about 10% annually on average over the strategic period. The strong cash conversion will lift operating free cash flow margins from 24% today to about 30%, placing us among the top performers in Europe. This underpins our long-term value creation model and reinforces our confidence in delivering sustainable cash flow growth in the years ahead. Turning now into the moving parts of our free cash flow. At EUR 952 million, our free cash flow was about 6% higher, driven by EBITDA growth and partially offset by changes in working capital and an increase in cash taxes and interest payments. Excluding the cash component of the IPR benefits, our free cash flow grew at low single-digit rate. Note that the DELTA provisions is related to lower pension effects -- pension provisions and some timing effects. Our cash margin over revenues improved by nearly 40 basis points to 16.3%, reflecting the solid cash generation momentum of KPN, and we ended the year with a cash position of EUR 552 million. KPN remains focused on creating long-term value, which is evidenced also by the strong return on capital employed. Our ROCE improved by 30 basis points year-on-year to 14.7%, nearing and marching towards our midterm ambition of 15%, driven by operational efficiency, demonstrating our continued commitment to create value through operations and investments. We maintain a strong and resilient balance sheet at year-end with a leverage ratio of 2.4x, stable compared to previous year and below our self-imposed ceiling of 2.5x. Our interest coverage ratio also remained strong. Our average cost of senior debt decreased by 30 basis points year-on-year, mainly due to optimization of our derivatives portfolio and our exposure to floating rates remains limited at 14%. Our total liquidity position of around EUR 1.6 billion remains strong, covering debt maturities until the end of 2028. At our strategy update, we reaffirmed our midterm 337 financial ambitions. We see healthy service revenue growth in the coming years while accelerating our transformation to deliver about EUR 100 million in net indirect OpEx savings annually by 2030, which means for 2026, group service revenue growth is expected between 2% and 2.5% with all segments contributing. We expect adjusted EBITDA after leases to be around EUR 2.67 billion or around 3% growth on a like-for-like basis, i.e., excluding IPR benefits and IP sales and in line with our midterm ambitions. Growth will be driven by continued service revenue growth and lower indirect costs. We anticipate net indirect OpEx savings of EUR 15 million to EUR 20 million next year. Throughout the year, EBITDA year-on-year growth is expected to be strong in Q1 and Q4, while Q2 and Q3 will face tougher comparisons. CapEx will remain at around EUR 1.25 billion, in line with our midterm guidance. And we expect a free cash flow of over EUR 950 million. On a like-for-like basis, so including the aforementioned one-off effects in 2025, our free cash flow expected to grow low to mid-single digits, primarily driven by EBITDA growth, partly offset by higher cash taxes. And finally, over the entire strategic period, we reiterate our financial ambitions to grow Service revenues and adjusted EBITDA by 3% and free cash flow by 7% per annum on average, as reflected in the 337 CAGR model. Note that our underlying 2026 guidance and our daily trading are both in line and on track with this multiyear ambition, and we feel confident to reach our planned level of cash generation and shareholder distributions. On that very matter, our financial framework is centered on long-term value creation for all stakeholders. In this respect, we are committed to returning all free cash flow to our shareholders. Our free cash flow per share was up 7% during the year, providing ample room for growth in our dividends per share as well, which means we intend to pay a regular dividend of EUR 0.20 per share over 2026, up 10% compared to the DPS over EUR 0.25 and fully in line with what we communicated at our strategy update. For 2027, we aim for a further increase to about EUR 0.25 or 25% increase year-on-year. And in addition, as announced this morning, we will launch a share buyback program of EUR 250 million in '25, notably starting tomorrow. Let me conclude with some key takeaways. We delivered on our 2025 outlook, consistent service revenue growth across all segments. Adjusted EBITDA and free cash flow came in slightly above guidance and disciplined cost management delivered a EUR 10 million reduction in indirect OpEx, marking a clear inflection point after 2 years of inflationary pressure. We saw solid Commercial, Consumer and Business, including record broadband net adds in Consumer. And we continue to lead the Dutch fiber market with accelerated delivery of fiber connected and activated homes. Our strong progress in 2025 confirms the successful execution of our strategy and positions us for future growth. We reaffirm our 337 financial framework and the announced 2026 targets are fully aligned with this multiyear plan including the CapEx step-down in '27 to unlock enhanced cash conversion. We are accelerating transformation, targeting EUR 100 million in indirect OpEx savings over the next 5 years. And beyond '27, we expect mid-single-digit free cash flow growth, supported by strong fundamentals and disciplined execution. And cash momentum was very strong and solid going into '25, providing us with confidence. Finally, we are committed to shareholders to returning all free cash flow to shareholders through growing dividends and buybacks and the latter starting tomorrow. Thanks for listening. Now back to your questions. Matthijs van Leijenhorst: Thank you, Joost and Chris. We will now start the Q&A session. [Operator Instructions]. Operator, could you please open the line for Q&A. Operator: [Operator Instructions] The first question comes from Mr. Polo Tang from UBS. Polo Tang: I have two. The first one is just about Consumer Broadband net adds. So they've been very solid for the past 3 quarters at more than 10,000 a quarter. But do you think this level of net adds growth is sustainable going forward? I'm just asking the question because you referenced taking more than your fair share earlier in the presentation. Also, you've got Odido gaining subscribers with FWA. VodafoneZiggo seems to be making progress in stabilizing its broadband base and also start wholesaling in the DELTA Fiber footprint. So I'm just interested in how you're thinking about competitive dynamics for the broadband market going forward? Second question is just on B2B. Do you think that B2B service revenues can grow in Q1 and Q2, given that you've got that tough comparable in Tailored Solutions? And what's your view on the Dutch macro environment? And are you seeing any signs of caution from your B2B clients? Joost Farwerck: Thanks for your questions, Polo, and I'll start and then Chris will join me, I guess. Yes, on Consumer Broadband net adds, you're right, 3 strong quarters in a row. And meanwhile, we operate in a very competitive market that remains competitive. This is more or less normal course of business for us nowadays. And I think what we can more or less conclude is that the new strategy of ours is working, where we focus on base management instead of acquiring new customers who leave in the air for free TV set from another service provider. So we invest a lot in our customer base, and that seems to work. Is it sustainable, you said? Well, you mentioned FWA from Odido, changes in the VodafoneZiggo strategy. I think FWA is a niche market. That's in a country where households have 2 or 3 fixed lines into a household where 1 gig is the standard and 4 gig is becoming quite normal fixed. Unlimited is the standard on mobile. Fixed wireless access as a broadband connection is more for a niche segment than anything else. We more or less have, by the way, the same for rural areas. VodafoneZiggo, they are clearly now making noise around being a full always-on provider when it comes to quality and content. But let's see. I think for us, the best answer to everything for the last years was believe in your own plan, believe in your own strategy and execute on that. Last quarters were good. Of course, we plan to continue, perhaps not always above 10%, but we plan for strong growth, healthy growth on broadband this year as well. And on this B2B service revenues, I mean, the Dutch economy is growing and also expected to grow in 2026. SME is a very important segment for ours. That will grow probably around 5% like we did last year. Yes, you see some changes in our top line in B2B because we -- what we mentioned, focus on value steering, that is mainly in the Tailored Solutions part where we say goodbye to revenues that are not really contributing when it comes to margin. So of course, for us, very important to explain that to you in the quarters to come. But when it comes to healthy margin-rich revenues, I think we will do fine in B2B. Chris? Hans Figee: Yes. Polo, on your first point on broadband, there's 2 points to add is that, obviously, the important drivers behind the solid net adds were lower churn and lower migration. So churn has been consistently lower and lowering or declining during the last half year. I think it also has to do with the fact that our copper base is gradually shrinking. So the vulnerable part of our business is declining. Migrations from front to back book have -- we've managed that successfully. Combivoordeel will work. So I would say the churn side has been very positive. And if you look at fiber, our real net adds, fiber net adds, excluding copper upgrades of clients moving from copper to fiber has been pretty consistent now for multiple quarters in a row. So I have no reason to see that stop. And on B2B, as Joost rightly pointed out, on the Tailored Solutions side, we've been focusing on value and margins. which means that SME will continue to grow north of 5% basically during the year. I mean that's the highest margin business that we have, and that continues to grow nicely across all quarters. I expect the LCE business to also show positive growth across the quarters. Tailored Solutions will be negative, I guess, in the first half year due to the comps. That means that reporting-wise, B2B across the entire year will be growing around 3%, but heavily tilted towards the second half of the year and then flattish, I guess, in the first half of the year. But that's really only a pure Tailored Solutions effect. The high-margin businesses, SME and LCE will continue to show steady growth throughout the year. And then when the comps start to work for us, you can see an acceleration of lease-up reported growth. But I mean the 3% for the year is pretty well supported. It just will be, as you rightly pointed out, tilted towards the second half of the year. Operator: The next question comes from Joshua Mills from BNP Paribas. Joshua Mills: A couple from me. The first one is on the Consumer side. So I think, Chris, you might have mentioned that the annual service revenue guidance for consumer. If you could just remind us of that. I assume it will be accelerating throughout the year. And my question is what's going to drive that? Is it continued volume growth? Or are you also expecting ARPU to improve as well? And then secondly, related to that, if I look at the price increases last year, you were broadly in line with both Odido and VodafoneZiggo on the broadband side. I think you're a bit ahead on the mobile side. Now that you are outperforming your net add share relative to your market share in the Dutch market, and given some of the more aggressive price increases we've seen from the likes of Swisscom yesterday and incumbents taking advantage of the network leadership to push prices up, how are you thinking about the value versus volume mix going forward? And is there the opportunity with these fiber networks to be a bit more ambitious on price take? Hans Figee: Yes. On Consumer, we guided 1.5% growth throughout the year. It will be a continuation of what we do today. I would say Mobile itself should continue to grow nicely, should be north of 3% during the year. We're now hovering around 3%. That should be fine continuing that with pretty healthy net add growth and supporting ARPU. I think I picked something similar. Joost talked about the base dynamics, churn improvements and a flat to up ARPU. So during the year, I'd expect a continuation of reasonable net add growth and flat to increasing ARPUs supported by some price indexations. Obviously, we're looking at back book and front book alike to make sure we are fully consistent with orienting with a value orientation. So strategy-wise, to also take on your second question, we are a value over volume business. We'd love to take a bit more than our running market share, which we do. I think that's a reflection of the networks and the quality that we've built. We see some effects on network quality, both in Mobile and Fixed positively reflecting on us. So that should allow us to get continued inflow of net adds. But it will remain value-oriented if anything else. And that means for Consumer, 1.5% growth during the year. I would say, during the year, I would expect Mobile to be stronger in the first half of the year and the second half of the year, possibly some of the Combivoordeel effects will fade with Fixed carrying the baton from the second half of the year a bit more. Joost Farwerck: And on price increases, I mean, that's a call we make every second quarter of the year on Broadband. And last year, it was more or less centered around the CPI, so inflation. Operator: The next question comes from Siyi He from Citi. Siyi He: I have 2, please. The first one is just going back on the consumer ARPU comment. And it seems that the Mobile ARPU has stabilized. And despite that you have the combo discount on the Fixed products and you still delivered a stable fixed ARPU. Just wondering if you could comment on what you see in the ARPU development. Should we expect there is a solid reason for us to believe that ARPU is going to be stable and growing going forward? And the second question is really a quick one. Just wondering your feels on the increasing rigid stance from the EU on the Chinese vendors. And if you could comment on what's your exposure there? And what do you think it could potentially impact your CapEx plan? Hans Figee: Yes. Siyi, let me take the first question on ARPU. I think for both Mobile and Fixed, we expect stable to a modest increase in ARPU on fixed driven by price indexations, a shift towards higher speed levels that we have this year as well and a relatively manageable amount of migration from front to back book and the latter obviously margin dilutive, but that's -- the effects tend to be increasingly limited. We're able to manage that pretty well. A big chunk of our Broadband base is in contract. So with that, I expect fixed ARPU to be stable to have a modest growth over the year. Something similar for Mobile. Obviously, we had a step down in Mobile in last year or at least lower growth, mostly in the no-frills part and driven by the noncommitted part of the ARPUs. I think that is -- it feels like stabilization in that space. So what should drive mobile ARPU, it is indexations, for surely in back book, possibly more. It is a gradual continued move to unlimited customers, a significant amount of our new sales are now in unlimited. We're basically at our targets and we won't have in unlimited. And I think also a gradual stabilization of the market in the no-frills segment with I would say, less pressure on the noncommitted part. So in summary, I'd expect both Fixed and Mobile ARPU to be at least stable or deliver some modest growth during the year. Joost Farwerck: Yes. And on Chinese vendors, yes, we are well on track on implementing 5G toolbox swapping non-Western suppliers from critical systems while we introduce European vendors there. And we already started down this path many years ago, and we are fully aligned with Dutch and EU security guidelines. Of course, there's some discussion in the market about the Cybersecurity Act. It seems it's proposing a further ban on high-risk vendors. For me, too early to tell what the full consequences are, and I expect extensive debate there, and yes, more finalization towards the end of 2027. But I think the main message is we already started this many years ago, and we follow this life cycle of assets in our approach. So we do not see any impact on our CapEx envelope in the future. Operator: The next question comes from Ajay Soni from JPMorgan. Ajay Soni: I've got a couple. The first is on your '26 wholesale growth. You guided to 3% and medium-term target here is 4%. So what are the headwinds you see this year, which you expect to fade into the medium term? Then the second one is just around the convergent impact on your Fixed Service revenue. So just wondering what the impact was in this quarter versus Q3 and then how you expect that impact to evolve over 2026? I think you already said it will kind of fade by H2. So just some clarity on that. Hans Figee: Yes. Let me take both of them. On Wholesale, indeed -- on Wholesale, Broadband and Mobile, Mobile is continuing to do well, both on the national solutions as well as our international sponsored roaming solution. There's a very good funnel of customers waiting to be connected or to be contracted. In Broadband, we've seen a reasonable decline in our total base, mostly copper. So we declined in copper, increased in fiber. It has to do with our main wholesale Broadband customer shutting down the brand. That effect will probably continue into Q1, but then gradually expect it to fade towards the half year, although you should ask the client for more intel. But I think that happened last year, and that effectively shows up in the numbers this year. So basically, a stabilization in this year will be supporting service revenue growth in 2027. There's always like a bit of a year lag between base development and what you actually report in terms of service revenue. So to be -- and also, it's moderation of Broadband and Service Revenue growth in this year and support next year as this brands fade away -- brand effect starts to fade away supporting growth in '27 onwards and continuation of the sponsored roaming effect. And on the convergence, the Combivoordeel effect, we reported a fixed service revenue growth of 0.4% in Q4. If we hadn't made this investment, Fixed Service revenue would have been around 1% for the year as fixed only. So that's kind of the magnitude of things. If you look at the total service revenues of next year, the total effect for the year is probably around 15 basis points of growth for KPN as a whole. So look, it's a small amount, but as we're talking about a few digits after the comma, it actually has an effect. So basically, Fixed would have been around 1% in Q4, like 0.4%. And for the full year '26, I think the effect on service revenue growth of this investment is about 15 basis points of growth. I expect this gradually to fade in the second half of the year, towards the end of the year. More like Q4, you'll see less and less. And basically, the investment will continue, but then the base that is subject to the plan will be big enough so you can see lower -- the effect of lower churn already for those customers who've been part of Combivoordeel plan have shown markedly lower churn. So that will start to weigh in the numbers in the second half of the year. And let's be conservative more towards Q4 than Q3. Operator: The next question comes from Keval Khiroya from Deutsche Bank. Keval Khiroya: I've got 2 questions, please. So firstly, you talked about Mobile growth within consumer of 3% in 2026. Q4 was at that level, but benefited from quite an easy comp. So can you just elaborate a little bit more on what's going to drive the acceleration to that 3% in Mobile for 2026? And secondly, DELTA and ODF have now pretty much completed their fiber rollouts. What's happening to your customer churn in these areas? Is it slowing as they've ended their rollouts? Or is churn still at similar levels given they're still ultimately trying to penetrate these networks? Hans Figee: Well, regarding Mobile, actually you've got different -- more challenging comps. But as last year, we've done both front book and back book repricings last year. We look at a more-for-more price increase last year, and we might as well just repeat that action this year. So there are a number of pricing actions we do on our Mobile business with gradual indexation and the more for more for existing customers. I think that's one. Secondly, our base has grown. Our total Mobile base has grown by 129,000 over the year. It's quite good. I mean '24 was a fantastic year. That makes '25 look like a lesser year. But remember, '25 was actually still a lot better than '23 and '22. So it's still one of the best Mobile years in history in terms of net adds. So basically, next year, you have the benefit of a higher starting base to continue and base continues to grow in Q4 and also the first weeks in this year. And then you have another round of price indexations and possibly a more for more indexation as well for customers. So that should support Mobile revenue growth. And secondly, obviously, the big unknown is amount of traffic and uncommitted. That has declined a lot, but it feels that -- well, hopefully, we reached the bottom of that as well. So that gives us comfort that in general, Mobile growth should be healthy also in the tougher first half year comps. Joost Farwerck: Yes, Keval, you're right. DELTA and ODF are no longer expanding their fiber footprint. They're clearly focusing more on trying to connect households. These are footprints of different qualities. In the DELTA footprint, we originally, in some places, have a lower market share and ODF built their footprint in mainly the strong Ziggo area, the larger cities. So it's a bit of different dynamics in both footprints. And in the ODF area, we're building as well. And yes, our strategy there, of course, is to not only pass households, but also connect and activate. And I think that's a big difference between us and the others. So on fiber by overbuilding in the cities, we're doing good. And market shares on copper in other 5 areas are, of course, lower than we represent the 5 areas, but still doing okay. And I think expanding our footprint to 70% and connecting so many households. And at the end, moving up to 85% makes the churn in the copper areas also slowing down. Operator: The next question comes from Paul Sidney from Berenberg. Paul Sidney: A couple of questions from me, please. Just the first one, just perhaps building on a few of the earlier questions around customer behavior. You've made some very positive comments around churn, retention, network quality appreciation, especially interesting given the price increases that you've been putting through over the past few years. But just a very high-level question. Does this really suggest a wider appreciation of the services you provide for consumers and businesses? And the follow-on from that is it feels like there's substantial room for price increases to continue for the next few years. And again, just going back to an earlier analyst comment around the Swisscom move yesterday, it does feel like a bit of a shift, but I'm just interested to hear your comments around that. And then just secondly, Chris, on capital allocation, your decision to return all the free cash flow to shareholders over '26, is it a fair assumption that there is, therefore, no sort of small bolt-on acquisition opportunities on the horizon? And could there be such opportunities perhaps beyond 2026? Joost Farwerck: Yes, Paul, I'll start. Yes. Well, I think one of the most important changes we started in our strategy beginning of '25 was that we said, let's focus more on the customer base. So giving away discounts or Netflix for free or free TV sets to new customers while all loyal customers get a price increase every year is a bit annoying for the customer base. Since we represent the largest customer base, we shifted to building more quality in the base. So Combivoordeel is a service where you can combine your services, you get more loyalty points and at the end, you can get something for free. We launched a free security package for all households, they can activate themselves. We launched a new MijnKPN app where you can really organize everything yourself, order or deorder connectivity or whatever, very simple. So I think the whole message to our customers is we invest in you and we invest in your loyalty. And that, of course, is something you can't measure on a daily basis, but acquisition you can. But after a couple of quarters, we can say the churn is really slowing down. Net Promoter Score went up. So doing things like that hand-in-hand with a price increase works much better. So I think this is an important switch we made, and we will continue to focus on this strategy because it's also far more positive. Hans Figee: Yes. And on the point also on network quality, network stability, we have seen, especially in the Business segment, some corporate customers turning to us recently. So more interest volume-wise for corporate customers to select KPN simply because of network quality, network stability, which I think is a positive, right? That's a payoff. And not necessarily massive pricing power at least give you a volume and competitive advantage in that market. On your second question, returning more cash to the shareholders, that's what we do. We ended the year with a 2.4x leverage below our self-imposed ceiling of 2.5x. We typically, by growing our EBITDA, delever by about 0.1 turn per year, right? But if we wouldn't return our cash to shareholders, we delever faster. But typically, if you grow your EBITDA, you delever by about 0.1 turn per year. That gives a reasonable headroom towards a self-imposed ceiling. So I think, Paul, our war chest is big enough for bolt-ons. That doesn't mean we're going on a massive acquisition spree. But if we bump into something interesting, we have the rooms and means to do it. And obviously, especially for bolt-ons, the first hurdle is, does it create value for us? Is it value creating for shareholders, value creating for the business? How does it compare to buying back shares? We always check whether an acquisition does something strategically and financially and does the stack up to buying back our own shares. But if we find opportunities, we have the room to do so simply because our balance sheet gives us sufficient headroom whilst returning all cash to shareholders. Operator: The next question comes from Andrew Lee from Goldman Sachs. Andrew Lee: I had 2 questions. One was just a follow up on that Chinese -- on the Chinese vendor question that Siyi asked. Could you just help us understand, so does the extent of the risk extend to just you having to fast track the swap out you're doing anyway out to 2027? Or could it mean even greater swap out of equipment? And can you just give us a sense as to the scale of that, if you were to fast track it and do it in 1 year, how much is that -- how much does that cost you? And any help on the scale would be useful. Then just secondly, on the copper migration competition on wholesale that a few questions have been asking around and specifically the ODF and DELTA Fiber competition. Are you getting a sense that now that the build is slowing down or has slowed down, that the ability for those operators to actually win customers is starting to decrease? Or are you seeing no real let up in the near term from their ability to gain customers? Joost Farwerck: Yes. So like I said, Andrew, with respect to Chinese vendors, in particular, I mean, we made good alignment with our government years ago, and we're fully on track to move out like we mentioned -- like we call the non-Western vendors out of the critical systems, mobile core, fixed core; mobile cores, Ericsson; fixed cores, Nokia, that's all known in the market, and we're almost done there. So we're pretty good on track. And we do this, like I say, in the life cycle thing. So when it comes to other assets, we're also good on track. And we do not see any acceleration or uplift in CapEx on any risks. I mean there's a discussion around this Cybersecurity Act, but that's all taking time. And taking into account where we are and our plans are -- we invest, by the way, every year in our mobile network as well. And we have a multi-vendor approach. So we like to not be dependent on one vendor. So I can't give you all the details, but I think what I can tell you is that we're good on track, and we do not see any risks there in CapEx uplifts in the coming years. Hans Figee: Andrew, we have a CapEx envelope and a CapEx level. So if we had to fit it in, we'd make it fit in. So you have to give priority to one project over others. That would be -- so I would say with the visibility that we have today, whatever we have to do, as you said, it most likely fits within our life cycle plans anyway. If we had to fast track it, we'd make it fit into the CapEx envelope and prioritize this thing over something else. On your question on the wholesale and the [indiscernible], possibly probably, yes. So that we are seeing less churn in our business altogether. I don't have a full econometric model explaining it to you, but I do relate to the fact that most people are most -- are effective in getting new customers up on rolling out fiber in the street. So you open the street, people are working in, and that's the moment it becomes visible and the moment you sell. That's the easiest way to sell fiber. So once the rollout stops, actually getting new customers in is more difficult, certainly if you don't have a household brand. And thirdly, also if you see the feedback from some of these parties, their door-to-door sales have not been very effective. So I would say I don't have a full proof, scientific proof for you, but it feels as if that actually -- that helps us. And in the wholesale side, we also see most of our customers not actively migrating customers. So if you don't just start to migrate a customer from one network to another, the churn risk is way too high. So we do see that the end of the rollout of third parties benefits us on the churn side. So long story short. Operator: The next question comes from David Vagman from ING. David Vagman: First one on Mobile. So we recently saw VodafoneZiggo being more aggressive on speed. Do you expect speed tiering to become more difficult to monetize? And does this affect your view on Mobile ARPU evolution? And then my second question on the Glaspoort-DELTA deal, what do you think is the end game here? Have you noticed any progress in the conversation with the regulator? Do they want remedies or something else? Hans Figee: Joost, you want to take the first one? Joost Farwerck: On the first one, on the speed tiering thing, the fact that some of our competitors do not have speed tiering, we don't see this as a sign of strength, the sign of the network from our point of view. So at this point, no feedback on that, no market fallout from that. I think people do value and understand the quality of the KPN network. And quality is more than speed, but it's also coverage, its stability, the risk of disruptions and distortion. So I think in a broader sense, not having speed tiering is not always a good sign because also we signed a deal, we don't have the network to deliver it. But our view is that customers value the KPN network extensively and should be able to defend it off. Yes, so... Hans Figee: Not much of a change there. And on Glaspoort, yes, well, it was since December '24 that we're waiting for our regulator to come up with a verdict. It takes very long. So it's clear that they find it very difficult to give it a go. So we're still waiting. No news there. And I think whatever the outcome will be, we'll decide on the next step. Like we said before, it's not a super significant deal. It's about 200,000 households, which is representing more or less 4 months building. So yes, in hindsight, it took us very long to get where we are today on the discussions with the government or the regulators. So probably they will come up with something coming months. But let's see. It's the Netherlands, everything takes long when it comes to legislation and decision-taking on the government side. So let's wait. Operator: The final question comes from David Wright from Bank of America. David Wright: I just wondered if you could give us a little guidance into the cash flow, perhaps, Chris, just where you're expecting that cash tax to come in. I know previously, you talked about EUR 80-odd million. It looks like that could be a little lighter, where you might expect working capital to show? And any other items that you might just be flagging in advance, it would just be super helpful for the modeling? Hans Figee: David, thank you so much. I've been so much waiting for this question. Let me give you a quick perspective on '25 and '26, right? So '25, we had EBITDA up by EUR 129 million. Operating cash flow up EUR 120 million. Positive on DELTA provisions basically means the cash quality of our earnings went up as well. So basically, more cash earnings this year. And also 2025, interest was up EUR 30 million, taxes up EUR 32 million. So together, interest and taxes took more than EUR 60 million and then working capital was flat. That gave you basically a EUR 50 million free cash flow increase in the year. Obviously, there's some IPR benefits in there as well. So that means the way I look at it from '24 to '26, you get effectively a 2.7% annual CAGR. Next year or 2026, we said EBITDA will be EUR 2.67 billion, obviously EUR 33 million up, but including the fading of the IPR benefit. CapEx is stable. It might be slightly down, expect stable. So that means operating cash flow up about EUR 40 million if you take the guidance. Cash restructuring will be around stable. I would say interest about stable towards this year, possibly a little lower. We're always trying to optimize our interest spend. Taxes, up EUR 40 million, estimate about EUR 225 million to EUR 230-ish million to EUR 25 million next year. Working capital flat, possibly negative. We're cautious with working capital. And then others flat, that gives about EUR 950 million. So just modeling-wise, EBITDA, EUR 2.67 billion. CapEx is stable, slightly down a few million. It gives you operating cash flow increasing of EUR 40 million. Interest stable, taxes up EUR 40 million to EUR 225 million. Cash restructuring stable and working capital flat to a small negative, gives you basically a flat free cash flow, but that includes, of course, the compensation for the fact that we don't have IPR and IP benefits again this year, which means that effectively, we're growing our free cash flow by 2.5% to 2.7% year-on-year from '24 to '25 to '26. So I can't make it more easy for you, David. This is, I think, a pretty clear guidance. Matthijs van Leijenhorst: Okay. Thank you all for your questions. This concludes today's session. In case of any questions, you know where to reach out. Thank you. Operator: Ladies and gentlemen, this concludes today's presentation. Thank you for participating. You may now disconnect your lines. Have a nice day.
Operator: Welcome to Dometic Q4 Report 2025. Today, I am pleased to present CEO, Juan Vargues; CFO, Stefan Fristedt; and Head of Investor Relations, Tobias Norrby. [Operator Instructions]. Now I will hand the conference over to the speakers. Please go ahead. Juan Vargues: Hello? Can you hear us? [Technical Difficulty]. Okay. So good morning, everybody. Well, I would like to start by apologizing for the technical problems, but we are back. So good morning, everybody, and welcome to this Q4 and full year webcast for 2025. With that said, let's move into the presentation. Starting with the highlights, market, the overall market conditions are still challenging. Consumer confidence is still not where we would like it to be. And at the same time, retailers and dealers as well as OEMs are still cautious in building inventories. Having said that, we also feel that inventories at retail level are improving. They are just now at a low level, and it's very much just now a question about consumers starting to buy. Looking at growth, 3% negative organic growth for the quarter, with Service & Aftermarket down 3%, which is obviously an improvement in comparison to previous quarters. Distribution, back to growth, very much driven by Mobile Cooling. And then we see also improvements from an OEM perspective, where still, Marine slightly negative. We also have LV slightly negative, while we see improvements in other areas. EBITA margin, 6% in comparison to 7.3%. But then we also need to consider that we have a major effect on -- when like-for-like. So we have a substantial negative effect by currencies -- driven by currencies, and we will get back to that on the details. At the same time, as we previously communicated at the end of last quarter, we also have negative impact in Mobile Cooling specifically from increased labor cost since we added about 250 new people in the organization at the same time as we also have the price corrections to compensate for the higher tariffs in Mobile Cooling. Looking at free cash flow, we ended up at SEK 20 million, which is a bit lower than 1 year ago, even there, very much influenced by the currencies. But at the same time, as we have seen a more positive order intake, backlog starting to come to the same level as last year, and we have been building inventories for the start of the season in Q2. At the same time, we also had later invoicing in the quarter this year in comparison to last year. All those factors are having an impact on the free cash flow. Leverage ended up at 3.3x in comparison to 3.1x in previous year. If we move over to numbers, sales ended up at slightly above SEK 4 billion for the year with 3% organic growth, 12% FX, meaning obviously a substantial impact, and then 1% negative by the portfolio changes that we are doing. EBITA ending up at SEK 245 million or an EBITA margin of 6%, as I commented before, compared to 7.3% last year. We got a negative EPS in the quarter of SEK 0.67, adjusted negative EPS of SEK 0.39. And as commented before, cash flow of SEK 20 million -- free cash flow, SEK 20 million, a leverage of 3.3x. Moving to the whole year, ended up at SEK 21 billion in sales with a total negative effect of FX for the year of 6%, 8% down organic growth and the same 1% on portfolio changes. With EBITA landing above SEK 2.2 billion, or an EBITA margin of 10.6% versus 10.8%. And of course, considering the negative growth, we feel quite proud of what we are achieving, working very, very hard to keep our cost in control despite the negative top line decline. EPS ending up at SEK 1.34, with an adjusted EPS of SEK 2.52, and a free cash flow of above SEK 1.4 billion. Net sales, obviously, we are still not there, but we're starting to get close. As you can see on the graph, we are coming from hovering around 10%, 11%, 12% quarter-by-quarter for the last 3 years. And we saw Q3 landing on minus 6%, now minus 3%. And as commented before, we see order [ intake and backlog ] improving. Difficult to say obviously when we are going to see Dometic moving into positive territory, but it's quite clear as well that we are getting very close. Looking at the different segments, Land vehicles ended up at minus 4% with Americas down 10%, EMEA positive for the quarter, plus 1%, APAC minus 10%. Marine came back to a negative growth of 3% after slightly growth shown in Q3. And we don't see that as anything strange. Obviously, the market needs to stabilize. We are coming from pretty negative growth. We saw plus 1%. Now we see minus 3%. We're expecting obviously to see improvements moving forward as well. Mobile Cooling, good to see that we are back to growth and optimistic about the expectation for 2026. And then Global Ventures, minus 3%. And we'll come back later to some more details on the different segments. Looking at the different channels, no major differences, in reality, is -- really, we see Service & Aftermarket becoming a little bit higher on the share, while the OEM channel is becoming a little bit lower, ending up at 39%. And just as comparison, we are coming from a situation, 2018, where the OEM side stood for 62% of total sales. Looking at the different channels, again, it's quite obvious that we are moving in the right direction. Service & Aftermarket, we were [indiscernible]. We were positive in Europe, while we were negative in Americas. Distribution, as I commented, we have positive in parts of Global Ventures and positive on Mobile Cooling having an effect -- 2% positive effect on the distribution channel. And then OEM is also quite clear that on one side. The European market is stabilizing. We see -- especially in Southern Europe, that we are starting to see growth, while Central Europe is still sitting on a little bit too high inventories even if they are coming down. So we expect even, from that perspective, improvements moving forward. We also saw, as a matter of fact, the commercial vehicles showing growth for the quarter, and we have seen growth for the entire year. So that's also a positive sign that things are improving. Looking at EBITA, as I commented at the beginning, 6% versus 7.3% last year. Looking at the underlying margin when comparing like-for-like, 2.9% higher than 1 year ago. FX, again, we will get back later, but had a major impact in this specific quarter. We also have the additional labor cost and the comparison to duty drawbacks in Mobile Cooling, that we commented in previous quarter, was going to have an effect also in Q4. We are happy to see gross margins improving, ending up at 28.7% versus 26.8% despite the lower sales. So it's clear that the restructuring program is biting quite a bit. And on top of the restructuring program, we also have a number of other activities to increase efficiency overall in the company. And then even if we are showing negative EBITA development in the quarter, we also see that both Land Vehicles and Global Ventures are showing better margins despite the currency situation. Moving to specifics on the -- moving on the specifics to Land Vehicles. We have, on Land Vehicles, net sales of SEK 1.8 billion with organic growth -- negative organic growth of 4%. We got decline in both channels. But as I commented before, growth on the CPV channel as part of Land Vehicles. And we also showed growth in EMEA for the first time during the last 5 quarters, which is telling us really that the LV -- RV business in Europe is stabilizing. EBITA, higher SEK 66 million in comparison to SEK 23 million last year or 3.6% EBITA margin with clearly a positive impact of the global restructuring program. As we commented, when we announced the program, the LV segment was going to be the one showing the major impact during that program. We see both increased profitability in EMEA. We see reduced losses in Americas and APAC still delivering pretty high margins despite the drop on the top line. Marine, down in organic growth, 3%, with sales and aftermarket stabilizing as well, flattish in comparison to 1 year ago, and single-digit decline in the OEM channel. EBITA, almost SEK 200 million or 18.5%. So a slight decline on the EBITA margin, defending, in other words, protecting the margins pretty well despite the drop in the top line. In this case, the margin decrease is very much due to the currencies, as Stefan is going to come back to. And then we see even there that we are doing a pretty good job in reducing cost to compensate for the drop on the top line. Mobile Cooling. Organic growth, positive. That was a positive in the quarter. We see a strong recovery in North America in Q4 in comparison to Q3. On the negative side, obviously, the margin in the quarter is not coming as a surprise. We also already announced that we had on one side the positive onetime effect of SEK 63 million coming from the duty drawback. At the same time, as we also had inefficiencies caused on one side by labor since we employed again about 250 new people at the same time as we have additional training costs and at the same time, as we implemented prices, but the prices are kicking in in January. So we are not expecting negative effects from those factors from January this year. Moving over to Global Ventures, ending up 3% negative as well with good continuous organic growth in other global verticals. At the same time, as we see decline in Mobile Power Solutions driven by the soft RV industry, even if it's improving. And even here, we are pleased to see that our EBITA margin is improving 7.1% and also in absolute value, is improving to SEK 28 million in comparison to SEK 24 million last year. As a consequence on one side of the sales mix -- positive sales mix, at the same time as we keep working on reducing our cost. On sustainability, we are happy to see progress in all areas but one. So injuries coming down to, I would say, all-time low. In this case, after a lot of investments that we have been doing across the company, to improve in this area. Female managers, up to all-time high, 31% in the quarter. We would like -- obviously, we will continue to work in that area. But again, showing progress. Energy, renewable energy operations, 37%, and also beating our own targets, while innovation index, the same ending up 23% in comparison to 21% 1 year ago. And that's a super important one because that has an immediate impact as well on climate. So new products drive lower climate. [Audio Gap] So looking at the products in the Marine area, we have a new sanitation product for sailing boats that we just launched. And then last but not least, also starting to see the synergies coming from our Mobile Power business and introducing new products in the Marine area, where we are going to increase efficiency by connecting a number of different batteries into one single device. Happy to report as well that our global restructuring program is running slightly better than expectations. As you may remember, we are expecting SEK 750 million in savings at the end of 2026 -- running rate at the end of 2026. And so far, 300 employees have been impacted. We have closed 1 manufacturing site and 5 distribution centers. We are running at the end of December at a rate -- a saving rate of SEK 350 million. And we had cash out that also impacted obviously our free cash flow in the quarter of SEK 100 million, a little bit higher than SEK 100 million. And totally for the year, the cash out has been a little bit above SEK 200 million. And then we keep working on the divestments. Unfortunately, we cannot communicate anything yet, but we are working on that. And then on discontinued businesses, we stopped a couple of businesses, leading to a 1% negative organic growth for the year -- for total year. And we will see that number now fading away step by step. And with that said, Stefan, stage is yours. Stefan Fristedt: Thank you, Juan. Good morning. And we are starting with the Q4 income statement. Gross profit-wise, we continue the positive trend in improving our gross profit. And that is despite that we have a SEK 30 million negative effect from the tariff/labor cost increases within Mobile Cooling. Then we have an underlying development in the EBITA margin. So let me save that for the next slide here, and so we will come back to the different details on that. Further comments that on operating expenses that we have reductions driven by global restructuring programs and other measures. And at the same time, we feel that we are able to invest in strategic growth areas like product development and sales resources. On the net financial expenses in the quarter, we can see that the interest on bank loans is slightly higher than last year, and that is very much driven by the fact that we have, in the short-term perspective, had higher debt than basically needed with the plan that we are going to repay debt. We have also done that in the later part of the quarter, and we will continue to do another repayment in May 2026. So that has been driving up the net interest on bank loans and financial income somewhat. On the tax side, the tax rate is negatively affected by nondeductible interest expenses in Sweden. And then we also have made a tax provision in the fourth quarter for ongoing tax audits. So let's move over to the specification of the EBITA in the quarter. And as you recall, we had in Q4 last year, a duty drawback repayment of SEK 63 million related to Mobile Cooling, which was a onetime off, and that did, of course, not repeat itself this year. Then we also, as communicated in Q3 that we have a delay between the price increases we are taking out to compensate ourselves for tariff cost and higher labor cost, also mainly in Mobile Cooling. That is SEK 30 million. So that is the second part for the adjustment. If we sum that up, then we have an underlying EBITA of 6.8% versus 6% last year. And then we have the currency impact, of course, especially the dollar has been swinging a lot. It's almost a SEK 2 difference to the dollar between Q4 last year and Q4 this year. And that have had an effect which, measured in EBITA margin, is 2.1%. So that's the specification on how we come to the 8.9% underlying versus 6% last year. Let's move on to the next, coming into our cash flow statement. We have a somewhat lower operating or free cash flow than what we have seen in the past. And from a working capital point of view, we have seen that -- and also that we talked about in Q3 that we also have to build up inventory to meet demand, that we are expecting to come. And then there is also a currency effect in the free cash flow impacting it. It's approximately SEK 250 million. And then obviously, there is also an underlying lower profit that is impacting the cash flow. Then we have a cash out related to our restructuring program of SEK 103 million in the quarter. That means that program to date, so starting to count from Q4 last year, we have now had a cash flow effect of SEK 270 million on our restructuring program. And as you remember, SEK 400 million is what we have said will be the cash flow impacting part of the restructuring program. So on the free cash flow before M&A, interest expenses paid is down and also taxes paid are down. And then as you can see at the bottom, we did a repayment of USD 229 million in the loan here using cash on hand, which is perfectly according to plan. Yes. Moving over to the next slide, you see the free cash flow development more in a time horizon. And if we look into 2026, I mean, I still feel that the free cash flow, it's probably not going to come up to the full level of 2025, but slightly below that level is my expectation for the full year 2026. Looking to the working capital. There, we see positive development here. The working capital over the last 12 months is 25% of net sales. It was 29% of net sales last year. And if we look not on an LTM basis, but in the quarter stand-alone for Q4, we are down to 23%. This is, of course, driven by the inventory balance, which is now SEK 4.8 billion compared to SEK 6.5 billion last year, and we can also see that the days of inventory on hand is down to 119 days versus 138 last year. So I think we -- I'm satisfied with how we have been able to drive down inventory during the year. Then there is still further potential to optimize working capital going forward, where the target is 20% of net sales. And you can see the different components here and obviously, where we have the most profound development within inventories. The other 2 stays pretty stable. Moving over to CapEx and R&D expenses. CapEx is a little bit down in the quarter, and we are also making strategic decisions about where we spend, so -- but it's also partly related to timing. If we look on R&D, it's now 3.5% of net sales, and that has been clearly a target that we have had continued to develop and launch new products, which we also see in the innovation index, which is continuing to come up. Moving over to our debt maturity profile. As you see, we have some debt falling due in 2026. The SEK 2.2 billion is the remaining part of the 2026 Eurobond, SEK 100 million we paid off when we did the new bond in September in 2025. And that is intended to be paid off with cash on hand. Then we also have SEK 0.8 billion falling due in September, and we are keeping our options open here. But if the cash situation allows for it, we are considering to pay it off in September. Looking a little bit on our debt portfolio. It now has an average maturity of 2.7 years. And we have also extended a USD 233 million term loan to 2029. And then the undrawn revolving credit facility of SEK 300 million is maturing in 2028. So with that, we move over to our leverage ratio, which ended at 3.3x, which is 0.1x up versus Q3, and it's, of course, driven by the reduced EBITA and which is then the impact from lower net sales mainly. And we are highly focused in the organization on protecting margin and reducing working capital and which we have seen in the past. And that work, of course, continue combined with a very clear growth focus as well. And we are, as we have said all the time, committed to drive towards our target of around 2.5x of leverage. So with that, that was my last slide. So I hand over to you, Juan, to conclude the presentation. Juan Vargues: Thank you, Stefan. So looking at the business, we continue to see a market stabilization, and we see also the signs in order intake and backlog situation. EBITA in the quarter was, of course, disappointed even for us. And of course, the currency is not a lot that [indiscernible]. But nonetheless, we were disappointed clearly. Massive impact from currencies. We already commented after Q3 Mobile Cooling, and that was obviously confirmed during the quarter. Happy to see that Land Vehicles, that has been the toughest, obviously, segment, very much impacted by the RV industry, is showing better margins as well as Global Ventures, despite, again, the currencies. Free cash flow, I want to repeat myself. Currency did have an important effect even here, but we also built up some inventories in preparation for the Q2 when looking at better order intake and backlog. We have lower profit, clearly, which is also impacting the free cash flow. And on top of that, we had this SEK 100 million due to the restructuring program as cash out in the quarter. Leverage, 3.3x versus 3.1x. Difficult to predict when we are going to move into positive territory, but we feel that we are getting very, very close. We have seen the trend moving from, again, around 10%, 11%, 12% into 6% into 3%. And, again, we feel confident that the order intake and the backlog is going to lead us to positive territory, provided, obviously, that the geopolitical situation doesn't have more negative impact on the consumer confidence. Strategically, we keep working exactly on the same topics, innovation, super important for us and our future, ending up at 23%, an improvement of 2 percentage points versus last year. I'm happy to see that the global restructuring program is biting and how our gross margins are improving quarter-by-quarter. And with that said, I would like to open for the Q&A session. Operator: [Operator Instructions]. The next question comes from Fredrik Ivarsson from ABG Sundal Collier. Fredrik Ivarsson: First, you talked about the stronger order backlog, obviously, and a gradually stronger demand. My question is, did you see any big swings from the previous quarter? Or is it just smaller, gradual improvements that you see? Juan Vargues: No, we have seen a step-wise improvement quarter-by-quarter since Q1. So it's a major improvement if you're comparing with Q1 step by step. And it is a little bit in all areas, I would say, including the OEM channel, has been showing better numbers during the last 2 quarters. Fredrik Ivarsson: Okay. And then on the FX drag, 2 percentage points on the margin in Q4. Do you have any guidance for us as we look into Q1, Q2 in terms of FX? And maybe also if you could say anything about the specific impact from tariffs during the front end of the year? Stefan Fristedt: Yes. That was an obvious question. And I can say, I mean, just to give you a little bit of guidance, I mean, if the dollar changes plus/minus 5%, that will have an effect of SEK 47 million on EBITA and equivalent on the euro side is SEK 37 million -- and I am -- and that is on a full year basis, right? So it's -- so I mean, where are the currencies going to go here? But I mean, we have actually been spending some time on that to try to understand that. And our view, and that is, of course, followed by 100 disclaimers, but -- depending on certain things. But I would say that maybe we will have to assume from the rate that we are using by the end of December until the end of March, a 5% to 7% movement on the dollar and maybe a 3% movement on the euro. But that is just -- I mean, as you know, the P&L is driven by an average. So it's obviously not moving as fast as the closing rates here. But I would say a negative 5% to 7% in the dollar rate and then a minus 3% on the euro rate. And then you obviously need to use the numbers that I gave you here in the beginning. And we are actually considering to have a specific call with analysts on the currency effects so that you can -- that we can talk about it in such a forum. But so it's going to be negative, but not as negative as we saw now in Q4. I mean it's also a little bit unfortunate, obviously, that Q4 is a small quarter and these type of effects also -- because of that, has a bigger effect on the margin as such. Then tariff-wise, we are expecting that we, from Q1, will have compensated ourselves with price increases and -- which we also communicated in connection with the Q3 report. So we don't see any changes in that. Fredrik Ivarsson: Perfect. And if I may squeeze in one last one for you, Stefan, on cash flow, coming back to what you said regarding the 2026 expectation, not fully reaching last year's level, I think you said. In that statement, what do you assume in terms of working capital because you still seem to be quite positive on the upside in working capital? Stefan Fristedt: Yes. No, But I still see that we have more to do on inventory. Then, of course, there is also going to be a component in here where we need to increase inventory to make sure that we maintain the service level to the customer. But we still have pockets where we know that we will have to continue to work with that. And I mean the ambition in the big trend is to come down to 100 days of inventory. And as you know, we are on 119 as we speak. And will we be able to take that full step in 2026? Maybe not, but still moving towards that target, I would say. But then we are also working with the other components here in finding ways to improve that. So I still feel that we will continue to move towards the 20% working capital to net sales here. And as you saw in Q4, we are on 23%, and we are on LTM, 25% basis. So continue to move towards that level. Operator: The next question comes from Daniel Schmidt from Danske Bank. Daniel Schmidt: Two questions from me then. And just coming back to organic growth and the lack of organic growth so far, you mentioned that you've seen order intake improving since Q1 last year. It doesn't sound like that has changed recently heading into Q1 this year. Just simply, doesn't that mean that you are in positive territory in terms of sales organically now or sort of the delay between order intake and sales longer than normal? Or have you seen cancellations during the year of sort of the backlog? Or what's happening there? Juan Vargues: Now what happens, obviously, that this is a gradual recovery month by month and quarter-by-quarter. So we are much closer in Q4 than we were in Q2 in comparison to Q1. So the major drop we saw really in the second half of 2023 and 2024. And then we entered Q1 2025 on a low level, and we have been recovering since then. Keep in mind how the market has been evolving. First, you had a drop in North America RV. As the market on the RV in North America was stabilizing, then we got, in the last quarter, the second half of 2024, the European market dropping big time, at the same time as Marine was dropping. So the American market has been improving, while the European market is starting to recover now during the last 3 months. So again, it's not that you have a big bang upwards or downwards when -- normally, being global is an advantage. In our case, because of the magnitude of the drop in the different geographies, that's the reason for showing this negative growth for so long in comparison to many other companies. If you look at our American colleagues, they have been dropping 45%. But then after 18 months, they are back. As we have been recovering in some areas, we have been deteriorating in some other areas. We see the recovery on the order intake is all over. I wouldn't say that this is in one geography. We see improvements all over. But still, we don't see the sales yet. Then you have, at the same time, a little bit what we have seen with Mobile Cooling, that people are super careful in building up inventories. So they place an order, and then they see whether they have the sell-through or not. And then depending a little bit on how they see it, they will wait another period of time. So I believe really that we are getting into more stability. But to tell you that we are going to show positive growth on the 15th of February, I would be lying to you. I believe that we will see still what we have seen in Marine, 1 quarter, plus 1% or plus 2% and then another quarter, minus 3%. It's very, very seldom that you are dropping 10% and then all of a sudden, you're moving to 10% growth. I believe that we are going to be most probably one more quarter and then we should be seeing the growth coming back. And more positive on the European market, clearly. We see that Southern Europe and the Southern European players are starting to manufacture again. They were not doing that a few months ago. We said that the German manufacturers are a little bit more hesitant. They are still talking about -- the dealers in Germany are still talking about a little bit too high inventories. While at the same time, we know that companies like [ Klaus ] or like [ HAIMER ], part of 4, are more optimistic about 2026, and we see a major gap between manufacturing in 2025 and registrations. Registrations in Europe ended up at minus 2%, while manufacturing after 9 months was down 17%, or 25% if you look at rolling September. So that's telling me, obviously, that we are reaching the breakeven point somewhere. Daniel Schmidt: Yes. I was just sort of maybe referring to that you potentially now have said that order intake has been improving for maybe 12 months as we get through this quarter, but let's say, 9 months. And -- but maybe you're also saying that sort of the certainty in the order intake is a bit less, it sounds like, when it comes to dealers postponing orders and so on. Juan Vargues: I mean we saw that, and we have seen that in Marine, we have seen that in Mobile Cooling, that people are still hesitant to build up inventories. So they place orders, and then they wait. So everything is depending just now on the sell-through. The good news is that altogether, the inventory levels are lower. So it's going to be more and more difficult to postpone the orders. That's what we are trying to say. Daniel Schmidt: Yes. Okay. And then secondly, we talked about it in Q3, the Igloo court case being moved to March from September. Is still March the date for the court and any sort of -- any changes to what you've provisioned? Juan Vargues: No. So we still feel very confident about our provisions, and we will be in trial, I think, it's the second week in March. Stefan Fristedt: I mean our point is still that we don't believe it lacks any merit this quarter. We still believe that we should not pay anything more. That's what we basically say. Daniel Schmidt: What is the length of such a trial normally? Stefan Fristedt: Yes. Because -- I mean, there is a trial. And then if it is a fast judge, she will -- it's a she, will take a decision directly in the -- after the hearing, but they have up to 6 months' time to come with their verdict, so to speak. And then there is obviously a chance to appeal after that from either side. So it's like we have said all along, it's -- it could be a lengthy process. Operator: The next question comes from Johan Eliason from SB1 Markets. Johan Eliason: Juan and Stefan, just a short question on market share developments. You have a little bit of a history losing some market share during the pandemic to the Chinese in the fridges and the warning side. How are things developing more recently in the current quarter, obviously, disregarding the business you are closing down? Are you keeping? Taking? Or are you still losing some areas? Juan Vargues: No, I think it's very much in the same situation. So obviously, what we are referring to is obviously Chinese company is very much active in North America. And I don't see that the situation has changed anything. On the rest of the business, it is very much the same. So obviously, we are into a number of industries, and we are into a number of different product areas. Sometimes you lose 1% here and then you win another percent there. So I do believe that -- I don't see any changes altogether. Johan Eliason: Good. And I think you mentioned that you hoped you would regain some market share in the earnings moving it back to the U.S. again. Has that materialized or... Juan Vargues: No, not yet. We are working on that. Operator: The next question comes from Agnieszka Vilela from Nordea. Agnieszka Vilela: I have 2 questions. The first one, my understanding is that when it comes to tariffs, you have been protected by the USMCA agreement when you imported things from Canada and Mexico. Does the situation change at all with the Section 232 right now? Do you have like -- did you expect more tariff burden? Or it does not apply to your products? Juan Vargues: We don't see any effects so far. Then of course, we have Mr. Trump's statement last week about 100% on tariffs on a number of different products. We don't have any more detailed information, but obviously, the communication has not been official. There's going to be on when it's going to be. So we are in a waiting mode. Agnieszka Vilela: All right. Understood. And then apologies, I missed the beginning of the call and maybe you commented on that. But can you just explain the profitability development in Marine specifically? What were the headwinds there? And also, should we expect these headwinds to sustain during 2026? Stefan Fristedt: I would say that in Q4 specifically, Marine is the segment that has been impacted the most by the currency effect. So that -- we obviously -- I mean, who knows what's going to happen with the currencies? But if we are staying with what I mentioned before, I mean, our assumptions on how we believe that the currency is going to develop based upon our average rates, then I would expect that impact to be less going forward. But that's, of course, with some disclaimers, no doubt. Agnieszka Vilela: Okay. And maybe just a follow-up on Marine as well. Just looking at the organic growth development in the business as well. Now you -- I think the organic growth declined by 3%, somewhat worse than what was the case in Q4. Any kind of flavor you could give us when it comes to your expectations for the Marine business specifically into 2026. Juan Vargues: I can give you some indications, Agnieszka. On one side, we have the European market, which obviously size-wise is much smaller than the American market, but we had 2-digit growth in the European market, Marine in Q4. On the contrary, we had negative growth in the American market. On the American market, what we see is that on one side, marine dealers are still very cautious and talking about high inventories. At the same time, we see as well that engine manufacturers are starting to show nice growth on engine manufacturing, which is going to bigger boats. And that could benefit us. The question is when are we going to see that in our order intake and in our sales. But we have a couple of indicators that are positive. The one that obviously needs to change is dealer sentiment on the American side. Tobias Norrby: And now we have a couple of questions from the webcast audience. The first one being about our restructuring measures, whether or not the current ones are enough? Or do we feel that we need to come up with additional measures? Juan Vargues: You will never be done, right? Because there is always something more to improve. But our perspective just now is that the market -- we have indications the market is improving. Priority #1, #2, #3, #4, #5 is to put management attention on growth while keeping, of course, full control on the cost while carrying out the restructuring program we have. Just now, we are going for growth. And we intend to show growth in 2026. Tobias Norrby: And then there's a question on our account receivables program. If you, Stefan, please, could provide a few comments and expectations on that. Stefan Fristedt: It's a program that we have been putting in place. It's a tool. I was speaking to that. We were also working with the other components of working capital, and that is an example of what we are working with. So for some of our customer bases, we have that in place now. And if I would look on what that would mean by the end of the year, so let's say, by the end of 2026, I would say that it would contribute with another SEK 300 million to SEK 400 million. And then, of course, as we are a very seasonal company, it will be significantly more in certain parts of the year. But if we look on it from end of year to the end of year, I would say, compared to where we ended 2025, I would probably say that there is another SEK 300 million to SEK 400 million to be gained out of that program. Tobias Norrby: And then a short question on FX and in particular, full year 2025, the impact on EBITA, approximately, margin. Stefan Fristedt: There we have -- it's significantly less than what we have seen in -- I mean, we were talking about 2.1% units in Q4. And on the full year, it's 0.4%. So this is -- this has been an accelerating situation. And also, of course, versus the comparison to 2024, where the dollar ended with SEK 11.1 at the end of 2024, and now it is more on SEK 9.1. So it's dramatical development that we have seen there. But for the full year, 0.4% units on the profitability or on the profit margin. Tobias Norrby: And finally, if we can share some more comments on leverage in 2026, ambitions, expectations. Stefan Fristedt: Yes. But I mean, as one important driver, of course, here is obviously growth. And as Juan quoted before that the very clear ambition for 2026 is obviously to show growth, even though it's not going to be -- you should not expect double-digit growth. It's going to be low to mid-single-digit growth, I would say, in our base case here. So that is, of course, an important part. But then to drive the other parts of free cash flow as well in order to be able to reduce the net debt. And we also -- with the -- yes, plan on how to pay back gross debt, we are also going to reduce our financial net as we go. So I still feel that we should see a reduction in leverage in 2026. Then the question is how far that is going to be? I could say personally, I would be disappointed if that would not be at 2x at the beginning and so that we get out of the area with a 3x at the beginning. So if you see my point. Juan Vargues: I think just to fill in, if you go back to the last 3.5, 4 years, it has been very much about protecting margins, protecting cash flow, releasing inventories. It has been about navigating along a very, very, very tough period of time in any consumer business. At the same time, we feel that we are very, very close to turning. And that means as well that we need to also spend as management team moving from the defense to the offense. Just now, it's about growing the company, and that will have obviously a major effect, both on free cash flow and leverage without forgetting cost control. So we can assure you that we will keep working on restructuring program. We will keep working on protecting margins. But at the same time, we simply need to see the results of all the hard work that we have been doing also and get back to growth. Tobias Norrby: Good. And with that, I think we have one more question from the conference call audience, please. Operator: The next question comes from Daniel Schmidt from Danske Bank. Daniel Schmidt: Yes, it's me again. Just 2 short follow-ups, maybe Stefan. You mentioned reduction of debt in '26, and you outlined that on the slide earlier today. But what is the run rate in terms of financial net you think heading into Q1? Just could you give us any indication on a quarterly basis? Stefan Fristedt: [Technical Difficulty]. Okay. Daniel, can you hear us now? Daniel Schmidt: Yes. Stefan Fristedt: [indiscernible]. Can you repeat your question? We didn't really -- we were... Daniel Schmidt: I was just wondering, we talked about reducing debt and all that, and you did a lot towards the end of Q4, I think, if I'm not mistaken. What is the current run rate on the financial net heading into Q1 now on a quarterly basis? Stefan Fristedt: Now I would say that Q1, there is not going to be -- it's going to be a little bit down, but not significantly. But then after May, when we are paying back the bigger -- the remaining part of our Eurobond, it should be trending down. So I would say I mean we are a little bit above SEK 200 million now. So we should probably see that coming down with -- to, let's say, SEK 180 million or something like that. Daniel Schmidt: Okay. Okay. And then just a detailed question on the tariff/labor cost impact that you had in Q4. I think that combined was SEK 30 million, and now you're raising prices to adjust your profitability in Mobile Cooling since of January. How much of that SEK 30 million can you sort of counteract with this price increases? All of it? Or still you're going to end up with higher labor cost that is still going to have a negative impact? Or how do you view it? Juan Vargues: No, I see that on the pricing, our expectation is really to cover up for the increases that we saw during 2025. Absolutely -- now we increased prices, Daniel. The problem is that they are not kicking in before 1st of January. Stefan Fristedt: Some of them. Juan Vargues: So most of them kicked into the year, but we had a couple of major customers, obviously, where -- the prices are kicking in in January -- 1st of January. So we should -- our expectation is that we are going to cover up for those inefficiencies that we had in 2025 and the tariffs, of course. Daniel Schmidt: As of the full quarter Q1, there won't be any sort of delays into Q1? Stefan Fristedt: Price increases should be effective from the 1st of January. Operator: That was the last question at this time. So I hand the conference back to the speakers for any closing comments. Juan Vargues: So we would like to thank you for your attention. It's clear that we are not happy with the performance that we showed in the quarter. We have a number of underlying indicators that are positive, but we cannot be happy, obviously, when our EBITA, for whatever reason it is, is lower than 1 year ago and our profit margins are lower than 1 year ago. And our job is left. We keep working very, very hard to prove that we are going to come back to growth, that we are going to see margin improvements and that we are going to see higher free cash flow next year. And with that said, thank you very much for your attention, and have a good day.
Monique Mols: Good morning, everyone, good afternoon, depending on where you are, maybe even good night. Welcome to the Q4 full year 2025 financial results press conference. You may not see that when you're dialing in online and you're watching us online, but we are actually in a different location than we were last year. Today, we host the press conference in our training center in the ASML Academy, and that is located at the Brainport Industries campus in Eindhoven. And this is actually the place where we plan our expansion in the Netherlands. So we thought it would be a good idea to invite everyone here in the room to see what our new location is going to look like. There's nothing there to see yet, but this is where we are planning our expansion. And Christophe will talk more about that later in the presentation. My name is Monique Mols, I'm Head of Media Relations. So welcome to you all. I'm really happy to see that there are people in the room and people online. For those online, if you have a question later on, you can fill out the form on the website and we will take your question from here. If you're in the room, my colleague, Mark will walk around with a microphone and pick up your question. Sorry. So this is our annual results. Forward-looking statements for those who like it. So again, we are here at the Academy. We have several of those training centers all around the world. Here, we have quite a big center where, on average, 400 employees come here every day to get a training. So they actually work on the machines that our customers have in their fabs. And every year, we have about 26,500 people coming here to train. So this is a very important location for us. And we're very happy that we can host a press conference here today. With that, I'm not the only one who's going to talk to you today, of course, I have Christophe Fouquet; and our CFO, Roger Dassen, and they will talk you through the numbers, through the developments and everything that's happening at ASML. So I would like to invite on stage, Christophe Fouquet. Christophe Fouquet: Thank you very much, Monique. So Roger will be the one doing the good numbers later on. As you have noticed, we finished the year very, very, very strong with a record quarter record year, record booking. And this is basically a sign of the direction this industry is taking. We are very happy, of course, with the walk, the ASML team has done, being able to execute on such a big quarter in Q4 and also prepare us basically for 2026. So a lot of good news today. And again, Roger will get into the number. I'd like to say that we welcome also that clarification. In the course of 2025, you have seen that sometimes the business was still a bit uncertain. The last 3 months have really clarified basically at least the horizon for 2026 and most probably a bit beyond that. So before we go into the numbers, I'd like to provide you some context about what's happening in the industry, what is driving basically this type of news today. And of course, the very first thing is AI. You have been hearing about AI already for a couple of years. You have heard major, major announcement about AI infrastructure. I think from the very beginning in ASML, we have been a believer that AI will be a big thing. And this is true because as with semi before, any major application moving forward will not only use semiconductor, but it will also use AI. And I put a few examples of those applications on this slide. It's pretty much everything you can think about when it comes to technology, when it comes to the future of society, this will all rely on AI. If you look at the opportunity, this has been said also before, this will drive basically advanced technology, advanced logic, advanced DRAM. This will also basically drive the entire data infrastructure. And the effect AI can have on the overall GDP is pretty big. In fact, if you look at the U.S., even in 2025, AI was counting for a very large part of the growth, and we expect that basically to be applied to the entire worldwide GDP. So the opportunity is there. What was a bit, I would say, frustrating for us for a while is that where we heard all those news, we heard about all those investments, but basically, this was not yet translating into capacity addition at our customer. I think what the last 3 months have done is change that. We have seen our customer basically moving forward. They start to really believe in the sustainability of the AI demand. That's true for memory, that's true for logic. And as a result, they started to invest. They started to plan for capacity. And of course, this will drive demand for our product at ASML. And when you look at the demand for our product, what's interesting with AI is that this basically touch on all products. Of course, AI is going to require very advanced chips, and this is going to drive EUV, for example. So this year will be a big year for EUV, Roger will talk about that. It's going to drive advanced inspection tool. But at the same time, AI needs a lot of data generation, a lot of sensor, and this will be still created by the use of more mature technology such as DUV. So AI will have also this effect basically to really drive our entire product portfolio in the coming years. This is a bit of a summary of what our customers have told us. So I talked already about the fact that they are more confident that AI is here to last, and therefore, they are going to invest. I think, in fact, for a lot of our customers in 2026, capacity will mean market share. So we will see them very eager to get the capacity as quickly as possible. There's a few more good news when it comes to AI, AI also drive very advanced technology. This drive an increased use of EUV. And one of the things we've been talking in 2025 quite a bit is the fact basically that we have seen the number of layers of EUV increasing basically at our key customer. And this means practically that the overall litho intensity is going up, which means basically more use of our advanced lithography tool. 2026, we expect, as you understand, as the number will show an improvement of the business, a significant growth especially on the advanced tool, EUV as said before, will be a big year. And again, on the midterm, we expect that to continue. Long term, we stick basically to what we have told the market already several times, which is what we share basically at our Capital Market Day in November 2024. We still expect for 2030 revenue between EUR 44 billion and EUR 60 billion with a gross margin of 56% to 60%. Going a bit now to the effect of AI in the market. So this graph is showing a bit what AI will do. What you see here basically is the growth of the different segment of semiconductor. At the bottom, you see the historical growth of memory logic, which is about 6%, 7% year-on-year. 6%, 7% year-on-year is pretty great already. There are many, many industries that will wish to see this kind of number. But what you see with AI is that when we look at advanced logic, when we looked at advanced memory the growth on those segments is going to be more than 20% year-on-year for the foreseeable future. And this is really what is going to drive basically more demand on lithography. Why is that? So we've talked in the past a lot about Moore's low, of course. And Moore's Law is law that say that every couple of years, we need to double the number of transistors per chips. And that law has been true for many, many years for PC for mobile application. Now when you look at AI and this started to happen in 2010, the curve is far more aggressive. When you look at the most advanced AI product today, NVIDIA products, for example, the request is not to grow 2x every 2 years, but in the last few years to grow 16x every 2 years. So you see a major acceleration basically of the need for silicon. And of course, we provide that in 2 different ways. We provide that with scaling by making transistors small. We can put more transistor per chips. And this has been a good way basically to provide more transistor and follow Moore's law for many, many years, but that's not enough anymore. And if you cannot put enough transistor per unit of area per chips, then the only option will be to make more wafers. And that's a bit what we see happening with AI. So the most advanced AI application are going to drive up volume. And this is why when we look at DRAM customer today, when we look at logic customer today, they are building mega fabs. Some of them are talking about hyper-cycle because they have to be able basically to also provide this volume to the market. So just to illustrate that, I pick one example, and I picked it from NVIDIA because all of you are, of course, very much aware of what's happening there. Today, on the black wall system, you need about 2.5 wafers to create the product. If you look at 2027 on the revenue product, this number will go up to 10 wafers. So to provide the same product to their customer, NVIDIA will need 4x more wafer than today. And this is one of the reason why, again, we will see capacity extension driven again by this type of application. That's what you see here. And this is again, I would say, a bit of a new dynamic we have in our market AI by this acceleration of the need for performance of power reduction is going to drive both volume and technology a lot harder than any technology before. So what does it mean for technology, EUV is key. 2026 is going to be a good year for EUV. We are looking at more shipments. And this, despite the fact that we have increased the productivity of our tool by more than 40%. So we're going to ship a lot of capacity for EUV this year. If you look at it historically, we have already been having quite a bit of capacity. So the capacity headed of EUV in the last few years have been in average 25% year-on-year growth, which is quite significant. So we have seen all our customers basically already adopting this, it was logic first, then DRAM, but we expect basically to see that even more moving forward. Then we have High NA, and High NA, of course, is not going to be the tool that provide the capacity of EUV in 2026, '27, but that's the tool that will enable our customers to shift to even more advanced technology around '28-'29, that's important for DRAM. That's important for logic. And that's important for AI because as I said before, AI is going to be looking for more advanced chips with low power consumption and High NA is going to play into that very strongly. So good progress on High NA in the last few months. Our customers are still qualifying the tools. This takes a bit of time. The results are good. This year is going to be used to prepare a bit for insertion. And again, if we look at 2027, '28, we are going to see the first product being manufactured using some High NA system. Deep UV remains very important. As I said, it's not all about advanced semiconductor. As you know, a lot of technology still require Deep UV. So we continue to drive the road map both on Immersion, where we have launched our 2150, which basically give us sub-nanometer accuracy and more than 300 wafer per hour. Productivity is important. Productivity, of course, a way to get capacity. So we continue to drive that on immersion, I think the example of the NXT:870B, which is a KrF system is even more spectacular because there we have been capable to achieve more than 400 wafer per hour. And that tool today is creating a lot of interest at our customer because productivity, again, is capacity. We talked also last quarter about us starting to help our customer with what we call 3D integration. So I told you, when you cannot put all the transistor in one ship, you just make more chips and bring them together with 3D integration. We have our first system, the TWINSCAN XT:260 that was shipped last quarter, lot of interest from our customer. For us, this is the first product looking at this new market opportunity, and we will continue to work with our customers basically to define more product moving forward to support them also on that segment. A few words on metrology and inspection. So we don't talk always about metrology inspection. But when you drive technology, yield become very, very important, and yield can be improved by doing more maturity and more inspection. So in 2025, we have seen our metrology inspection business growing up by almost 30%, which is a major growth number. It has to with need for more metrology in spectrum, it has also do with the quality of our product in optical metrology for overlay, but also in e-beam. And one of the products where we have seen quite some progress in 2025 is multi-beam. Multi-beam is going to provide e-beam inspection at higher speed and most probably in the next, I would say, a couple of years really enable our customer to move this technology to high-volume manufacturing. So a lot of good progress there as well. You all heard about Mistral, I say back in the end of the summer when we announced our collaboration but also our investment in Mistral. The rationale there was to get AI in ASML and to get the very best people, the very best competence in ASML in order to be able to first strengthen our core competencies, read putting AI in our product, support the connected market, to offer some of those capability to our customers and also create new opportunity basically moving forward. That's a project we are going to talk more about in '26, in '27. We are making great progress with Mistral, our partner. Our teams are working very, very closely together to basically execute on each one of those points. Going a bit into some of the other things we are very, very proud of at ASML. This is our engagement in the community. We have been spending, I would say, both the time, talent, money in order to work together with the community on a few very important topics. The first one is mobility. Well, we are here today. As you know, this is also close to our next campus, which I will explain in a minute. We plan to have a groundbreaking this year in a few months. We want to continue basically to work with the Brainport community to improve the infrastructure because we are very much aware also that as we grow, we can sometimes create more headache, and it's very important to address that. So we have major investment there also, of course, through the Beethoven program. Affordable housing, there's been quite some press in 2025 about some of the progress we have done there. This is ongoing now for a few years. This remains very, very important, and we will continue to invest. You see the number there. I don't need to stress it to basically create more housing. We also understand that this is a broader challenge across the Netherlands, and we definitely want to do our part helping the community here. Culture. So we are very proud to be one of the, I would say, initial partner for the future Rijksmuseum here in Eindhoven. We love the city of Eindhoven. We love this place. But sometimes we feel that if we can bring a bit more culture, a bit more activity, I think this will help people to enjoy it even more to attract even more people moving forward. That's why we stay very committed to the PSV Football Club, as you know. But this we thought was a very, very nice initiative from the city of Eindhoven and we really wanted to be there. Finally, education, you know that we have a long-standing relationship with the TU University here in Eindhoven that could extend that to many other university across the Netherlands. This is key. We want to develop tenant that will be able to work in semiconductor moving forward, and we will continue to do that, of course, very strongly. One last word. We need to continue to grow. I will come back to some of the other announcement we had today about our focus on innovation and engineering. At the same time, we see more demand for our product. And therefore, our footprint needs to continue to grow because we need to invest in customer service. We need to invest in manufacturing. We need to invest in space. So last year, we opened 2 major sites, one in Korea, one in the U.S., and that intends to support basically our activity here. The big event in 2026 will be the groundbreaking of the big campus, which is our second big campus in the community. We'll do that mostly in May, June, and I'm sure you will be invited to join us with the idea that we can already start moving people as early as in 2028. So this will be very good for our people. It will be very good also to debottleneck a bit the campus in Eindhoven, of course. And this is a project, as you know, that is very, very important for ASML. This is my update. I will come back in a bit to talk a bit about the action we are taking on our engineering team to strengthen our innovation. In the meantime, I'll give a chance to Roger to give us those very nice numbers. Thank you. R.J.M. Dassen: Thank you, Christophe. And good morning, good afternoon, everyone. So indeed, I will present the financials for '25 and the outlook. Christophe said it, clearly, Q4 2025, a record quarter by any standard. It was a record quarter in terms of sales. It was a record quarter in terms of order intake. It was a record quarter in terms of cash flow generation. On the back of all the good developments that Christophe just shared with you. So I won't call them out here, but just looking at the quarter, it's pretty clear that it was indeed a very strong quarter. If we look at 2025, and if we look at the total business for ASML, we ended the year with EUR 32.7 billion in net revenue, 52.8% gross margin. And you see the key elements in here, a net income of EUR 9.6 billion and an EPS earnings per share of close to EUR 25 per ordinary share. All in all, a very, very strong year in which we also paid back and returned quite some money to our shareholders. And also, we're able to do the participation in Mistral that Christophe just alluded to. Very clearly, EUV was the main driver behind it. And you will see it in the pie chart that I will share with you in a moment. It will clarify that it is particularly the leading technology that really contributed to the growth. So both immersion, but first and foremost, also EUV. So EUV grew 39% in comparison to -- in comparison to last year to 2024, a mix of both more tools, significantly higher sales price of the tools because most of the tools that we sold, most of the low NA tools that we sold in 2025 were 3,800 tools, which, as you know, saw an increase in productivity from 160 wafers per hour to 220 wafers per hour and of course, a commensurate increase in the sales price. And obviously, we also had the recognition of a number of EXE tools, High NA tools. So it's in that combination that really EUV was the big driver of growth for us this year. Big moment indeed, and Christophe showed it as well, the revenue recognition of the first 5200B really big moment for us because that is the high-volume manufacturing tool on High NA and the fact that we were able to not just chip it but also get it installed and get accepted by the customer and the customer and really looking at putting that tool into high-volume manufacturing for its leading nodes is a very significant moment for the company. Deep UV went down a bit, decreased 6%. If you look at the geographies, you would see that most of the decline would come from -- would actually come from China. So that's where most of the decline on Deep UV was immersion is still quite strong, particularly on the dry side, it was lower than it was in 2024. But there, the step into the 3D integration market with the introduction of the 260, obviously was another big moment, application very strong. Christophe alluded to it a 20% increase right there with the need for more process control for our customers at the leading nodes. And finally, very, very strong 26% increase in our installed base business, both on the back of service, our installed base and EUV is obviously growing. Therefore, you see a continuous step up of our service revenue from EUV, but also increased appetite in EUV in upgrades. I'll come back to that later. This gives you some breakdowns and I won't call them out at all. But I think if you look at technology, it's interesting to see that the leading technologies, so both EUV and immersion combined give you 90% of our systems revenue. And I think that really talks volumes, I think, about the shift that Christophe is also talking about the shift to more and more leading nodes, clearly represented here in the share of technology. In terms of end use, you see -- we see memory at 34%, logic at 66%. You see memory actually declining a little bit in terms of percentage. We actually see that flip in 2026. So in 2026, you will see that memory becomes more and more important. In terms of regions, a lot to be said there, but I think China is still very, very big, but smaller than it was last time, both in terms of percentage of system sales and also in absolute numbers, you see a bit of a decline in the China market. We expect that decline to continue. As we said, we expect the China business for this year to be around 20% of our total sales. So here it was 33% of total -- of system sales was 29% in terms of total sales, we expect the 29 percentage number to go down to approximately 20% this year. This gives you the net sales by end use over the years. I won't spend too much time on it. Just one fun fact. If you look at the installed base business at EUR 8.2 billion, that comes pretty close to the total revenue for ASML in 2017. That just tells you how unbelievably rapidly the company grew. And the fact that we have such a big number in terms of installed base business, obviously, also provides a lot of resilience for the company. So therefore, it's an important number for us to focus on and to continue to increase. This gives you the business over the years. So if you just -- if you take the 4 year -- so the 4-year increase from 2021 to 2025, you would see that the company has grown 75% at the top line. You also see that R&D increases from 2.5 to 4.7, which, of course, was absolutely critical in getting us prepared for all the beautiful products that we're currently shipping to our customers. But I think it's also fair to acknowledge that this increase in R&D number has also driven some organizational complexity that Christophe will talk about after my contribution. So this gives you the overview. And as you see earnings per share an interesting number, round it 25, 25 by 25 is something that you might easily recall on a go-forward basis. In terms of return to shareholders, if we look at dividend, the total dividend that we proposed to the AGM for the year EUR 7.50, this quarter, we'll do EUR 1.60 per ordinary share as an interim dividend in Q1. And therefore, if the AGM accepts our proposal, we would have a final dividend of EUR 2.70, and that's a significant increase over last year. In terms of share buyback, we did not complete the full program of share buyback. As you see here, EUR 7.6 billion out of the total program of EUR 12 billion. We did announce a new program, EUR 12 billion over a 3-year period. In terms of outlook for the quarter, we expect net revenue between EUR 8.2 billion and EUR 8.9 billion with a gross margin between 51% and 53%. Look again at the installed base management sales, 2.4. So last quarter, 2.1 goes up to 2.4. What it really tells you is that the appetite from customers when it comes to upgrades is very, very high, because in the client that Christophe was describing, but customers really have a lot of appetite to increase their capacity as quickly as they can. Of course, on the one hand, they will try and complete their fab billing as soon as they can, such that they can new tools in. But in the meantime, once these fabs are still in construction, the fastest way to get extra capacity is really to make sure that the tools are squeezed to the maximum and therefore, to put as much upgrades on the tool as possible. And that's -- that's what you see here, and that really contributes to very, very strong installed base sales going up again this quarter. So the gross margin, 51% to 53% R&D and SG&A costs nicely under troll. For the full year, EUR 34 billion to EUR 39 billion, really on the back of all the developments that Christophe talked about. So the real steam engine behind this growth is once again EUV. So we once again expect the EUV business to go up significantly this year. We also expect the installed base business to go up this year, and it will go a little bit at the detriment of the non-EUV business. We expect that to be about flattish. So non-EUV business is expected to flattish from '25 to '26. With us moving parts for the leading nodes, so for the big customers, both in memory and advanced logic, we actually expect the Deep UV business to go up a bit. As I mentioned, in China, we expect the China business will go down. Metrology and inspection, we expect to be quite strong. So those are more or less the moving parts within the non-EUV business. Again, for the full year, EUR 34 billion to EUR 39 billion, which at the midpoint after a growth of 16% in '25. At the midpoint, you would be looking at a 12% increase in this year with good potential as the bandwidth also suggests gross margin 51% to 53% and annualized effective tax rate of 17%. And that concludes my presentation. And as I mentioned, Christophe has a part for you on the streamlining of our engineering and innovation function. Christophe Fouquet: Thank you, Roger. Good. Yes, I have one slide I want to share with you on the action we are taking basically to strengthen our innovation and engineering team. So I think that the net results of that, which is 1,700 people leaving the company, I think, has been picked up pretty clearly already this morning. What I want to do is to give you some background. And of course, you understand listening to our outlook, listening to the numbers. We are not doing that in any case because we are in trouble because we need to save money, et cetera, et cetera. Now the reason we are doing that is that we have been growing very fast. And this is also true for a technology team or innovation engine, and as you know, the technology team, the innovation engine of ASML has been the reason for our success. It's been true for many, many years, and this is still going to be true for many, many years to come. And as we have said in 2025, we want to continue to innovate more. This is why we engage in AI. This is why we engage in 3D integration. This is why we have a long road map on e-beam, and we believe that innovation will for many, many years to come, define our success. But when we listen to the feedback of many of our stakeholders, they have told us in the last few years that we're not very agile in fact. And we are not, I would say, responsive enough. So our customer are pointing to the need for us on technology to be able to respond much faster to work on quality to work on new product. A very important feedback we got is from our whole engineers who told us Well, a lot of the time we spend in ASML is not anymore on innovation, right? Because the organization has become so complex. We have so many people steering us in different direction that we have to spend a bigger part of our time just dealing with that. And this has been a very, very strong, and I would say, loud message from our people, and we felt the need basically to address that. Our supplier, if you talk to them, they also tell us the same, and therefore, we felt the need to move. So you heard about the number 1,700. I'd like to give you a bit more color to this number. If you look at our technology organization today, we have about 4,500 leaders, which is quite a bit. When we look at a future organization where we simplify our processes, where we reduce the number of steering access towards our engineers, we believe basically that we need about 1,500 leader to run this organization. So it's a 3,000 less leaders needed if we are successful in simplifying. So out of the 3,000 people that we don't need basically to lead the team, we are going to create 1,400 engineering positions. So we're going to add, in fact, some engineering bandwidth to work on existing product to work on future products. We want to, in fact, have out of this action, more engineers and less, I will say, leadership so that engineers can be fully enable to do their job. And as a result of that, if you do the math, we have 1,600 people out of the technology team that will not have a job in ASML anymore. Now the difference between the 1,600 and 1,700 is 100 people coming out of IT when we have a similar situation, similar feedback and where there, we believe that about 100 leading position are not needed. So this is a bit the math, we want to really boost again our engineering capability, our innovation engine. We want to improve, I would say, the satisfaction of our engineers, our customer, our supplier. And of course, this come at the cost of a very difficult decision we had to make. We explained our employees this morning. This is most probably the most difficult decision the management team ever had to make in ASML. But we do it because we truly believe that this is the right thing to do for the company for our stakeholders, starting with our employees and to basically continue to be this great company moving forward. So that's a bit more background. And with that, I think we'd like to take some questions from you. Thank you very much. Monique Mols: Okay. Thank you. So we have some questions online, and we have some people here in the room and because you all came here, I think you should go first. So let's ask some questions in the room first. Please state your name and your publication first, so everyone knows. Sarah Jacob: I'm Sarah Jacob. I'm from Bloomberg News. Regarding the job cuts that you announced today, what kind of restructuring costs or charges can we expect from this? R.J.M. Dassen: That's obviously subject to the discussions that we're having with the Work Council and first and foremost, union. So I cannot talk about that, but these costs in the grand scheme of ASML would not be considered material. Well, the finalization of number is very much subject to discussion, but not materially in our numbers. Sarah Jacob: I got a question about -- there's a lot of talk about capacity expansion from your customers. We've seen a lot of announcements. But how much of those announcements or is related to real capacity expansion? And what part is CapEx inflation, so to speak, because the cost of a wafer is increasing. How sustainable is that? Can you elaborate a little bit on that? Christophe Fouquet: Well, I think so, I talked about short and midterm. So I think that visibility we get from ASML is mostly for the next couple of years. And when we talk about capacity expansion, we talk about new systems. So that's why we said that if we look at 2026, we expect ship quite a few more EUV tool. It's also true with metrology with inspection. I think Roger was rightfully stressing the progress of our installed base business, which also include upgrades, and we will see also a lot of that. So I would say when you hear our customer talking about capacity expansion, this translate directly into need for more tools. And for a long time, we heard our customer' customer, sometimes our customer, customer, customer talking about expansion, and this was still a bit far away from us. In the last 3 months, if you have listened to TSMC, Samsung, Micron. Micron has been announcing groundbreaking almost every week for the last few weeks. There, you have a direct translation basically into shipment for us. And we have not said that in our talk, but also build up of capacity. So of course, a lot of that will affect positively, not only ASML, but the entire supply chain here in the region. Monique Mols: Okay. Let's turn to an online question and get back to you then. So a question from Financial Times. Please can you talk a bit more about how the AI memory shortage is driving your business? And to what extent those customers are being more aggressive in their capacity expansion than logic? Christophe Fouquet: I will start. I think that it's difficult to say if logic or DRAM is the bottleneck for AI today. I will still pick mostly memory at this point of time. And the reason for that is that it comes to memory, the demand for high bandwidth memory, which is the AI memory is extremely high. But the demand for DDR memory, which is for mobile PC is also very high. And as a result, we have seen basically the price of DRAM going up significantly in the last few weeks. Therefore, there's a need for capacity. And our memory customers are moving very aggressively. I mentioned a few examples. And the reason for that is when you have such a demand for capacity, capacity is also market share. And if we look at 2026, we know that the memory demand will be very, very tight because our customers are saying that publicly. So there is a huge appetite and it started most probably end of last year for our DRAM customer to really build up capacity as quickly as possible. And that's the dynamic we are in which, of course, has a major positive benefit for ASML. Monique Mols: Okay. Thank you. Mark, in the room, I see some hands. Unknown Analyst: So [indiscernible]. How does the stabilizing AI market influence the perspective of the amount of jobs you're about growing in Eindhoven? Christophe Fouquet: Well, so if you look at the big picture, so I mentioned again our long-term forecast as we establish it in November 2024, where we still see us going towards EUR 44 billion to EUR 60 billion revenue, which means that we see still need for more capacity. Even as we speak, this year, we will be adding jobs in manufacturing and customer service in order to support basically the need. So I will say the long-term trajectory is still a trajectory of growth. we take today a very specific action on a very, very focused part of the organization, which is the technology team and in fact, even focused specifically on the leadership of the technology team. But it doesn't change fundamentally our growth trajectory and therefore, our commitment to people, but also as I've shown to footprint, et cetera, et cetera, the supply chain I could add to that. And I think it's very important to understand that even as a company grow and is very successful, there's still a need once a while to make sure that some of the key elements of the company and for us, that's the technology. Technology is really our heart. We have to make sure that we keep the heart in the best possible shape. And the action we are taking today is difficult, is painful. But the intention is to make sure that, that innovation engine keeps going so that as the market grow, we keep our very strong leadership position in the market. Unknown Analyst: Mark [ NSA ]. I have 2 questions. One relating to the reorganization and the other one is to being prepared to this huge demand in new machines. First of all, the reorganization we refer to the technology team, does it mean that something changes within the internal structure as well regarding D&E or R&D? And the other question is when it comes to being prepared for this new up cycle, is your supply chain also prepared. So did you do some stockpiling there? Or is every -- does everybody have to expand? Christophe Fouquet: I'll take the first one and leave you the second one. So I think the short answer to your first question is yes. I think that the transformation, the change in the organization will be mostly around D&E, not only but mostly around D&E. The leadership I was referring to is mostly within D&E. That's also why Marco, our CTO, together with Jose are taking the lead also on that activity. But since innovation is the heart of the company, everything else is connected to that. And by improving the organization, the D&E organization, we also improve the interfaces with operation. We improve the interfaces with our customer, and we improve the interfaces with our supplier, right? So all the people who told us basically, you've got to do something better should benefit from that. So a lot of the work will be focused on D&E. In fact, what we talk about today, I would say, practically doesn't concern the very large majority of the team ASML, but the impact, I think, will go beyond D&E. R.J.M. Dassen: Mark, on the capacity, what we've done, as you know, in the past couple of years is to put in what we call the long lead time items, which means that everything that takes, let's say, longer than 12, 18 months to realize is in place in order to get to a much higher volume. So that means factory space, et cetera, et cetera. We've done that, and we've worked with our supply chain for them to do that as well. So what we're doing now based on the very strong signals that we're getting from our customers and also them indicating that they believe this development is sustainable. We're now making sure that every quarter, we increase our move rate because as you will appreciate, you cannot move from 44 units in 2025 to 80 units in 2026 doesn't work that way. So you gradually need to crank up your move rate, and that's exactly what we're doing right now. We're doing that. We have a very solid understanding also with our supply chain. They're doing the same thing, and that will lead to a very, very meaningful increase in our capacity this year, but also moving forward. Monique Mols: I'm going to go to one online and then get back to you. Could you share how ASML's R&D spending is currently divided between EUV-related development and non-EUV technologies. This is a question from the Chemical Daily in Tokyo and we have a lot of people from Japan online watching us. So that's really nice. R.J.M. Dassen: The lion's share of the R&D expense really is an EUV, right? Because on EUV, we have both High NA, we have the Low NA platform that where we still see a lot of potential to develop that. And we're also working on what we call the high perform platform. So we have 3 very significant work streams in the D&E organization to focus on EUV. So without a doubt, EUV is the lion's share of the development. But that said, we do have road maps for the other products as well. You heard us talk about the 260. You might have heard about the 870, which is a platform that really significantly increases the output capability in the drive business. So we're working there as well. Lion's share is really focused on EUV. Unknown Analyst: Folks, I had a question about the China business, which is going down quite dramatically. I'm wondering whether it's also going down in absolute numbers? And if that's the case, what's driving that? Where it just still a backlog thing or whether something else is going on as well? R.J.M. Dassen: Well, it is going down in absolute numbers as well, right? So if you do the math on the system sales, if you take the chart, you take the percentage and you apply it to the total system sales, you would see that actually it goes down in system sales, I think, something like EUR 850 million. But you can do the math yourself and verify whether I -- whether my memory serves me well here, but it's clearly going down from 24 to 25 and also at the 20% number that we indicated for this year, it will go down further. What's going on there? Well, first of all, it's normalizing, right? Because I think the reality is we should ask ourselves a question what was going on in previous years. What was going on in previous years is that over the COVID period, we build up a huge backlog because we -- and in fact, we underserve the Chinese market during the COVID days. As a result of that, a huge backlog has been built, and we have been executing on that backlog in the past couple of years. So at a certain point in time, we expect -- we already expected China to normalize. Frankly, the very strong China sales still in 2025 surprised us a bit. But given all the dynamics that we're looking at right now, we think 20% is probably the right number, which, by the way, still gives you at the midpoint close to EUR 7.5 billion of sales. So it's not in any way falling off a cliff, right? But it is reduced in comparison to what it was last year. So it's more normalization than that anything very spectacular is going on there. Monique Mols: So a lot of interest in the room. So let's go back to the room. Dan? Unknown Analyst: Dan from [indiscernible]. I have 2 questions. The first one is you mentioned that the EUV business will grow quite rapidly this year. I was wondering what share of that will be High NA. I think you mentioned this is really a preparation year for the coming years for insertion. Just wondering how many machines do you plan to ship this year? And the second one is, do you have a progress update on Hypernet the year you'll make a firm decision on it? And maybe on platform as well. R.J.M. Dassen: I'll take the first one, you take the second one. So on the -- the other way around. So the vast share of the growth will clearly be in low NA, right? So because it all goes into high-volume manufacturing because there is such a big need for customers to grow there. So that's where the lion's share goes High-NA will just continue to go along the lines of what Christophe has described earlier on, which is the 3 phases, and we're not yet in the high-volume manufacturing phase though as we did point out, the fact that one customer has accepted, signed off on the 5200B, our first high-volume manufacturing tool, of course, is an important step in that direction. But the lion's share of the growth this year will be low NA. Christophe Fouquet: Yes. On the Hyper NA before I go there, I need to take a bit of a step back. So we talk about low NA, we talk about High NA I think we talked about Hyper NA because we see that in the future, there may be a need for even a more advanced litho system. And we could end up in a war, I'm talking 10 years from now where the customer use basically each one of those 3 systems. Now this being said, when you look 10 years ahead, it's very difficult to know exactly when this will happen. And in order to not have to answer that question today, what we did is develop a program, which we call high productivity platform. So Roger mentioned it as one of the key program in EUV, and that program basically consists in defining an EUV platform that will come to the market early next decade, and that will be able to support Low NA, this major productivity improvement. We look at more than 400 wafer per hour. High NA, also with major improvement and potentially Hyper NA. So we're designing a platform basically that we'll be able to receive ultimately Low NA optic, High NA optic, hyper NA optic. This give us basically the full flexibility over time to decide exactly when and how we should introduce hyper NA. So the team has done a lot of work. So if you talk to our engineers, they tell you we could do it more, but there's no need for it tomorrow. So what we will do is, again, just continue to prepare for it. If you follow a technical conference, there will be a presentation on that a SPA in a few weeks from now, so you get a bit more. But the key is to is to be prepared basically to serve the whole market with EUV and the high productivity platform program we have put in place and we're executing on allow us to do that exactly. Monique Mols: I have a question from online, and then I'll ask to you, Toby. Maybe can do this quickly, but I think it's a question that a lot of people ask themselves. This is from [indiscernible] Novel in France, you're going to cut 1,700 jobs, but you say you want more engineers. Are you planning to hire in 2026 and beyond? And if so, do you have a figure? Will this offset the 1,700 job cuts? Or will ASML's workforce ultimately decrease? Christophe Fouquet: Yes. So I think 2 steps. So first, as I explained, we free practically about 3,000 people out of the action we take on the leadership in the technology team. And out of those 3,000 people, we already create 1,400 position. So that's the first thing. The second thing I've said is that a lot of that is done to enable, I would say, the full potential of engineers. So our engineers tell us today, well, maybe we spend 20%, 30% of our time not doing engineering, but doing meetings, talking to many different managers, et cetera, et cetera. Well, if we take that away from them, we give them also more bandwidth for development. So we also expect basically that our engineering workforce will be able to create more moving forward for the same amount of people. So it means that as we go through this transformation, we get 1,400 more people, and we get a lot more of everyone else in the organization. How this will really play out. We don't know, but we believe that this could fuel quite a few of our programs basically moving forward. So we will continue to hire people based on our need, and we do that today on operation. We'll do that if we need to on D&E because we can afford it or so, let's be honest. But we also expect that at least the next couple of years, the gain we could make by enabling our engineers to the full extent, will create a lot more bandwidth for us to develop. Toby Sterling: This is Toby from Reuters, Toby Sterling. Ballpark question. The only thing that did better than ASML's price in the past year is gold and silver. So I'm wondering if you guys can maybe say maybe not so much ASML, but how is this going to affect your industry? The rise in price for gold and precious metals? Christophe Fouquet: Gold and Silver, I would say, our industry over whole I think it's very small. I think it's very, very small. I think from all the things we worry about -- I tell you something, we worry a lot more about energy cost than gold or silver, because energy is, as we've discussed in the past, most probably, we love AI, we love the opportunity. I think Elon Musk say that also last week in Denver, but energy is most probably the one thing to watch to make sure that this industry keeps going. And now the good news for us is one way to reduce energy consumption is to move to more advanced chips because they reduce basically power consumption. . So that's also an opportunity. But I think if there's one thing this industry has to worry about as a whole is energy, cost and I would even say availability. Gold, silver, I say okay. Toby Sterling: Paul here from [indiscernible]. Do you expect to max out on capacity this year? And if so, what will be the bottleneck? R.J.M. Dassen: The question is not necessarily just for us whether we're going to be maxed out. I mean, it will be a very busy year. That's for sure. But I think in everyone trying to drive up capability, we also need to look at our customers. So I think everyone will be scrambling to get more capacity. . It starts with our customers because we can ship tools, but our customers also need to be in a position to receive them, and therefore, they need the fabs to be done. So I think that's what's going on. We will work extremely hard to get as much out as we can and as our customers are asking for it. But I think important factor will be when will our customers have their fabs ready to really receive those tools. Monique Mols: We have 4 minutes left. So let's go back to the room again. Unknown Analyst: San Hilson of Dutch Publicans. About the reorganization, I was wondering if you could share some insight on how did you end up in the situation in the first place, why did you create so many leadership roles in the past months or years? And can you give us a time frame on when the reorganization will be executed? Christophe Fouquet: Yes. It's always a good question. And if you look at the growth of the company, I think at any point of time, you try to make the best decision for the company. And I think this has been down. But as any large company, you tend to have a side job over time with the belief that they really help, and I think to some extent, they do at the beginning because you strengthen certain axis, right? You strengthen, I don't know, quality, you strengthen maybe the execution of part of the company. But there is a point of time where you add -- if you had too many of different axes, then people get confused. And we started to get that signal, I would say, already for 2, 3 years. We spent quite some time because the next question could be, how do you know now that the next things would be better than the previous one, which is another very good question. We didn't want to rush in that, and we spend more than 12 months designing not in the board of management, but designing with the people that are working day after day in technology, but also in the sector because of the connection I talked about. So we spent more than 12 months working with those people to try to drive an organization that they believe will fit better what they need. And I think we need to make sure over time that we keep on scanning the organization so that if we made maybe some non-optimized move in the past, we can correct it. So I think it's very normal in the company. What is not right is not to correct things if you feel they're not helping you anymore. R.J.M. Dassen: I think if you look in any rapidly growing organization, where do organizations grow? They grow because the number of competencies grow or products become far more complex. As a result of that, also the competencies that are necessary to get it done become more complex. 15 years ago, software, for instance, was not as important as it is today, just to call out one. So you see an expansion of capability and you need to see an expansion of a road map, many, many more products on the road map than we ever had before. The answer to something like that, that any rapidly growing organization does is a matrix organization where the competencies and the products meet each other. So that's your answer. And that gives you scalability for a while. But there is a point in time where a matrix organization, any matrix organization becomes so complex that you got to act. And I think that's the journey that we've been on. That's the thing that we've now concluded and hence the action that Christophe calls out. And I think the worst thing you can do is not recognize the issue and just continue to go on as you did before. In terms of timing, because that was your other question. I mean that completely depends on the negotiations that are currently going on with the unions, with the workers' council, et cetera, but this will definitely be a number of months. From our vantage point, as soon as possible because we want to be able to provide clarity to everyone in the organization and get rid of the uncertainty at the personal level. So that's why we would like to push as soon as we can in the interest of the people that are affected. Monique Mols: Okay. Our time is up. Thank you very much for coming. Thank you, everyone, online for watching. You can still send us your question. The media team is available for you. And for those in the room, nice you're here. There's coffee and we have some chats with some of you, and we look forward to seeing you next year. Thank you very much. Christophe Fouquet: Thank you. R.J.M. Dassen: Thank you.
Operator: Welcome to Dometic Q4 Report 2025. Today, I am pleased to present CEO, Juan Vargues; CFO, Stefan Fristedt; and Head of Investor Relations, Tobias Norrby. [Operator Instructions]. Now I will hand the conference over to the speakers. Please go ahead. Juan Vargues: Hello? Can you hear us? [Technical Difficulty]. Okay. So good morning, everybody. Well, I would like to start by apologizing for the technical problems, but we are back. So good morning, everybody, and welcome to this Q4 and full year webcast for 2025. With that said, let's move into the presentation. Starting with the highlights, market, the overall market conditions are still challenging. Consumer confidence is still not where we would like it to be. And at the same time, retailers and dealers as well as OEMs are still cautious in building inventories. Having said that, we also feel that inventories at retail level are improving. They are just now at a low level, and it's very much just now a question about consumers starting to buy. Looking at growth, 3% negative organic growth for the quarter, with Service & Aftermarket down 3%, which is obviously an improvement in comparison to previous quarters. Distribution, back to growth, very much driven by Mobile Cooling. And then we see also improvements from an OEM perspective, where still, Marine slightly negative. We also have LV slightly negative, while we see improvements in other areas. EBITA margin, 6% in comparison to 7.3%. But then we also need to consider that we have a major effect on -- when like-for-like. So we have a substantial negative effect by currencies -- driven by currencies, and we will get back to that on the details. At the same time, as we previously communicated at the end of last quarter, we also have negative impact in Mobile Cooling specifically from increased labor cost since we added about 250 new people in the organization at the same time as we also have the price corrections to compensate for the higher tariffs in Mobile Cooling. Looking at free cash flow, we ended up at SEK 20 million, which is a bit lower than 1 year ago, even there, very much influenced by the currencies. But at the same time, as we have seen a more positive order intake, backlog starting to come to the same level as last year, and we have been building inventories for the start of the season in Q2. At the same time, we also had later invoicing in the quarter this year in comparison to last year. All those factors are having an impact on the free cash flow. Leverage ended up at 3.3x in comparison to 3.1x in previous year. If we move over to numbers, sales ended up at slightly above SEK 4 billion for the year with 3% organic growth, 12% FX, meaning obviously a substantial impact, and then 1% negative by the portfolio changes that we are doing. EBITA ending up at SEK 245 million or an EBITA margin of 6%, as I commented before, compared to 7.3% last year. We got a negative EPS in the quarter of SEK 0.67, adjusted negative EPS of SEK 0.39. And as commented before, cash flow of SEK 20 million -- free cash flow, SEK 20 million, a leverage of 3.3x. Moving to the whole year, ended up at SEK 21 billion in sales with a total negative effect of FX for the year of 6%, 8% down organic growth and the same 1% on portfolio changes. With EBITA landing above SEK 2.2 billion, or an EBITA margin of 10.6% versus 10.8%. And of course, considering the negative growth, we feel quite proud of what we are achieving, working very, very hard to keep our cost in control despite the negative top line decline. EPS ending up at SEK 1.34, with an adjusted EPS of SEK 2.52, and a free cash flow of above SEK 1.4 billion. Net sales, obviously, we are still not there, but we're starting to get close. As you can see on the graph, we are coming from hovering around 10%, 11%, 12% quarter-by-quarter for the last 3 years. And we saw Q3 landing on minus 6%, now minus 3%. And as commented before, we see order [ intake and backlog ] improving. Difficult to say obviously when we are going to see Dometic moving into positive territory, but it's quite clear as well that we are getting very close. Looking at the different segments, Land vehicles ended up at minus 4% with Americas down 10%, EMEA positive for the quarter, plus 1%, APAC minus 10%. Marine came back to a negative growth of 3% after slightly growth shown in Q3. And we don't see that as anything strange. Obviously, the market needs to stabilize. We are coming from pretty negative growth. We saw plus 1%. Now we see minus 3%. We're expecting obviously to see improvements moving forward as well. Mobile Cooling, good to see that we are back to growth and optimistic about the expectation for 2026. And then Global Ventures, minus 3%. And we'll come back later to some more details on the different segments. Looking at the different channels, no major differences, in reality, is -- really, we see Service & Aftermarket becoming a little bit higher on the share, while the OEM channel is becoming a little bit lower, ending up at 39%. And just as comparison, we are coming from a situation, 2018, where the OEM side stood for 62% of total sales. Looking at the different channels, again, it's quite obvious that we are moving in the right direction. Service & Aftermarket, we were [indiscernible]. We were positive in Europe, while we were negative in Americas. Distribution, as I commented, we have positive in parts of Global Ventures and positive on Mobile Cooling having an effect -- 2% positive effect on the distribution channel. And then OEM is also quite clear that on one side. The European market is stabilizing. We see -- especially in Southern Europe, that we are starting to see growth, while Central Europe is still sitting on a little bit too high inventories even if they are coming down. So we expect even, from that perspective, improvements moving forward. We also saw, as a matter of fact, the commercial vehicles showing growth for the quarter, and we have seen growth for the entire year. So that's also a positive sign that things are improving. Looking at EBITA, as I commented at the beginning, 6% versus 7.3% last year. Looking at the underlying margin when comparing like-for-like, 2.9% higher than 1 year ago. FX, again, we will get back later, but had a major impact in this specific quarter. We also have the additional labor cost and the comparison to duty drawbacks in Mobile Cooling, that we commented in previous quarter, was going to have an effect also in Q4. We are happy to see gross margins improving, ending up at 28.7% versus 26.8% despite the lower sales. So it's clear that the restructuring program is biting quite a bit. And on top of the restructuring program, we also have a number of other activities to increase efficiency overall in the company. And then even if we are showing negative EBITA development in the quarter, we also see that both Land Vehicles and Global Ventures are showing better margins despite the currency situation. Moving to specifics on the -- moving on the specifics to Land Vehicles. We have, on Land Vehicles, net sales of SEK 1.8 billion with organic growth -- negative organic growth of 4%. We got decline in both channels. But as I commented before, growth on the CPV channel as part of Land Vehicles. And we also showed growth in EMEA for the first time during the last 5 quarters, which is telling us really that the LV -- RV business in Europe is stabilizing. EBITA, higher SEK 66 million in comparison to SEK 23 million last year or 3.6% EBITA margin with clearly a positive impact of the global restructuring program. As we commented, when we announced the program, the LV segment was going to be the one showing the major impact during that program. We see both increased profitability in EMEA. We see reduced losses in Americas and APAC still delivering pretty high margins despite the drop on the top line. Marine, down in organic growth, 3%, with sales and aftermarket stabilizing as well, flattish in comparison to 1 year ago, and single-digit decline in the OEM channel. EBITA, almost SEK 200 million or 18.5%. So a slight decline on the EBITA margin, defending, in other words, protecting the margins pretty well despite the drop in the top line. In this case, the margin decrease is very much due to the currencies, as Stefan is going to come back to. And then we see even there that we are doing a pretty good job in reducing cost to compensate for the drop on the top line. Mobile Cooling. Organic growth, positive. That was a positive in the quarter. We see a strong recovery in North America in Q4 in comparison to Q3. On the negative side, obviously, the margin in the quarter is not coming as a surprise. We also already announced that we had on one side the positive onetime effect of SEK 63 million coming from the duty drawback. At the same time, as we also had inefficiencies caused on one side by labor since we employed again about 250 new people at the same time as we have additional training costs and at the same time, as we implemented prices, but the prices are kicking in in January. So we are not expecting negative effects from those factors from January this year. Moving over to Global Ventures, ending up 3% negative as well with good continuous organic growth in other global verticals. At the same time, as we see decline in Mobile Power Solutions driven by the soft RV industry, even if it's improving. And even here, we are pleased to see that our EBITA margin is improving 7.1% and also in absolute value, is improving to SEK 28 million in comparison to SEK 24 million last year. As a consequence on one side of the sales mix -- positive sales mix, at the same time as we keep working on reducing our cost. On sustainability, we are happy to see progress in all areas but one. So injuries coming down to, I would say, all-time low. In this case, after a lot of investments that we have been doing across the company, to improve in this area. Female managers, up to all-time high, 31% in the quarter. We would like -- obviously, we will continue to work in that area. But again, showing progress. Energy, renewable energy operations, 37%, and also beating our own targets, while innovation index, the same ending up 23% in comparison to 21% 1 year ago. And that's a super important one because that has an immediate impact as well on climate. So new products drive lower climate. [Audio Gap] So looking at the products in the Marine area, we have a new sanitation product for sailing boats that we just launched. And then last but not least, also starting to see the synergies coming from our Mobile Power business and introducing new products in the Marine area, where we are going to increase efficiency by connecting a number of different batteries into one single device. Happy to report as well that our global restructuring program is running slightly better than expectations. As you may remember, we are expecting SEK 750 million in savings at the end of 2026 -- running rate at the end of 2026. And so far, 300 employees have been impacted. We have closed 1 manufacturing site and 5 distribution centers. We are running at the end of December at a rate -- a saving rate of SEK 350 million. And we had cash out that also impacted obviously our free cash flow in the quarter of SEK 100 million, a little bit higher than SEK 100 million. And totally for the year, the cash out has been a little bit above SEK 200 million. And then we keep working on the divestments. Unfortunately, we cannot communicate anything yet, but we are working on that. And then on discontinued businesses, we stopped a couple of businesses, leading to a 1% negative organic growth for the year -- for total year. And we will see that number now fading away step by step. And with that said, Stefan, stage is yours. Stefan Fristedt: Thank you, Juan. Good morning. And we are starting with the Q4 income statement. Gross profit-wise, we continue the positive trend in improving our gross profit. And that is despite that we have a SEK 30 million negative effect from the tariff/labor cost increases within Mobile Cooling. Then we have an underlying development in the EBITA margin. So let me save that for the next slide here, and so we will come back to the different details on that. Further comments that on operating expenses that we have reductions driven by global restructuring programs and other measures. And at the same time, we feel that we are able to invest in strategic growth areas like product development and sales resources. On the net financial expenses in the quarter, we can see that the interest on bank loans is slightly higher than last year, and that is very much driven by the fact that we have, in the short-term perspective, had higher debt than basically needed with the plan that we are going to repay debt. We have also done that in the later part of the quarter, and we will continue to do another repayment in May 2026. So that has been driving up the net interest on bank loans and financial income somewhat. On the tax side, the tax rate is negatively affected by nondeductible interest expenses in Sweden. And then we also have made a tax provision in the fourth quarter for ongoing tax audits. So let's move over to the specification of the EBITA in the quarter. And as you recall, we had in Q4 last year, a duty drawback repayment of SEK 63 million related to Mobile Cooling, which was a onetime off, and that did, of course, not repeat itself this year. Then we also, as communicated in Q3 that we have a delay between the price increases we are taking out to compensate ourselves for tariff cost and higher labor cost, also mainly in Mobile Cooling. That is SEK 30 million. So that is the second part for the adjustment. If we sum that up, then we have an underlying EBITA of 6.8% versus 6% last year. And then we have the currency impact, of course, especially the dollar has been swinging a lot. It's almost a SEK 2 difference to the dollar between Q4 last year and Q4 this year. And that have had an effect which, measured in EBITA margin, is 2.1%. So that's the specification on how we come to the 8.9% underlying versus 6% last year. Let's move on to the next, coming into our cash flow statement. We have a somewhat lower operating or free cash flow than what we have seen in the past. And from a working capital point of view, we have seen that -- and also that we talked about in Q3 that we also have to build up inventory to meet demand, that we are expecting to come. And then there is also a currency effect in the free cash flow impacting it. It's approximately SEK 250 million. And then obviously, there is also an underlying lower profit that is impacting the cash flow. Then we have a cash out related to our restructuring program of SEK 103 million in the quarter. That means that program to date, so starting to count from Q4 last year, we have now had a cash flow effect of SEK 270 million on our restructuring program. And as you remember, SEK 400 million is what we have said will be the cash flow impacting part of the restructuring program. So on the free cash flow before M&A, interest expenses paid is down and also taxes paid are down. And then as you can see at the bottom, we did a repayment of USD 229 million in the loan here using cash on hand, which is perfectly according to plan. Yes. Moving over to the next slide, you see the free cash flow development more in a time horizon. And if we look into 2026, I mean, I still feel that the free cash flow, it's probably not going to come up to the full level of 2025, but slightly below that level is my expectation for the full year 2026. Looking to the working capital. There, we see positive development here. The working capital over the last 12 months is 25% of net sales. It was 29% of net sales last year. And if we look not on an LTM basis, but in the quarter stand-alone for Q4, we are down to 23%. This is, of course, driven by the inventory balance, which is now SEK 4.8 billion compared to SEK 6.5 billion last year, and we can also see that the days of inventory on hand is down to 119 days versus 138 last year. So I think we -- I'm satisfied with how we have been able to drive down inventory during the year. Then there is still further potential to optimize working capital going forward, where the target is 20% of net sales. And you can see the different components here and obviously, where we have the most profound development within inventories. The other 2 stays pretty stable. Moving over to CapEx and R&D expenses. CapEx is a little bit down in the quarter, and we are also making strategic decisions about where we spend, so -- but it's also partly related to timing. If we look on R&D, it's now 3.5% of net sales, and that has been clearly a target that we have had continued to develop and launch new products, which we also see in the innovation index, which is continuing to come up. Moving over to our debt maturity profile. As you see, we have some debt falling due in 2026. The SEK 2.2 billion is the remaining part of the 2026 Eurobond, SEK 100 million we paid off when we did the new bond in September in 2025. And that is intended to be paid off with cash on hand. Then we also have SEK 0.8 billion falling due in September, and we are keeping our options open here. But if the cash situation allows for it, we are considering to pay it off in September. Looking a little bit on our debt portfolio. It now has an average maturity of 2.7 years. And we have also extended a USD 233 million term loan to 2029. And then the undrawn revolving credit facility of SEK 300 million is maturing in 2028. So with that, we move over to our leverage ratio, which ended at 3.3x, which is 0.1x up versus Q3, and it's, of course, driven by the reduced EBITA and which is then the impact from lower net sales mainly. And we are highly focused in the organization on protecting margin and reducing working capital and which we have seen in the past. And that work, of course, continue combined with a very clear growth focus as well. And we are, as we have said all the time, committed to drive towards our target of around 2.5x of leverage. So with that, that was my last slide. So I hand over to you, Juan, to conclude the presentation. Juan Vargues: Thank you, Stefan. So looking at the business, we continue to see a market stabilization, and we see also the signs in order intake and backlog situation. EBITA in the quarter was, of course, disappointed even for us. And of course, the currency is not a lot that [indiscernible]. But nonetheless, we were disappointed clearly. Massive impact from currencies. We already commented after Q3 Mobile Cooling, and that was obviously confirmed during the quarter. Happy to see that Land Vehicles, that has been the toughest, obviously, segment, very much impacted by the RV industry, is showing better margins as well as Global Ventures, despite, again, the currencies. Free cash flow, I want to repeat myself. Currency did have an important effect even here, but we also built up some inventories in preparation for the Q2 when looking at better order intake and backlog. We have lower profit, clearly, which is also impacting the free cash flow. And on top of that, we had this SEK 100 million due to the restructuring program as cash out in the quarter. Leverage, 3.3x versus 3.1x. Difficult to predict when we are going to move into positive territory, but we feel that we are getting very, very close. We have seen the trend moving from, again, around 10%, 11%, 12% into 6% into 3%. And, again, we feel confident that the order intake and the backlog is going to lead us to positive territory, provided, obviously, that the geopolitical situation doesn't have more negative impact on the consumer confidence. Strategically, we keep working exactly on the same topics, innovation, super important for us and our future, ending up at 23%, an improvement of 2 percentage points versus last year. I'm happy to see that the global restructuring program is biting and how our gross margins are improving quarter-by-quarter. And with that said, I would like to open for the Q&A session. Operator: [Operator Instructions]. The next question comes from Fredrik Ivarsson from ABG Sundal Collier. Fredrik Ivarsson: First, you talked about the stronger order backlog, obviously, and a gradually stronger demand. My question is, did you see any big swings from the previous quarter? Or is it just smaller, gradual improvements that you see? Juan Vargues: No, we have seen a step-wise improvement quarter-by-quarter since Q1. So it's a major improvement if you're comparing with Q1 step by step. And it is a little bit in all areas, I would say, including the OEM channel, has been showing better numbers during the last 2 quarters. Fredrik Ivarsson: Okay. And then on the FX drag, 2 percentage points on the margin in Q4. Do you have any guidance for us as we look into Q1, Q2 in terms of FX? And maybe also if you could say anything about the specific impact from tariffs during the front end of the year? Stefan Fristedt: Yes. That was an obvious question. And I can say, I mean, just to give you a little bit of guidance, I mean, if the dollar changes plus/minus 5%, that will have an effect of SEK 47 million on EBITA and equivalent on the euro side is SEK 37 million -- and I am -- and that is on a full year basis, right? So it's -- so I mean, where are the currencies going to go here? But I mean, we have actually been spending some time on that to try to understand that. And our view, and that is, of course, followed by 100 disclaimers, but -- depending on certain things. But I would say that maybe we will have to assume from the rate that we are using by the end of December until the end of March, a 5% to 7% movement on the dollar and maybe a 3% movement on the euro. But that is just -- I mean, as you know, the P&L is driven by an average. So it's obviously not moving as fast as the closing rates here. But I would say a negative 5% to 7% in the dollar rate and then a minus 3% on the euro rate. And then you obviously need to use the numbers that I gave you here in the beginning. And we are actually considering to have a specific call with analysts on the currency effects so that you can -- that we can talk about it in such a forum. But so it's going to be negative, but not as negative as we saw now in Q4. I mean it's also a little bit unfortunate, obviously, that Q4 is a small quarter and these type of effects also -- because of that, has a bigger effect on the margin as such. Then tariff-wise, we are expecting that we, from Q1, will have compensated ourselves with price increases and -- which we also communicated in connection with the Q3 report. So we don't see any changes in that. Fredrik Ivarsson: Perfect. And if I may squeeze in one last one for you, Stefan, on cash flow, coming back to what you said regarding the 2026 expectation, not fully reaching last year's level, I think you said. In that statement, what do you assume in terms of working capital because you still seem to be quite positive on the upside in working capital? Stefan Fristedt: Yes. No, But I still see that we have more to do on inventory. Then, of course, there is also going to be a component in here where we need to increase inventory to make sure that we maintain the service level to the customer. But we still have pockets where we know that we will have to continue to work with that. And I mean the ambition in the big trend is to come down to 100 days of inventory. And as you know, we are on 119 as we speak. And will we be able to take that full step in 2026? Maybe not, but still moving towards that target, I would say. But then we are also working with the other components here in finding ways to improve that. So I still feel that we will continue to move towards the 20% working capital to net sales here. And as you saw in Q4, we are on 23%, and we are on LTM, 25% basis. So continue to move towards that level. Operator: The next question comes from Daniel Schmidt from Danske Bank. Daniel Schmidt: Two questions from me then. And just coming back to organic growth and the lack of organic growth so far, you mentioned that you've seen order intake improving since Q1 last year. It doesn't sound like that has changed recently heading into Q1 this year. Just simply, doesn't that mean that you are in positive territory in terms of sales organically now or sort of the delay between order intake and sales longer than normal? Or have you seen cancellations during the year of sort of the backlog? Or what's happening there? Juan Vargues: Now what happens, obviously, that this is a gradual recovery month by month and quarter-by-quarter. So we are much closer in Q4 than we were in Q2 in comparison to Q1. So the major drop we saw really in the second half of 2023 and 2024. And then we entered Q1 2025 on a low level, and we have been recovering since then. Keep in mind how the market has been evolving. First, you had a drop in North America RV. As the market on the RV in North America was stabilizing, then we got, in the last quarter, the second half of 2024, the European market dropping big time, at the same time as Marine was dropping. So the American market has been improving, while the European market is starting to recover now during the last 3 months. So again, it's not that you have a big bang upwards or downwards when -- normally, being global is an advantage. In our case, because of the magnitude of the drop in the different geographies, that's the reason for showing this negative growth for so long in comparison to many other companies. If you look at our American colleagues, they have been dropping 45%. But then after 18 months, they are back. As we have been recovering in some areas, we have been deteriorating in some other areas. We see the recovery on the order intake is all over. I wouldn't say that this is in one geography. We see improvements all over. But still, we don't see the sales yet. Then you have, at the same time, a little bit what we have seen with Mobile Cooling, that people are super careful in building up inventories. So they place an order, and then they see whether they have the sell-through or not. And then depending a little bit on how they see it, they will wait another period of time. So I believe really that we are getting into more stability. But to tell you that we are going to show positive growth on the 15th of February, I would be lying to you. I believe that we will see still what we have seen in Marine, 1 quarter, plus 1% or plus 2% and then another quarter, minus 3%. It's very, very seldom that you are dropping 10% and then all of a sudden, you're moving to 10% growth. I believe that we are going to be most probably one more quarter and then we should be seeing the growth coming back. And more positive on the European market, clearly. We see that Southern Europe and the Southern European players are starting to manufacture again. They were not doing that a few months ago. We said that the German manufacturers are a little bit more hesitant. They are still talking about -- the dealers in Germany are still talking about a little bit too high inventories. While at the same time, we know that companies like [ Klaus ] or like [ HAIMER ], part of 4, are more optimistic about 2026, and we see a major gap between manufacturing in 2025 and registrations. Registrations in Europe ended up at minus 2%, while manufacturing after 9 months was down 17%, or 25% if you look at rolling September. So that's telling me, obviously, that we are reaching the breakeven point somewhere. Daniel Schmidt: Yes. I was just sort of maybe referring to that you potentially now have said that order intake has been improving for maybe 12 months as we get through this quarter, but let's say, 9 months. And -- but maybe you're also saying that sort of the certainty in the order intake is a bit less, it sounds like, when it comes to dealers postponing orders and so on. Juan Vargues: I mean we saw that, and we have seen that in Marine, we have seen that in Mobile Cooling, that people are still hesitant to build up inventories. So they place orders, and then they wait. So everything is depending just now on the sell-through. The good news is that altogether, the inventory levels are lower. So it's going to be more and more difficult to postpone the orders. That's what we are trying to say. Daniel Schmidt: Yes. Okay. And then secondly, we talked about it in Q3, the Igloo court case being moved to March from September. Is still March the date for the court and any sort of -- any changes to what you've provisioned? Juan Vargues: No. So we still feel very confident about our provisions, and we will be in trial, I think, it's the second week in March. Stefan Fristedt: I mean our point is still that we don't believe it lacks any merit this quarter. We still believe that we should not pay anything more. That's what we basically say. Daniel Schmidt: What is the length of such a trial normally? Stefan Fristedt: Yes. Because -- I mean, there is a trial. And then if it is a fast judge, she will -- it's a she, will take a decision directly in the -- after the hearing, but they have up to 6 months' time to come with their verdict, so to speak. And then there is obviously a chance to appeal after that from either side. So it's like we have said all along, it's -- it could be a lengthy process. Operator: The next question comes from Johan Eliason from SB1 Markets. Johan Eliason: Juan and Stefan, just a short question on market share developments. You have a little bit of a history losing some market share during the pandemic to the Chinese in the fridges and the warning side. How are things developing more recently in the current quarter, obviously, disregarding the business you are closing down? Are you keeping? Taking? Or are you still losing some areas? Juan Vargues: No, I think it's very much in the same situation. So obviously, what we are referring to is obviously Chinese company is very much active in North America. And I don't see that the situation has changed anything. On the rest of the business, it is very much the same. So obviously, we are into a number of industries, and we are into a number of different product areas. Sometimes you lose 1% here and then you win another percent there. So I do believe that -- I don't see any changes altogether. Johan Eliason: Good. And I think you mentioned that you hoped you would regain some market share in the earnings moving it back to the U.S. again. Has that materialized or... Juan Vargues: No, not yet. We are working on that. Operator: The next question comes from Agnieszka Vilela from Nordea. Agnieszka Vilela: I have 2 questions. The first one, my understanding is that when it comes to tariffs, you have been protected by the USMCA agreement when you imported things from Canada and Mexico. Does the situation change at all with the Section 232 right now? Do you have like -- did you expect more tariff burden? Or it does not apply to your products? Juan Vargues: We don't see any effects so far. Then of course, we have Mr. Trump's statement last week about 100% on tariffs on a number of different products. We don't have any more detailed information, but obviously, the communication has not been official. There's going to be on when it's going to be. So we are in a waiting mode. Agnieszka Vilela: All right. Understood. And then apologies, I missed the beginning of the call and maybe you commented on that. But can you just explain the profitability development in Marine specifically? What were the headwinds there? And also, should we expect these headwinds to sustain during 2026? Stefan Fristedt: I would say that in Q4 specifically, Marine is the segment that has been impacted the most by the currency effect. So that -- we obviously -- I mean, who knows what's going to happen with the currencies? But if we are staying with what I mentioned before, I mean, our assumptions on how we believe that the currency is going to develop based upon our average rates, then I would expect that impact to be less going forward. But that's, of course, with some disclaimers, no doubt. Agnieszka Vilela: Okay. And maybe just a follow-up on Marine as well. Just looking at the organic growth development in the business as well. Now you -- I think the organic growth declined by 3%, somewhat worse than what was the case in Q4. Any kind of flavor you could give us when it comes to your expectations for the Marine business specifically into 2026. Juan Vargues: I can give you some indications, Agnieszka. On one side, we have the European market, which obviously size-wise is much smaller than the American market, but we had 2-digit growth in the European market, Marine in Q4. On the contrary, we had negative growth in the American market. On the American market, what we see is that on one side, marine dealers are still very cautious and talking about high inventories. At the same time, we see as well that engine manufacturers are starting to show nice growth on engine manufacturing, which is going to bigger boats. And that could benefit us. The question is when are we going to see that in our order intake and in our sales. But we have a couple of indicators that are positive. The one that obviously needs to change is dealer sentiment on the American side. Tobias Norrby: And now we have a couple of questions from the webcast audience. The first one being about our restructuring measures, whether or not the current ones are enough? Or do we feel that we need to come up with additional measures? Juan Vargues: You will never be done, right? Because there is always something more to improve. But our perspective just now is that the market -- we have indications the market is improving. Priority #1, #2, #3, #4, #5 is to put management attention on growth while keeping, of course, full control on the cost while carrying out the restructuring program we have. Just now, we are going for growth. And we intend to show growth in 2026. Tobias Norrby: And then there's a question on our account receivables program. If you, Stefan, please, could provide a few comments and expectations on that. Stefan Fristedt: It's a program that we have been putting in place. It's a tool. I was speaking to that. We were also working with the other components of working capital, and that is an example of what we are working with. So for some of our customer bases, we have that in place now. And if I would look on what that would mean by the end of the year, so let's say, by the end of 2026, I would say that it would contribute with another SEK 300 million to SEK 400 million. And then, of course, as we are a very seasonal company, it will be significantly more in certain parts of the year. But if we look on it from end of year to the end of year, I would say, compared to where we ended 2025, I would probably say that there is another SEK 300 million to SEK 400 million to be gained out of that program. Tobias Norrby: And then a short question on FX and in particular, full year 2025, the impact on EBITA, approximately, margin. Stefan Fristedt: There we have -- it's significantly less than what we have seen in -- I mean, we were talking about 2.1% units in Q4. And on the full year, it's 0.4%. So this is -- this has been an accelerating situation. And also, of course, versus the comparison to 2024, where the dollar ended with SEK 11.1 at the end of 2024, and now it is more on SEK 9.1. So it's dramatical development that we have seen there. But for the full year, 0.4% units on the profitability or on the profit margin. Tobias Norrby: And finally, if we can share some more comments on leverage in 2026, ambitions, expectations. Stefan Fristedt: Yes. But I mean, as one important driver, of course, here is obviously growth. And as Juan quoted before that the very clear ambition for 2026 is obviously to show growth, even though it's not going to be -- you should not expect double-digit growth. It's going to be low to mid-single-digit growth, I would say, in our base case here. So that is, of course, an important part. But then to drive the other parts of free cash flow as well in order to be able to reduce the net debt. And we also -- with the -- yes, plan on how to pay back gross debt, we are also going to reduce our financial net as we go. So I still feel that we should see a reduction in leverage in 2026. Then the question is how far that is going to be? I could say personally, I would be disappointed if that would not be at 2x at the beginning and so that we get out of the area with a 3x at the beginning. So if you see my point. Juan Vargues: I think just to fill in, if you go back to the last 3.5, 4 years, it has been very much about protecting margins, protecting cash flow, releasing inventories. It has been about navigating along a very, very, very tough period of time in any consumer business. At the same time, we feel that we are very, very close to turning. And that means as well that we need to also spend as management team moving from the defense to the offense. Just now, it's about growing the company, and that will have obviously a major effect, both on free cash flow and leverage without forgetting cost control. So we can assure you that we will keep working on restructuring program. We will keep working on protecting margins. But at the same time, we simply need to see the results of all the hard work that we have been doing also and get back to growth. Tobias Norrby: Good. And with that, I think we have one more question from the conference call audience, please. Operator: The next question comes from Daniel Schmidt from Danske Bank. Daniel Schmidt: Yes, it's me again. Just 2 short follow-ups, maybe Stefan. You mentioned reduction of debt in '26, and you outlined that on the slide earlier today. But what is the run rate in terms of financial net you think heading into Q1? Just could you give us any indication on a quarterly basis? Stefan Fristedt: [Technical Difficulty]. Okay. Daniel, can you hear us now? Daniel Schmidt: Yes. Stefan Fristedt: [indiscernible]. Can you repeat your question? We didn't really -- we were... Daniel Schmidt: I was just wondering, we talked about reducing debt and all that, and you did a lot towards the end of Q4, I think, if I'm not mistaken. What is the current run rate on the financial net heading into Q1 now on a quarterly basis? Stefan Fristedt: Now I would say that Q1, there is not going to be -- it's going to be a little bit down, but not significantly. But then after May, when we are paying back the bigger -- the remaining part of our Eurobond, it should be trending down. So I would say I mean we are a little bit above SEK 200 million now. So we should probably see that coming down with -- to, let's say, SEK 180 million or something like that. Daniel Schmidt: Okay. Okay. And then just a detailed question on the tariff/labor cost impact that you had in Q4. I think that combined was SEK 30 million, and now you're raising prices to adjust your profitability in Mobile Cooling since of January. How much of that SEK 30 million can you sort of counteract with this price increases? All of it? Or still you're going to end up with higher labor cost that is still going to have a negative impact? Or how do you view it? Juan Vargues: No, I see that on the pricing, our expectation is really to cover up for the increases that we saw during 2025. Absolutely -- now we increased prices, Daniel. The problem is that they are not kicking in before 1st of January. Stefan Fristedt: Some of them. Juan Vargues: So most of them kicked into the year, but we had a couple of major customers, obviously, where -- the prices are kicking in in January -- 1st of January. So we should -- our expectation is that we are going to cover up for those inefficiencies that we had in 2025 and the tariffs, of course. Daniel Schmidt: As of the full quarter Q1, there won't be any sort of delays into Q1? Stefan Fristedt: Price increases should be effective from the 1st of January. Operator: That was the last question at this time. So I hand the conference back to the speakers for any closing comments. Juan Vargues: So we would like to thank you for your attention. It's clear that we are not happy with the performance that we showed in the quarter. We have a number of underlying indicators that are positive, but we cannot be happy, obviously, when our EBITA, for whatever reason it is, is lower than 1 year ago and our profit margins are lower than 1 year ago. And our job is left. We keep working very, very hard to prove that we are going to come back to growth, that we are going to see margin improvements and that we are going to see higher free cash flow next year. And with that said, thank you very much for your attention, and have a good day.
Operator: Good day, ladies and gentlemen, and welcome to GE Vernova's Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] My name is Liz, and I will be your conference coordinator today. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the program over to your host for today's conference, Michael Lapides, Vice President of Investor Relations. Please proceed. Michael Lapides: Welcome to GE Vernova's Fourth Quarter 2025 Earnings Call. I'm joined today by our CEO, Scott Strazik; and CFO, Ken Parks. Our conference call remarks will include both GAAP and non-GAAP financial results. Reconciliations between GAAP and non-GAAP measures can be found in today's press release and presentation slides, both of which are available on our website. Please note that our year-over-year commentary or variances on orders, revenue, adjusted and segment EBITDA and margin discussed during our prepared remarks are on an organic basis, unless otherwise specified. In addition, our 2026 guidance and our by 2028 outlook being presented today include the Prolec GE acquisition. We will make forward-looking statements about our performance. These statements are based on how we see things today. While we may elect to update these forward-looking statements at some point in the future, we do not undertake any obligation to do so. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. With that, I'll hand it over to Scott. Scott Strazik: Thanks, Michael. Good morning, everyone, and welcome to our fourth quarter earnings call. We have been busy since our December 9 Investor Update, and I thought I'd start with progress since the event. First, on the positive. We continue to see very strong new gas contracts with an incremental 6 gigawatts signed in the last 3 weeks of December, for a total of 24 gigawatts of new contracts in 4Q '25 alone. We also ended the year with strong orders in both Electrification and Wind. Electrification had its largest order quarter in its history and Wind had its largest order quarter of '25. On the negative, we have been impacted by the U.S. government halting of all offshore wind activity on December 22, which led to us booking an incremental accrual in 4Q for costs associated with the delay on the Vineyard Wind project. Ken will talk more about this in his section. I'm pleased that our Prolec GE acquisition has received rapid approval from all required jurisdictions. This will allow us to close the acquisition on Monday, February 2. Taking all this into consideration, we are raising our full year '26 financial guidance, which now includes GE Vernova's full ownership and operation of Prolec for 11 months in '26. Taken in totality, the last 3 weeks of December since our last update were a reasonable proxy for our '25 performance in total: strong growth in our largest, most profitable businesses with momentum continuing; challenges and wins that we are continuing to combat with accretive capital allocation with the approvals required to close our first sizable acquisition as a stand-alone public company. '25 sets us up for substantially more profitable growth moving forward. In '25, we increased our total backlog by over 25% or $31 billion to $150 billion with robust profitable order growth in Power and Electrification, further underscoring our momentum as we kick off '26. In Power, we continue to see accelerating demand and favorable pricing trends for both equipment and services as customers invest in new units and existing assets. In 4Q, gas power equipment backlog and slot reservations increased from 62 to 83 gigawatts sequentially, primarily due to strong U.S. demand, but also with agreements in the Middle East, Vietnam and Taiwan, with backlog increasing from 33 to 40 gigawatts and SRAs increasing from 29 to 43 gigawatts. We expect to reach approximately 100 gigawatts under contract in '26. Under the assumption, we'll ship high teens in gigawatts this year with new contracts north of 30 gigawatts. In 4Q, we grew our power services backlog to $70 billion, up $5 billion sequentially and $9 billion year-over-year. This increase was mainly driven by strength in gas with customers investing in fleets and signing new long-term service agreements at favorable pricing, which drove strong, high-margin services backlog growth. In Electrification, customers are working to keep pace with growing electricity demand, grid stability needs and national security interests. In 4Q, we grew the segment's total backlog to $35 billion, up $4 billion sequentially and $11 billion year-over-year, representing Electrification's largest growth quarter on a dollar basis in '25. Importantly, we are seeing demand across the segment for grid and data center equipment, both with traditional customers globally and hyperscalers, primarily in the U.S. Of note, over $2 billion of Electrification's orders were signed directly for data centers in '25, more than triple the 24 total. We also signed large deals for providing grid resilience and reliability solutions in Saudi Arabia and Australia, an HVDC contract in Germany and a large grid equipment contract in Iraq in the year. In Wind, we received approximately $3 billion of orders in 4Q, the largest of the year for the segment. In onshore, we continue to receive [indiscernible] for repowering and new units as customers utilize safe harbor and initiate physical work for approximately 10 gigawatts of repowering opportunities in the U.S. The team is focused on what we can control. Taken together, our pathway to substantially more profitable growth is right in front of us. I'll talk about this more on Page 5 with the growth of margin in our equipment backlog, including $8 billion of incremental margin added to our equipment backlog in '25. I'm also pleased with the returns that our '25 investments are yielding. On the CapEx side, we remain on track to see a substantial step-up in gas turbine output in 3Q '26. We installed over 200 new machines in our factories while adding nearly 1,000 new production workers in '25. We plan on adding an incremental 200 machines and over 500 production workers in '26. Electrification is on track with its growth, delivering more than 25% revenue growth in '25 with a clear pathway to deliver $13.5 billion to $14 billion in revenue, representing 20% organic growth plus approximately $3 billion from Prolec GE in '26. Our investments in automation and robotics are advancing at scale, and AI is starting to gain momentum in our engineering organizations and back-office functions. Our Advanced Research Center is progressing future businesses for us. This includes direct air capture, where we already have a facility up and running, real momentum in our solid-state transformer program and a good technical progress on our fuel cell program in Malta, New York. We are making all of these investments from a position of financial strength, ending the year with almost $9 billion in cash. In '25, we were able to return $3.6 billion to our shareholders while repurchasing more than 8 million of our shares. We continue to see substantial opportunity to create value including through incremental investments with strong returns. A few more comments on our financial performance on Page 4. We booked $59 billion of orders, up 34% year-over-year. We also grew our revenue by 9% year-over-year to $38 billion with growth in both equipment and services while increasing our adjusted EBITDA margin by 210 basis points year-over-year. We generated $3.7 billion in free cash flow, more than double our prior year, while investing more than $2 billion in R&D and CapEx. We are increasing our '26 guidance and by '28 outlook, which now includes Prolec GE. Ken will speak to this more in a moment. And as announced, we are doubling our dividend in '26 versus '25 and have increased our stock buyback authorization to $10 billion from the previously approved $6 billion program. One of the primary drivers of our conviction on our path forward is the significant growth and margin expansion in our equipment backlog again in '25, which I will touch on in the next page. On Page 5, we show the growth of margin in our equipment backlog consistent with our practice from last January. We started '25 with the expectation to increase our margin dollars and equipment backlog above our run rate in the prior 2 years. We achieved that expectation, adding $8 billion in equipment backlog margin dollars in '25, more than the prior 2 years combined. We ended '25 with $64 billion in equipment backlog, an increase of approximately 50% year-over-year, with an incremental 6 points in equipment margin expansion. This included 11 points of growth in Power, mainly driven by our gas power business. We expect significant growth again in Power and Electrification's backlog in '26 at better margins as we convert higher-priced gas slot reservation agreements into orders and benefit from strong demand and pricing for grid equipment. These businesses' longer equipment cycles mean that we will not begin delivering on the majority of the higher-margin orders placed in '24 and '25 until '27 and beyond. In Wind, we expect relatively stable margins this year and for backlog to decrease as we execute on the remaining unprofitable offshore wind backlog, and project a smaller onshore wind backlog given the recent softness in U.S. orders. As we noted in December, we see incremental opportunity for the teams to expand margins that are not projected in our backlog today. This includes our operating teams delivering our backlog with variable cost productivity versus known cost today, accelerating capacity additions, leveraging lean to sell incremental slots and a recovery in U.S. onshore wind orders. In summary, good progress in '25, and we are excited about what's ahead. With continued strong demand and pricing in gas, the strong demand environment across multiple products in Electrification and my expectation for the team to drive variable cost productivity not embedded in our backlog margins today, we expect to add at least as much equipment margin dollars in backlog in '26 as in '25, setting us up for even more profitable growth over the long-term. Said differently, in totality, the equipment margin and backlog from '23 to '26, those 4 years will add at least $22 billion in equipment margin, driving future profitable growth. With that, I will turn the call over to Ken for more details on our full year and fourth quarter performance as well as our financial outlook. Kenneth Parks: Thanks, Scott. Turning to Slide 6. We finished 2025 strong with robust orders, growing backlog and revenues, margin expansion and significant free cash flow generation. In the fourth quarter, we booked orders of $22.2 billion, a 65% increase year-over-year and a book-to-bill ratio of approximately 2x. Equipment orders increased 91% while service orders increased 22%. All 3 segments delivered significant orders growth across equipment and services. As Scott mentioned, our backlog expanded to $150 billion, a year-over-year and sequential increase, with equipment backlog increasing to $64 billion, up approximately $21 billion and 50% year-over-year, while our services backlog grew $10 billion or 13% year-over-year to $86 billion led by Power. Revenue increased 2% with services growth in all 3 segments. Equipment revenue was flat year-over-year as 41% growth at Electrification and 8% growth at Power was offset by anticipated lower Wind revenues. Price was positive in all segments. Adjusted EBITDA grew 6% year-over-year to $1.2 billion, led by Electrification and Power. Adjusted EBITDA margin expanded 30 basis points with higher price and productivity more than offsetting higher contract losses at offshore wind as well as inflation and investments in growth and innovation. The strong adjusted EBITDA and working capital management drove positive free cash flow of $1.8 billion in the fourth quarter. Working capital was a $2.3 billion cash benefit, driven primarily by down payments on higher orders and slot reservations at Power as well as higher orders at Electrification. Year-over-year, free cash flow increased more than $1 billion, driven by higher positive benefits from working capital and stronger adjusted EBITDA, partially offset by higher CapEx investments supporting capacity expansion. We ended 4Q with a healthy cash balance of nearly $9 billion, up approximately $1 billion compared to the third quarter. During the fourth quarter, we returned $1.1 billion of cash to shareholders through share repurchases and dividends. Also, both S&P and Fitch upgraded our investment grade credit ratings and maintain positive outlooks on these upgraded ratings. In early February, we expect to issue roughly $2.6 billion of debt as we complete the previously announced acquisition of the remaining 50% ownership stake of Prolec GE. We'll remain below 1x gross debt to adjusted EBITDA after this debt issuance. We're encouraged by our strong financial performance in 2025. During the year, we secured $59 billion of orders led by Power equipment orders more than doubling and Electrification equipment orders growing more than 20%. Service orders increased 12% with growth in each segment. We delivered approximately $38 billion in revenue with 26% growth in Electrification and 10% growth in Power. We increased adjusted EBITDA by 46% and expanded margins 210 basis points driven by price, volume and productivity, more than offsetting the impact of growth and innovation investments and the impact of tariffs. Finally, we generated $3.7 billion of free cash flow, a year-over-year increase of $2 billion. As discussed in prior quarters, we continue to utilize lean to improve our billings and collection processes and drive better cash management and linearity. In 2025, we reduced days sales outstanding by 2 days compared to year-end 2024, resulting in over $200 million of additional free cash flow in 2025. Our growing backlog and healthy margin provides an excellent foundation for continued improvement in our financial performance moving forward. Turning to Slide 7. Power delivered another strong year, led by gas power. Power orders in 2025 grew more than 50% given robust demand for gas equipment and growth in services, which combined, increased backlog by more than $20 billion. Power grew revenue 10% for the year and expanded EBITDA margins by 100 basis points to 14.7%, driven by higher price and productivity, primarily at gas power and steam power. In the fourth quarter, Power orders grew 77% led by gas power equipment tripling year-over-year on higher volume and pricing. We booked 41 heavy-duty gas turbines, our largest orders quarter of the year and an increase of more than 70% year-over-year, including 15 HA units. We also secured orders for 18 aeroderivative units, that's 8 more than the fourth quarter of 2024. Power services orders increased 15% as customers continue to invest in their existing fleets. Revenue increased 5%. Services revenue increased due to higher gas transactional services and nuclear. Equipment revenue increased driven by nuclear as we progress in building our first SMR at the Darlington site with OPG, as well as aeroderivative growth at gas power. This growth was partially offset by fewer heavy-duty gas turbine shipments, primarily due to the improved linearity of deliveries through 2025 compared to 2024. EBITDA margins expanded 160 basis points to 16.9%, mainly driven by price and productivity more than offsetting additional expenses to support capacity investments at gas and R&D at nuclear along with inflation. Looking to the first quarter of 2026 at Power, we expect continued year-over-year growth in gas equipment orders. We also anticipate high single-digit revenue growth driven by both higher equipment and services. We expect EBITDA margin of approximately 14% to 15% as volume, price and productivity should more than offset additional expenses to support capacity and R&D investments as well as inflation. Given the typical seasonality of services outage, Power revenue and EBITDA margin should be lower sequentially in the first quarter. Turning to Slide 8. The Wind team delivered similar EBITDA losses in 2025 despite the impact of tariffs, driven by improved pricing and higher turbine deliveries at onshore wind, offset by offshore due to the absence of contract cancellation settlement gain recorded in the third quarter of 2024, net of lower year-over-year contract losses. In the fourth quarter, Wind orders increased 53% year-over-year, mainly due to improved onshore equipment orders, primarily outside of North America. However, it's still difficult to call an inflection point in U.S. orders as customers still face permitting delays and tariff uncertainty. At offshore, we remain focused on executing our challenged backlog. Wind revenue decreased 25% in the quarter given lower onshore equipment deliveries as a result of softening orders over the last year. Wind EBITDA losses were $225 million in the quarter, below the fourth quarter of 2024 levels due to higher offshore contract losses, including the impact of the recently issued U.S. order to halt construction of all offshore projects and lower onshore equipment volume, partially offset by improved onshore services. For the year, Wind losses came in at approximately $600 million, higher than our expectations of approximately $400 million outlined during our December investor event, driven by the U.S. government's December 22 stop work order for offshore wind projects. Until that point, the team was on the path to achieve these expectations as they worked to complete the Vineyard Wind project in early January. The order created a potential delay of at least 90 days and we accrued in 4Q the estimated incremental contract losses for the extension of installation work. As a reminder, the project has 62 turbines in total, and we've made significant progress with only 10 turbines needing blades and 1 turbine left to be installed at the time of the stop work order. At any time the order is in place, we are unable to execute the project. This and the resulting incremental costs are excused under a declaration of force majeure prompted by the government action. We understand that Vineyard Wind received an injunction of the stop work order yesterday. If given permission to resume work soon, we would work to complete installation of the remaining turbines by the end of March. At the end of March, we'll lose access to the vessel required to complete installation of the remaining turbines. If we're unable to complete the installation of the remaining 11 turbines, 2026 Wind revenue could be negatively impacted by approximately $250 million due to our inability to bill the customer for those turbines. Because of our contract loss accruals and protection from incremental costs resulting from the stop work order, we do not anticipate significant additional negative EBITDA impacts for the Vineyard Wind project beyond the amounts already recorded. For first quarter 2026, we anticipate Wind revenue to decline at high teens rate year-over-year due to lower onshore equipment deliveries. We expect EBITDA losses to be between $300 million and $400 million, down year-over-year primarily as a result of lower onshore equipment volume as well as the approximately $70 million impact of tariffs that started in 2Q of last year. Looking at 2026, we expect significant improvement in Wind revenue in the second half of the year given only 30% of our expected onshore turbine shipments are in the first half as almost 70% of our 2025 equipment orders came later in the year. Also, the volume we're shipping in the first half has fewer contractual protections for tariffs since we signed these orders before their implementation. As a result, we expect EBITDA losses in the first half to be partially offset by profitability in the second half. Now turning to electrification on Slide 9. Strong demand and price resulted in 21% orders growth and 26% revenue growth in 2025. Electrification equipment orders continued outpacing revenue, further increasing the equipment backlog to $31 billion, up more than $10 billion compared to the fourth quarter of 2024. EBITDA margins expanded 560 basis points to 14.9% driven by volume, favorable price and productivity. In the fourth quarter, orders remained strong at roughly 2.5x revenue and increased 50% year-over-year to approximately $7.4 billion due to growing grid equipment demand, particularly for synchronous condensers, substations partially to support data center growth and switchgear. We saw strong equipment orders growth in the Middle East, which increased over $1 billion and in North America, which more than doubled year-over-year. Revenue increased 32% with growth across all regions. We saw strong volume and higher price driven by switchgear and HVDC equipment. EBITDA increased 63% in the quarter with margin expansion of 320 basis points to 17.1%. Margin expansion was led by more profitable volume, productivity and favorable pricing. Looking to the first quarter of 2026, we anticipate continued solid equipment orders with healthy margins. First quarter Electrification revenues should be similar to the fourth quarter of 2025 as we include Prolec GE, resulting in a significant year-over-year increase. We expect continued strong EBITDA margin expansion to 16% to 17% from volume, price and productivity. Moving to Slide 10 to discuss GE Vernova guidance. For the first quarter of 2026, based on our expectations for the segments, as already outlined, we expect continued year-over-year revenue growth and adjusted EBITDA margin expansion. We also expect to deliver positive free cash flow in the first quarter of 2026 given our ongoing focus on aligning the timing of inflows and outflows along with the impact of down payments, which correlate with the timing of orders. For the full year, we're increasing our 2026 guidance provided in December to now include the Prolec GE acquisition. We now expect full year 2026 revenue to be in the range of $44 billion to $45 billion, up from $41 billion to $42 billion, with growth in both services and equipment. We continue to expect adjusted EBITDA margins of 11% to 13% as we deliver our growing backlog with favorable pricing plus improved operational execution. We're also increasing our free cash flow guidance to between $5 billion and $5.5 billion, up from $4.5 billion to $5 billion. By segment, we continue to expect 16% to 18% of organic revenue growth in Power, driven by gas power. We anticipate Power EBITDA margins to be between 16% and 18% as positive price, increased volume leverage and productivity more than offset inflationary impacts and the additional expenses for AI, automation and increased production. In Electrification, we now anticipate revenue to be between $13.5 billion and $14 billion, which represents 20% organic growth, plus approximately $3 billion of revenue from Prolec GE. We continue to expect EBITDA margin to expand to 17% to 19% as we deliver our more profitable backlog. In Wind, organic revenue is expected to be down low double digits due to decreased onshore equipment revenues given the softness in orders, but we expect EBITDA losses to be approximately $400 million in 2026, which is consistent with our expectations discussed in December as improvement in onshore wind services and offshore wind offset the lower onshore equipment volume. We expect 2026 GEV adjusted EBITDA to be more second half weighted than 2025, with the highest revenue and EBITDA in the fourth quarter of '26. We expect higher second half gas power revenue as we ship more gas turbines in the second half of the year as we increase annual production capacity to approximately 20 gigawatts starting in midyear '26. We also anticipate typical gas services seasonality, with the highest outage volume in the fourth quarter. We continue to expect Electrification EBITDA to increase sequentially through the year following the completion of the Prolec GE acquisition. And as mentioned earlier in Wind, we expect higher second half onshore turbine shipments given our recent orders profile and better services profitability. At Corporate, costs are typically uneven across quarters due to compensation timing and portfolio activity at our financial services business. We expect full year 2026 corporate costs to be between $450 million and $500 million as we continue investing in AI, robotics and automation to drive productivity over the medium and long-term. Turning to Slide 11. We're also increasing our by 2028 outlook to include Prolec GE. We now project at least $56 billion of total revenue by 2028, up from $52 billion, implying a low teens growth CAGR through 2028. And we still expect to achieve adjusted EBITDA margins of 20%. We're increasing our cumulative GE Vernova free cash flow generation from '25 to '28 by approximately $2 billion to at least $24 billion, which incorporates nearly $1 billion of incremental CapEx from Prolec GE to support increased transformer production. This brings our expected cumulative CapEx and R&D investments through this period to approximately $11 billion. At Electrification, by incorporating Prolec GE into our by '28 outlook, we now expect approximately $4 billion of incremental revenue on top of high teens organic growth and we maintain expectations for 22% EBITDA margins. We're not including any synergies from the Prolec acquisition into our updated outlook, but we see real opportunities in both revenues as well as costs. Overall, the combination of rising demand, combined with the consistently stronger execution, investments into our business and the acquisition of Prolec GE sets us up nicely going forward. With that, I'll turn it back to Scott. Scott Strazik: Thanks, Ken. And to wrap, a few themes. We are executing well in the early stages of our multiyear growth trajectory. This is evidenced in the $150 billion backlog we entered '26 with versus roughly $100 billion in backlog that we entered '22 with after the announcement of our spin from GE in November of '21. Just think about that for a moment. Just over 4 years ago, we announced our separation from GE. And today, our backlog is 50% larger than it was upon the time of the spin announcement. The steepness of our growth trajectory is probably best evidenced in our Electrification segment, which I often say has been the largest beneficiary of GEV working as one, purpose-built, focused company, now better linking the commercial muscle and customer relationships of our Power and Wind businesses with the Electrification solutions we provide. Electrification generated about $5 billion in revenue in '22, and we now expect that number to be $13.5 billion to $14 billion in '26, and we are just getting started. But this isn't about growth for growth's sake. In the last 3 years alone, we've more than doubled our GEV equipment backlog, adding over $14 billion in future margin dollars in this backlog, while adding $13 billion in high-margin services backlog over the same period. On the operations front, we are improving but culturally hunting every day for waste and opportunities to serve our customers in a more efficient manner. Take our transformer product line inside Electrification. Our labor hours were up 39% in 4Q, with output increasing more than 50% year-over-year as we drive significant productivity at these sites. And we now see real opportunity to apply a similar playbook to the 5 large factories we are acquiring with Prolec GE. In onshore wind, our critical, customer-facing events are down over 50% in '25 versus '24, and the business is well positioned to deliver a much more profitable services business in '26. But we also are running a business with the humility to acknowledge we continue to have real opportunity to improve on our execution in areas like offshore wind as we complete our only 2 projects. We are doing all of this while investing across the near, mid and long-term horizons. Our customers and investors will see substantial value creation from our increased gas turbine output starting in 3Q '26. These incremental returns are right in front of us, less than 180 days from now. Other investments we are making are just starting to take shape, but I have high confidence that our automation and AI investment returns will grow in '27, becoming a bigger part of our margin expansion in '28. These investment returns are not included in our '28 financial outlook today. And as we invest in these time horizons, we also are investing in businesses for the next decade. We expect SMR to contribute meaningfully to the top line of our power business in the next decade. We're making real products in construction of our first plant in Ontario today while continuing to invest in the engineering to drive down the cost of the product for the long-term. Nuclear was a drag on Power's '25 margins, and we expect '26 to be directionally similar. But our customers and investors will see this value in the next decade. Similar theme with our solid-state transformer product line. We've completed production of our first unit. And just 2 weeks ago, I visited our new testing facility in Upstate New York that we'll be using to test and validate the performance of this first unit before delivering the completed solution to our hyperscaler customer in the autumn of this year. And we can do all of this while returning substantial capital to our shareholders as evidenced in our $3.6 billion return of capital in '25 and our announced increase in our dividend and share buyback program. So we enter '26 pumped up about the company we are creating, the opportunities to serve our customers and deliver returns for our owners, not only in '26 but through cycles and for the long-term. With that, I'll hand it to Michael for the Q&A part of the call. Michael Lapides: Before we open the line, I'd ask everyone in the queue to consider your fellow analysts and ask 1 question so we can get to as many people as possible. Please return to the queue if you have follow-ups. Operator, please open the line. Operator: [Operator Instructions] Our first question comes from Joe Ritchie with Goldman Sachs. Joseph Ritchie: So let's just -- I'm just going to focus my one question on gas power equipment orders. Clearly, incredible momentum in 2025. I think your original expectation was for backlog and for SRAs to be roughly around 60 gigawatts and you ended at 83 gigawatts. Now you have an expectation of 100 gigawatts by the end of 2026. Scott, maybe just talk about just the nature of your discussions. Have they changed at all? Types of customers? And then also, you did mention that you expected the margin in your backlog to be better as well. So it sounds like the pricing discussions have also been positive. Scott Strazik: Yes, Joe. I mean, on the end of that, I'd say, yes, pricing does continue to strengthen. When we look at where we're trending with our slot reservation agreements today versus our existing backlog, there's another 10 to 20 points of pricing strength in the SRAs today. We are pleased -- you're right, we were talking in the middle of last year at 60 gigawatts and landed at 83 gigawatts, because the intensity of the discussions really late summer fall right through the holidays have continued to be very intense. When you think about this year getting to 100 gigawatts by the end of the year, what I would tell you is it's likely going to be a larger proportion of orders. Today, with the 83 gigawatts, it's 40 gigawatts of orders, 43 gigawatts of SRAs, that probably shifts towards more of a 60-40 split with 60% on order over the course of 2026. And then really the question that we'll have to evaluate and share with you as we go is how many customers are ready to commit to slots today for really '31 to '35. And our 100-gigawatt assumption that we talked about today doesn't really assume a lot of those, let's call it, framework agreements get closed in 2026, but there are active discussions right now, and active discussions we're going to keep working that could take that 60-40 split of 60 gigawatts of orders directionally and 40 gigawatts of SRAs, to see the SRA number grow even higher over the course of this year. But it's January and we want to see how those discussions progress. Operator: The next question comes from Julian Mitchell with Barclays. Julian Mitchell: Just wanted to circle back to the gas power equipment market because I suppose we get a lot of questions from investors around smaller turbine makers looking to grab share, looking to take advantage of the fact that you're trying to be measured on capacity increases and there are very long lead times. And obviously, there was an announcement of someone looking to repurpose ancient narrow-body engines for power gen supply. So I just wondered, I suppose, 2 things. One was how serious do you think the threat of market share gains from that plethora of smaller players is? And do you think that they could have some negative effects on pricing in the equipment market as their capacity and share gain efforts ramp up in the years ahead? Scott Strazik: Thanks, Julian. I would just reinforce the comment I made before, which is we do see our slot reservation agreements 10 to 20 points higher in price than where we are in the backlog. So we're continuing to gain price as we continue to play this game in gas. Frankly, a lot of the smaller applications are simply enabling more projects to get started, because what it's enabling is earlier power that truthfully we can't provide, but then on the back end, as the heavy-duty gas turbines are available, those smaller applications will become the reliability solution on the back of the -- on the heavy-duty gas turbines. So what we talk about every day is this is about economics. And when you're underwriting 20-year business cases, efficiency matters a lot when you're running these units at base load. So now with humility, we don't really view those smaller units to be competition, but that doesn't mean that's not a good business in the near-term. I think those smaller applications could do very good business in the next few years. But we also have just as much conviction in the competitiveness and the value proposition our heavy-duty gas turbines are providing and will continue to provide, and we expect to continue to have the attractive share in the market that we have had and we'll continue to have. Kenneth Parks: And Julian, I know you know this, but we obviously play in a piece of that as well, right? So we have aeroderivative units, and I think last year we booked orders for about 63 of those, which was up significantly year-over-year. Because of us playing in that market, it informs those comments that Scott just made, which is we know how the customers are thinking about utilizing that equipment in the midterm. Operator: The next question comes from Nigel Coe with Wolfe Research. Nigel Coe: So my one question is on the backlog margins, specifically for Power. So 11 points of improvement year-over-year is really impressive. Maybe just can you talk about the 17 points of improvement since year-end '22? The starting point would have been about a breakeven. I just want to confirm that. And then based on where you're pricing turbines today, would you expect backlog margins to continue improving in 2026? Scott Strazik: That's fair that, directionally, the starting point is approximately breakeven, and most definitely, we expect the margins in equipment backlog in Power to continue to grow at a very healthy clip in '26. And that's why we articulated on the call that we expect to add at least as much equipment margin in backlog in '26, i.e., at least $8 billion, this year as we did last year. Kenneth Parks: And we get excited about that not only on the equipment side of it, but if you think about the pricing on the service contract that comes along with a new heavy-duty gas turbine, as the pricing is accelerating on the equipment itself, as we sign those new contracts for service orders, we'll see incremental pricing there. So your point is exactly right, we're seeing accretion in margins on the equipment. That also leads to a long life of pricing improvement on the service side of the portfolio. Scott Strazik: Because when you think about it, everybody, we added about $12 billion of equipment backlog in Power. We added $9 billion of services backlog in Power over the course of the year. Both are experiencing real margin accretion. Operator: The next question comes from Mark Strouse with JPMorgan. Mark W. Strouse: Scott, maybe switching gears to the Electrification segment. Just kind of stepping back, kind of leading up to the spin. Just kind of the opportunity that you've been talking about, kind of investing in that business to expand it from what it's been over the last decade or so. Obviously, you're clearly making progress with the orders. You talked about kind of record orders in 4Q. To the extent that it's possible, can you just kind of update how much of that do you think is really driven by just kind of the overall market strength versus what GE is doing specifically to gain market share? Scott Strazik: Well, I mean, Mark, with humility, I would argue that we're able to provide a very unique solution to the end customers today with the linkage of the power generation and the electrical equipment together in a way that it is difficult for many other providers to do. So this isn't simply about drafting on a larger market. I would say that was maybe more of a theme in '23 as the European market started to move post the Ukraine crisis, that supply and demand created an opportunity for us and we took advantage of it. That was a '23 theme. '25 theme is we're providing a differentiated solution. And our ability to link power generation solutions with electrical equipment is positioning us to continue to grow this business on an outsized basis. So I look at the business and I say $14 billion of revenue in 2026, directionally, we think our addressable market today with the products we sell, directionally $150 billion. So I mean, we're at like 10% of our directional market and there's a lot we can do. Now yes, to earn that, we've got to get better with our operations. And that's why we talked about the fact that from '24 to '28, we're doubling our output with transformers and switch gears. And most of that is coming from more shifts, more investments in how we operate that helps. And at the same time, we talked about things like solid-state transformers in December. I mentioned it in my prepared remarks, 2 weeks ago, I saw our first product that's completed, we'll be testing it over the course of the summer before we deliver it to the hyperscaler customer, that could be a substantial order for us with a new product line in 2027 for deliveries later in the decade. So I continue to grow my optimism and, frankly, my expectations with how material this is as a part of GE Vernova. And we're going to keep leaning into this business. Kenneth Parks: And then it's a great opportunity to think about the Prolec acquisition, right? Because you talked about what are we able to do not only just from a market, but from a GEV perspective, bringing things together. This was one of the primary reasons that we were so excited about the Prolec acquisition, because there were terms and conditions around the arrangement which allowed us to keep things within certain markets. Now that it's totally going to be consolidated by GEV and fully owned by GEV, we're able to optimize where we can have transformers go around the world. So that's a really good thing. But one of the other opportunities as well is Prolec is a provider of distribution transformers, which are a key part of what's going into data centers. So this opportunity of bringing GEV together and how it's benefiting the Electrification business though it runs right exactly to what Scott says, but it gave me the opportunity to remind everybody what the importance of this Prolec acquisition is. Operator: The next question comes from Alexander Virgo with Evercore ISI. Alexander Virgo: Can we start on Electrification, please? And just integrating Prolec, I'm surprised there hasn't been a little bit more of an accretion on the original margin guidance. So I wondered if you just talk a little bit about costs to integrate an investment that you might need to do to make sure that you get the benefit of what you just talked about and think about how that margin profile might look as we look at the 2028 guidance. Scott Strazik: I mean, Alexander, I'd just start by saying no change from the expectations from Prolec from what we talked about when we closed the deal in October. The reality is we could have a little bit of a debate as to whether we wanted to change the margin guide by basis points to be exact to where we had framed things up in October. What I would just interpret is this gives us even more opportunity to outperform over the course of '26. I wouldn't overthink that there's been any change in the financial contribution from Prolec in 11 months of, call it, the '26 or, at all, the '28 expectations. Frankly, if anything, we've had a very productive 3 months of integration meetings and are very excited for this to be part of the company on Monday. Operator: The next question comes from David Arcaro with Morgan Stanley. David Arcaro: I was wondering if you could touch on the nuclear space. We've seen a lot of momentum on the policy side, deal side and the SMR space. Wondering if you could talk to your project opportunities. Have things accelerated? Could there be opportunities for more SMR deals to come? Scott Strazik: David, the opportunity is great. The discussions are progressing. What I would say with nuclear, maybe a little bit different than gas and grid because we're really restarting an industry here in the western world, is they're progressing, they're sequential. There's a lot of terms and conditions that are being discussed. We're working very closely with the U.S. administration that is very determined to restart a nuclear industry in the U.S., and we're very motivated to serve them on that path. We're also having productive conversations in Sweden, in Poland today that we're very optimistic about going forward. But it may take a little while before they translate to announcements. So we're into a new year. We're working hard with a number of both governments and customer archetypes, including the hyperscalers on what this can mean for them in, let's call it, the first half of the next decade. So opportunity pipeline growing, but the timing to close is going to be a little bit different than the intensity of the closed velocity right now with gas and grid. Operator: The next question comes from Nicole DeBlase with Deutsche Bank. Nicole DeBlase: Scott, I wanted to get your thoughts on something a bit higher level. A few weeks ago, we had this announcement from Trump kind of pushing for an emergency power auction. I'm really curious about your reaction to that, both with respect to the potential impact on gas power demand in the market in the U.S. as well as GEV. Scott Strazik: There's clearly a need to continue to evolve the market mechanisms to encourage what's needed in this country, which is substantially more new build of firm, fixed power generation capacity. Whether that happens through the auction mechanism a few weeks ago announced by the administration allowing hyperscalers to bid into a separate auction for separate PPAs, that's one pathway to do it. Do we probably need in a number of markets a capacity auction mechanism that provides more years of revenue guarantee for more build to happen today? Definitely. The market's already moving, right? We moved into '25 with 46 gigawatts on contract. We ended the year with 83 gigawatts. We'll end this year with at least 100 gigawatts. So the market is moving regardless, but we are very motivated by continuing to iterate with the administration on how to enable even faster growth and simultaneously thinking our way through on how we'll fulfill if that happens. So motivated by the announcement a few weeks ago. But I'd also emphasize it's early. I think changing policy in how these markets have worked isn't going to happen overnight. But clearly, you can see in our orders book that the market continues to move our way regardless. Operator: The next question comes from Amit Mehrotra with UBS. Amit Mehrotra: Just one clarifying question. Can you just update us on what you're sold out through -- I think last time it was 2028 on both heavy-duty and aeroderivatives. I mean these backlog members are eye-popping, so I assume we're going out quite further. And then just one clarification on Electrification. I know you talked about it earlier, but it just seems like the organic growth expectations have maybe come down for '26 when you include Prolec in there relative to the 20% you had last year. Maybe I did my math wrong, but if you could just clarify that point, that would be helpful. Kenneth Parks: Let me do the last part first and then I'll hand it back to Scott. No, the organic growth expectations haven't come down. When we give you the organic growth number we're giving it to you without Prolec. So just to make that easy, we're saying the organic growth for Electrification and then just add the $3 billion on top of it. So there's been no change in the expectations for Electrification negatively. Scott Strazik: And they've demonstrated ability to outperform the last few years with their ramp. Let's see how they do this year. But yes, no change, Amit, from December 9. The gas capacity, the reality is the 83 gigawatts that we now have on capacity is certainly very heavily playing into '29, but there are slots in '30 and beyond that are also secured. So we do continue to have capacity available today at 83 gigawatts on contracts for 2029. That said, by the time we get to 100 gigawatts, which we're now projecting by the end of the year, that 100 gigawatts directionally will have both '29 and '30 largely sold out based on where we see it today. But sitting here today on January 28, there are still slots available for 2029. Michael Lapides: Operator, we have time for 1 more question, please. Operator: This question comes from the line of Andrew Kaplowitz with Citigroup. Andrew Kaplowitz: Scott, can you give us more color on your assessment of how your teams are doing on that variable cost, productivity that you talked about and what that might mean for the next couple of years? Obviously, you've reiterated this 22% EBITDA margin targets for '28 in Power and Electrification, still early days on lean. What are you seeing on the ground as you begin to ramp up capacity more significantly? And can you remind us how your contracts are structured for rising commodity costs? Scott Strazik: Well, the commodity cost, to a large extent, I would say from when we take orders, Andrew, to a large extent, we lock in with the suppliers the price. So it's generally matched. The only exception of that is with our long-term service contracts, and those have material escalators attach with them. So on our $150 billion backlog, we feel very good about our protection for material inflation. Now on our variable productivity journey and where we are, it's a very good and timely question. We'll have our February operating reviews with our business teams next week, and that is the main event or one of our main events. If I assess where we are right now, I would say with the backlog that's grown by 50% in the last 4 years, the team has been making very good progress in our ability to fulfill on that. And that's when we talk about seeing the gas ramp up in the third quarter of '28 -- third quarter '26, excuse me, we'll hit that. Doubling transformers and switch gears '24 to '28, we'll hit that. Now can we be even more effective with our sourcing leverage here now that we're at this level of scale? And do I have a high degree of expectations that the sourcing productivity will contribute even more to our margin expansion, when we show you that chart that we showed you today on backlog in March 12 months from now? The answer is yes. But there's a maturation process here between investments in the factories for output and fulfillment, feeling very good, somewhat countered with how strategically forward thinking our teams are with sourcing savings that I think we've got a few miles still to go together. That is good news in the sense that it's opportunity, an opportunity for us to get better and something I look forward to updating everyone on as we go through that journey together in 2026. Michael Lapides: Before we wrap up, let me turn it back to Scott for closing comments. Scott Strazik: Michael, thank you, everybody. I would just again with our customers. We are humbled with their confidence in us to drive that $150 billion backlog to the 75,000 employees we have today that I'm proud to represent every day, as is Ken, in these meetings. For everybody on the call, we appreciate your continued interest in GE Vernova. And I hope you can hear in our voices both the combination of humility and hunger that we have as we go into a new year that there's a lot of work to do. We're ready to do that work. And we look forward to interacting with all of you throughout 2026. Thanks, everyone. Kenneth Parks: Thank you. Operator: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen. Welcome to KPN's Fourth Quarter Earnings Webcast and Conference Call. Please note that this event is being recorded. [Operator Instructions] I will now turn the call over to your host for today, Matthijs van Leijenhorst, Head of Investor Relations. You may now begin. Matthijs van Leijenhorst: Yes. Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us today. Welcome to KPN's Fourth Quarter and Full Year 2025 Results Webcast. With me today are Joost Farwerck, our CEO; and Chris Figee, our CFO. As usual, before we begin our presentation, I would like to remind you of the safe harbor on Page 2 of the slides, which applies to any statements made during this presentation. In particular, today's presentation may include forward-looking statements, including KPN's expectations regarding its outlook and ambitions, which were also included in the press release published this morning. All such statements are subject to the safe harbor. Now, let me hand over to our CEO, Joost Farwerck. Joost Farwerck: Thank you, Matthijs. Welcome, everyone. Let's start with some highlights of the fourth quarter and full year. We delivered on our 2025 outlook and group service revenues increased by 2.7% with all segments contributing. Adjusted EBITDA and free cash flow exceeded guidance. We maintained strict cost control across the organization. Indirect costs were EUR 10 million lower than last year, marking a clear turning point in indirect OpEx. In the fourth quarter, we saw Consumer delivering another quarter of strong commercial momentum, especially in Broadband with record net additions for the full year. Business growth was mainly driven by SME and Wholesale continued to grow mainly driven by sponsored roaming. Last year, we expanded our footprint by adding 440,000 fiber homes and around 400,000 homes connected. And we strengthened our mobile network with the launch of our tower company, Althio. And through ongoing investments in cybersecurity, we ensured a resilient network that protects all users. For 2026, we expect service revenue growth of 2% to 2.5%, EBITDA AL of approximately EUR 2.67 billion, CapEx of about EUR 1.25 billion and free cash flow of more than EUR 950 million. Our dividend per share is expected to grow by 10%, and we intend a new share buyback of EUR 250 million in 2026. All in all, we closed the year in a good way, and we are well positioned to sustain healthy service revenue growth in the coming years, supported by our leading positions in consumer and business markets and continued growth in Wholesale. At the same time, we are accelerating our transformation to deliver around EUR 100 million in annual net indirect OpEx savings by 2030. And reducing CapEx below EUR 1 billion by 2027 next year will drive strong cash generation and deliver attractive shareholder returns. Later, Chris will give you more details on our financials and 2026 outlook. We delivered on our 2025 outlook. Service revenues grew by around 3%. EBITDA slightly exceeded guidance. Free cash flow was strong at EUR 952 million ahead of the upgraded outlook we gave at the half year results despite slightly higher CapEx. We reiterate our dividend commitment, and we will pay a regular dividend per share of EUR 0.182 over 2025 following AGM approval in mid-April. At our strategy update in November, we reaffirmed that we are well on track to achieving our Connect, Activate and Grow strategy, which is supported by 3 key pillars: one, we continue to invest in the leading networks; two, we continue to grow and protect our customer base; and three, we further modernize and simplify our operating model. And together, these priorities support our ambition to grow service revenues and EBITDA by approximately 3% on average and free cash flow by approximately 7% over the entire strategic period. Let me now walk you through the operational performance in more detail. We hold a clear lead in the Dutch fiber market, both in homes passed and connected and in business parks through our joint venture in Glaspoort. And together with Glaspoort, we now cover nearly 6 million Dutch homes or around 70% of the country. And to maintain our network leadership, we further optimized our rollout process and shifted focus from passing homes to connecting and activating the households. And this approach is paying off with a record number of homes connected in Q4 and continued growth in fiber Broadband net adds. Consumer Service revenues continue to grow, driven by consistent Fiber and Mobile service revenue growth. And commercial momentum remained strong across both fixed and mobile with subscriber growth exceeding our fair share. Throughout the year, our Net Promoter Score improved, supported by operational excellence, our Combivoordeel offer and initiatives launched to strengthen digital engagement. Now let's take a closer look at our fourth quarter KPIs. Thanks to a strong execution and proactive base management, we delivered double-digit Broadband net adds growth for the third quarter in a row, supported by a healthy inflow of new fiber customers. Our fixed ARPU held firm despite continued investments in our base and the competitive markets. Together, these achievements drove service revenues growth of 0.4%. In Mobile, we added 24,000 postpaid subscribers and postpaid ARPU increased year-on-year, supported by the price increase in October, partly offset by the ongoing promotional activity in the no-frill segment. Combined, these factors led to 2.9% growth in Mobile Service revenue. Now let's turn to B2B. Business service revenues increased by 2.3% year-on-year, mainly driven by SME. And also here, Net Promoter Score improved throughout the year, reflecting the continued trust from our B2B customers for stability, reliability and the quality of our networks and services. SME remains B2B's main growth engine driven by Broadband, Mobile and Cloud and Workspace. LCE service revenue growth trend remained relatively stable, supported by continued growth in Unified Communications, CPaaS, IoT and a growing customer base, partially offset by continued price pressure in mobile. And finally, Tailored Solutions service revenue decreased, reflecting a focus on value steering. Wholesale continued to grow, mainly driven by the strong performance in Mobile. Broadband service revenues increased driven by fiber and the growth trend leveled off compared to previous quarters, driven by the decline in the wholesale copper base. Mobile remained strong, driven by continued growth in International sponsored roaming and other service revenues increased mainly due to an uptake in visitor roaming. ESG remains a core element of our strategy. And on this slide, we show you the progress on carbon reduction, circularity and diversity. To further reduce our carbon footprint across the value chain, we increased our green energy sourcing in 2025, supported by a solar energy partnership with Eneco. And our Scope 2 emissions have further decreased by 70% year-on-year, while Scope 3 emissions slightly increased, but this was due to an expanded scope. Next to this, we, of course, remain committed to improving our diversity targets. Although achieving gender balance and recruitment remains challenging, diversity and inclusion continue to be a top priority for us. And to summarize, we ended 2025 in a strong position, and we carry that momentum into 2026. With strong commercial execution, a healthy base inflow and improving ARPUs, we are well positioned and confident in delivering on our 2026 outlook. Now let me hand over to Chris to give you more details on the financials. Hans Figee: Thank you, Joost. Let me now take you through our financial performance. First, let me summarize some key figures for the fourth quarter and the full year. First, the adjusted revenues were up 2.7% year-on-year in Q4, driven by service revenue growth across all segments and also higher non-service revenues. Second, our adjusted EBITDA after leases grew by 5.1% compared to last year, supported by higher revenues and lower indirect costs. Underlying EBITDA growth, excluding LTO was 3.7% in Q4 and our EBITDA margin improved by 100 basis points to 44.6% of total adjusted revenues. Third, our net profit increased 12% year-on-year, supported by a one-off tax gain of about EUR 20 million from the recognition of a deferred tax asset. Finally, for the full year, our free cash flow increased by 5.8% year-on-year to EUR 952 million, mainly driven by EBITDA growth. Also, our free cash flow margin over total adjusted revenues grew by nearly 40 basis points. And with our ongoing share buybacks, reducing the number of shares outstanding, our free cash flow per share growth is even stronger at 7% year-on-year. I will share more detail on the underlying cash developments later in the presentation. In the fourth quarter, group service revenues grew by 1.8% year-on-year, supported by growth in all segments. In this mix, we saw Consumer Revenue -- Service revenues increased by 1.2%, driven by continued solid commercial momentum in both Fixed and Mobile. For 2026, we expect Consumer Service revenue growth about 1.5% year-on-year, supported by base growth and commercial improvements. Business Service revenue growth was 2.3% year-on-year, mainly driven by SME. Tailored Solutions remain negative, reflecting our focus on margins and contract quality. For 2026, we expect B2B to grow about 3% year-on-year with growth weighted towards the second half of the year, given the segment's strong performance in the first half of 2025 and therefore, the comps that will weigh against Tailored Solutions revenue growth. Our higher-margin SME business will continue to show growth in the 5% region throughout the year. And finally, Wholesale Service revenues increased by 3.9% year-on-year, driven by ongoing growth in international sponsored roaming business. For '26, Wholesale is expected to grow by about 3%, supported by Mobile. For the full year and on a like-for-like basis, so excluding IPR benefits and the contribution from Althio, our adjusted EBITDA grew by 3.1%, exceeding our 3% CFD hurdle. This growth was driven by higher service revenues and supported by strict cost control. Direct costs or cost of goods sold increased mainly due to the Service Revenue mix effects in B2B and higher third-party access costs within Glaspoort. In 2025, we reduced indirect costs by about EUR 10 million, marking a clear inflection point after 2 years of inflationary pressure. The savings came from disciplined cost management, automation, digitalization, lease portfolio optimization and workforce reductions of over 300 FTEs year-on-year or more than 500 if we include contingent external staff. As shared at our strategy update, we are targeting EUR 100 million in net indirect OpEx savings over the next 5 years under our transformation programs. In 2026, we expect about EUR 15 million to EUR 20 million in additional savings driven by fast digital transformation, AI-enabled process improvements and continued cost base optimization. Our cost reduction program clearly builds momentum and will show gradually accelerating benefits over the coming years. Our operational free cash flow continues to show healthy growth of nearly 10% or about 6%, excluding IPR benefits in LTO. The growth was driven by EBITDA, while CapEx was marginally higher than last year, primarily due to a noncash accounting reassessment relating to cable damages. For 2026 and on a like-for-like basis, so excluding IPR benefits and excluding IP sales, we expect to deliver a mid- to high single-digit growth in operational free cash flow, in line with our CFD guidance. This underlying growth in operational free cash flow will be driven by EBITDA growth and effectively stable CapEx. In 2026, after completing the heavy lifting phase of our fiber rollout, we expect and confirm a significant step down in CapEx of about EUR 250 million, bringing total CapEx to below EUR 1 billion. With EBITDA growth and this CapEx step-down in 2027, operating free cash flow is set to grow by about 10% annually on average over the strategic period. The strong cash conversion will lift operating free cash flow margins from 24% today to about 30%, placing us among the top performers in Europe. This underpins our long-term value creation model and reinforces our confidence in delivering sustainable cash flow growth in the years ahead. Turning now into the moving parts of our free cash flow. At EUR 952 million, our free cash flow was about 6% higher, driven by EBITDA growth and partially offset by changes in working capital and an increase in cash taxes and interest payments. Excluding the cash component of the IPR benefits, our free cash flow grew at low single-digit rate. Note that the DELTA provisions is related to lower pension effects -- pension provisions and some timing effects. Our cash margin over revenues improved by nearly 40 basis points to 16.3%, reflecting the solid cash generation momentum of KPN, and we ended the year with a cash position of EUR 552 million. KPN remains focused on creating long-term value, which is evidenced also by the strong return on capital employed. Our ROCE improved by 30 basis points year-on-year to 14.7%, nearing and marching towards our midterm ambition of 15%, driven by operational efficiency, demonstrating our continued commitment to create value through operations and investments. We maintain a strong and resilient balance sheet at year-end with a leverage ratio of 2.4x, stable compared to previous year and below our self-imposed ceiling of 2.5x. Our interest coverage ratio also remained strong. Our average cost of senior debt decreased by 30 basis points year-on-year, mainly due to optimization of our derivatives portfolio and our exposure to floating rates remains limited at 14%. Our total liquidity position of around EUR 1.6 billion remains strong, covering debt maturities until the end of 2028. At our strategy update, we reaffirmed our midterm 337 financial ambitions. We see healthy service revenue growth in the coming years while accelerating our transformation to deliver about EUR 100 million in net indirect OpEx savings annually by 2030, which means for 2026, group service revenue growth is expected between 2% and 2.5% with all segments contributing. We expect adjusted EBITDA after leases to be around EUR 2.67 billion or around 3% growth on a like-for-like basis, i.e., excluding IPR benefits and IP sales and in line with our midterm ambitions. Growth will be driven by continued service revenue growth and lower indirect costs. We anticipate net indirect OpEx savings of EUR 15 million to EUR 20 million next year. Throughout the year, EBITDA year-on-year growth is expected to be strong in Q1 and Q4, while Q2 and Q3 will face tougher comparisons. CapEx will remain at around EUR 1.25 billion, in line with our midterm guidance. And we expect a free cash flow of over EUR 950 million. On a like-for-like basis, so including the aforementioned one-off effects in 2025, our free cash flow expected to grow low to mid-single digits, primarily driven by EBITDA growth, partly offset by higher cash taxes. And finally, over the entire strategic period, we reiterate our financial ambitions to grow Service revenues and adjusted EBITDA by 3% and free cash flow by 7% per annum on average, as reflected in the 337 CAGR model. Note that our underlying 2026 guidance and our daily trading are both in line and on track with this multiyear ambition, and we feel confident to reach our planned level of cash generation and shareholder distributions. On that very matter, our financial framework is centered on long-term value creation for all stakeholders. In this respect, we are committed to returning all free cash flow to our shareholders. Our free cash flow per share was up 7% during the year, providing ample room for growth in our dividends per share as well, which means we intend to pay a regular dividend of EUR 0.20 per share over 2026, up 10% compared to the DPS over EUR 0.25 and fully in line with what we communicated at our strategy update. For 2027, we aim for a further increase to about EUR 0.25 or 25% increase year-on-year. And in addition, as announced this morning, we will launch a share buyback program of EUR 250 million in '25, notably starting tomorrow. Let me conclude with some key takeaways. We delivered on our 2025 outlook, consistent service revenue growth across all segments. Adjusted EBITDA and free cash flow came in slightly above guidance and disciplined cost management delivered a EUR 10 million reduction in indirect OpEx, marking a clear inflection point after 2 years of inflationary pressure. We saw solid Commercial, Consumer and Business, including record broadband net adds in Consumer. And we continue to lead the Dutch fiber market with accelerated delivery of fiber connected and activated homes. Our strong progress in 2025 confirms the successful execution of our strategy and positions us for future growth. We reaffirm our 337 financial framework and the announced 2026 targets are fully aligned with this multiyear plan including the CapEx step-down in '27 to unlock enhanced cash conversion. We are accelerating transformation, targeting EUR 100 million in indirect OpEx savings over the next 5 years. And beyond '27, we expect mid-single-digit free cash flow growth, supported by strong fundamentals and disciplined execution. And cash momentum was very strong and solid going into '25, providing us with confidence. Finally, we are committed to shareholders to returning all free cash flow to shareholders through growing dividends and buybacks and the latter starting tomorrow. Thanks for listening. Now back to your questions. Matthijs van Leijenhorst: Thank you, Joost and Chris. We will now start the Q&A session. [Operator Instructions]. Operator, could you please open the line for Q&A. Operator: [Operator Instructions] The first question comes from Mr. Polo Tang from UBS. Polo Tang: I have two. The first one is just about Consumer Broadband net adds. So they've been very solid for the past 3 quarters at more than 10,000 a quarter. But do you think this level of net adds growth is sustainable going forward? I'm just asking the question because you referenced taking more than your fair share earlier in the presentation. Also, you've got Odido gaining subscribers with FWA. VodafoneZiggo seems to be making progress in stabilizing its broadband base and also start wholesaling in the DELTA Fiber footprint. So I'm just interested in how you're thinking about competitive dynamics for the broadband market going forward? Second question is just on B2B. Do you think that B2B service revenues can grow in Q1 and Q2, given that you've got that tough comparable in Tailored Solutions? And what's your view on the Dutch macro environment? And are you seeing any signs of caution from your B2B clients? Joost Farwerck: Thanks for your questions, Polo, and I'll start and then Chris will join me, I guess. Yes, on Consumer Broadband net adds, you're right, 3 strong quarters in a row. And meanwhile, we operate in a very competitive market that remains competitive. This is more or less normal course of business for us nowadays. And I think what we can more or less conclude is that the new strategy of ours is working, where we focus on base management instead of acquiring new customers who leave in the air for free TV set from another service provider. So we invest a lot in our customer base, and that seems to work. Is it sustainable, you said? Well, you mentioned FWA from Odido, changes in the VodafoneZiggo strategy. I think FWA is a niche market. That's in a country where households have 2 or 3 fixed lines into a household where 1 gig is the standard and 4 gig is becoming quite normal fixed. Unlimited is the standard on mobile. Fixed wireless access as a broadband connection is more for a niche segment than anything else. We more or less have, by the way, the same for rural areas. VodafoneZiggo, they are clearly now making noise around being a full always-on provider when it comes to quality and content. But let's see. I think for us, the best answer to everything for the last years was believe in your own plan, believe in your own strategy and execute on that. Last quarters were good. Of course, we plan to continue, perhaps not always above 10%, but we plan for strong growth, healthy growth on broadband this year as well. And on this B2B service revenues, I mean, the Dutch economy is growing and also expected to grow in 2026. SME is a very important segment for ours. That will grow probably around 5% like we did last year. Yes, you see some changes in our top line in B2B because we -- what we mentioned, focus on value steering, that is mainly in the Tailored Solutions part where we say goodbye to revenues that are not really contributing when it comes to margin. So of course, for us, very important to explain that to you in the quarters to come. But when it comes to healthy margin-rich revenues, I think we will do fine in B2B. Chris? Hans Figee: Yes. Polo, on your first point on broadband, there's 2 points to add is that, obviously, the important drivers behind the solid net adds were lower churn and lower migration. So churn has been consistently lower and lowering or declining during the last half year. I think it also has to do with the fact that our copper base is gradually shrinking. So the vulnerable part of our business is declining. Migrations from front to back book have -- we've managed that successfully. Combivoordeel will work. So I would say the churn side has been very positive. And if you look at fiber, our real net adds, fiber net adds, excluding copper upgrades of clients moving from copper to fiber has been pretty consistent now for multiple quarters in a row. So I have no reason to see that stop. And on B2B, as Joost rightly pointed out, on the Tailored Solutions side, we've been focusing on value and margins. which means that SME will continue to grow north of 5% basically during the year. I mean that's the highest margin business that we have, and that continues to grow nicely across all quarters. I expect the LCE business to also show positive growth across the quarters. Tailored Solutions will be negative, I guess, in the first half year due to the comps. That means that reporting-wise, B2B across the entire year will be growing around 3%, but heavily tilted towards the second half of the year and then flattish, I guess, in the first half of the year. But that's really only a pure Tailored Solutions effect. The high-margin businesses, SME and LCE will continue to show steady growth throughout the year. And then when the comps start to work for us, you can see an acceleration of lease-up reported growth. But I mean the 3% for the year is pretty well supported. It just will be, as you rightly pointed out, tilted towards the second half of the year. Operator: The next question comes from Joshua Mills from BNP Paribas. Joshua Mills: A couple from me. The first one is on the Consumer side. So I think, Chris, you might have mentioned that the annual service revenue guidance for consumer. If you could just remind us of that. I assume it will be accelerating throughout the year. And my question is what's going to drive that? Is it continued volume growth? Or are you also expecting ARPU to improve as well? And then secondly, related to that, if I look at the price increases last year, you were broadly in line with both Odido and VodafoneZiggo on the broadband side. I think you're a bit ahead on the mobile side. Now that you are outperforming your net add share relative to your market share in the Dutch market, and given some of the more aggressive price increases we've seen from the likes of Swisscom yesterday and incumbents taking advantage of the network leadership to push prices up, how are you thinking about the value versus volume mix going forward? And is there the opportunity with these fiber networks to be a bit more ambitious on price take? Hans Figee: Yes. On Consumer, we guided 1.5% growth throughout the year. It will be a continuation of what we do today. I would say Mobile itself should continue to grow nicely, should be north of 3% during the year. We're now hovering around 3%. That should be fine continuing that with pretty healthy net add growth and supporting ARPU. I think I picked something similar. Joost talked about the base dynamics, churn improvements and a flat to up ARPU. So during the year, I'd expect a continuation of reasonable net add growth and flat to increasing ARPUs supported by some price indexations. Obviously, we're looking at back book and front book alike to make sure we are fully consistent with orienting with a value orientation. So strategy-wise, to also take on your second question, we are a value over volume business. We'd love to take a bit more than our running market share, which we do. I think that's a reflection of the networks and the quality that we've built. We see some effects on network quality, both in Mobile and Fixed positively reflecting on us. So that should allow us to get continued inflow of net adds. But it will remain value-oriented if anything else. And that means for Consumer, 1.5% growth during the year. I would say, during the year, I would expect Mobile to be stronger in the first half of the year and the second half of the year, possibly some of the Combivoordeel effects will fade with Fixed carrying the baton from the second half of the year a bit more. Joost Farwerck: And on price increases, I mean, that's a call we make every second quarter of the year on Broadband. And last year, it was more or less centered around the CPI, so inflation. Operator: The next question comes from Siyi He from Citi. Siyi He: I have 2, please. The first one is just going back on the consumer ARPU comment. And it seems that the Mobile ARPU has stabilized. And despite that you have the combo discount on the Fixed products and you still delivered a stable fixed ARPU. Just wondering if you could comment on what you see in the ARPU development. Should we expect there is a solid reason for us to believe that ARPU is going to be stable and growing going forward? And the second question is really a quick one. Just wondering your feels on the increasing rigid stance from the EU on the Chinese vendors. And if you could comment on what's your exposure there? And what do you think it could potentially impact your CapEx plan? Hans Figee: Yes. Siyi, let me take the first question on ARPU. I think for both Mobile and Fixed, we expect stable to a modest increase in ARPU on fixed driven by price indexations, a shift towards higher speed levels that we have this year as well and a relatively manageable amount of migration from front to back book and the latter obviously margin dilutive, but that's -- the effects tend to be increasingly limited. We're able to manage that pretty well. A big chunk of our Broadband base is in contract. So with that, I expect fixed ARPU to be stable to have a modest growth over the year. Something similar for Mobile. Obviously, we had a step down in Mobile in last year or at least lower growth, mostly in the no-frills part and driven by the noncommitted part of the ARPUs. I think that is -- it feels like stabilization in that space. So what should drive mobile ARPU, it is indexations, for surely in back book, possibly more. It is a gradual continued move to unlimited customers, a significant amount of our new sales are now in unlimited. We're basically at our targets and we won't have in unlimited. And I think also a gradual stabilization of the market in the no-frills segment with I would say, less pressure on the noncommitted part. So in summary, I'd expect both Fixed and Mobile ARPU to be at least stable or deliver some modest growth during the year. Joost Farwerck: Yes. And on Chinese vendors, yes, we are well on track on implementing 5G toolbox swapping non-Western suppliers from critical systems while we introduce European vendors there. And we already started down this path many years ago, and we are fully aligned with Dutch and EU security guidelines. Of course, there's some discussion in the market about the Cybersecurity Act. It seems it's proposing a further ban on high-risk vendors. For me, too early to tell what the full consequences are, and I expect extensive debate there, and yes, more finalization towards the end of 2027. But I think the main message is we already started this many years ago, and we follow this life cycle of assets in our approach. So we do not see any impact on our CapEx envelope in the future. Operator: The next question comes from Ajay Soni from JPMorgan. Ajay Soni: I've got a couple. The first is on your '26 wholesale growth. You guided to 3% and medium-term target here is 4%. So what are the headwinds you see this year, which you expect to fade into the medium term? Then the second one is just around the convergent impact on your Fixed Service revenue. So just wondering what the impact was in this quarter versus Q3 and then how you expect that impact to evolve over 2026? I think you already said it will kind of fade by H2. So just some clarity on that. Hans Figee: Yes. Let me take both of them. On Wholesale, indeed -- on Wholesale, Broadband and Mobile, Mobile is continuing to do well, both on the national solutions as well as our international sponsored roaming solution. There's a very good funnel of customers waiting to be connected or to be contracted. In Broadband, we've seen a reasonable decline in our total base, mostly copper. So we declined in copper, increased in fiber. It has to do with our main wholesale Broadband customer shutting down the brand. That effect will probably continue into Q1, but then gradually expect it to fade towards the half year, although you should ask the client for more intel. But I think that happened last year, and that effectively shows up in the numbers this year. So basically, a stabilization in this year will be supporting service revenue growth in 2027. There's always like a bit of a year lag between base development and what you actually report in terms of service revenue. So to be -- and also, it's moderation of Broadband and Service Revenue growth in this year and support next year as this brands fade away -- brand effect starts to fade away supporting growth in '27 onwards and continuation of the sponsored roaming effect. And on the convergence, the Combivoordeel effect, we reported a fixed service revenue growth of 0.4% in Q4. If we hadn't made this investment, Fixed Service revenue would have been around 1% for the year as fixed only. So that's kind of the magnitude of things. If you look at the total service revenues of next year, the total effect for the year is probably around 15 basis points of growth for KPN as a whole. So look, it's a small amount, but as we're talking about a few digits after the comma, it actually has an effect. So basically, Fixed would have been around 1% in Q4, like 0.4%. And for the full year '26, I think the effect on service revenue growth of this investment is about 15 basis points of growth. I expect this gradually to fade in the second half of the year, towards the end of the year. More like Q4, you'll see less and less. And basically, the investment will continue, but then the base that is subject to the plan will be big enough so you can see lower -- the effect of lower churn already for those customers who've been part of Combivoordeel plan have shown markedly lower churn. So that will start to weigh in the numbers in the second half of the year. And let's be conservative more towards Q4 than Q3. Operator: The next question comes from Keval Khiroya from Deutsche Bank. Keval Khiroya: I've got 2 questions, please. So firstly, you talked about Mobile growth within consumer of 3% in 2026. Q4 was at that level, but benefited from quite an easy comp. So can you just elaborate a little bit more on what's going to drive the acceleration to that 3% in Mobile for 2026? And secondly, DELTA and ODF have now pretty much completed their fiber rollouts. What's happening to your customer churn in these areas? Is it slowing as they've ended their rollouts? Or is churn still at similar levels given they're still ultimately trying to penetrate these networks? Hans Figee: Well, regarding Mobile, actually you've got different -- more challenging comps. But as last year, we've done both front book and back book repricings last year. We look at a more-for-more price increase last year, and we might as well just repeat that action this year. So there are a number of pricing actions we do on our Mobile business with gradual indexation and the more for more for existing customers. I think that's one. Secondly, our base has grown. Our total Mobile base has grown by 129,000 over the year. It's quite good. I mean '24 was a fantastic year. That makes '25 look like a lesser year. But remember, '25 was actually still a lot better than '23 and '22. So it's still one of the best Mobile years in history in terms of net adds. So basically, next year, you have the benefit of a higher starting base to continue and base continues to grow in Q4 and also the first weeks in this year. And then you have another round of price indexations and possibly a more for more indexation as well for customers. So that should support Mobile revenue growth. And secondly, obviously, the big unknown is amount of traffic and uncommitted. That has declined a lot, but it feels that -- well, hopefully, we reached the bottom of that as well. So that gives us comfort that in general, Mobile growth should be healthy also in the tougher first half year comps. Joost Farwerck: Yes, Keval, you're right. DELTA and ODF are no longer expanding their fiber footprint. They're clearly focusing more on trying to connect households. These are footprints of different qualities. In the DELTA footprint, we originally, in some places, have a lower market share and ODF built their footprint in mainly the strong Ziggo area, the larger cities. So it's a bit of different dynamics in both footprints. And in the ODF area, we're building as well. And yes, our strategy there, of course, is to not only pass households, but also connect and activate. And I think that's a big difference between us and the others. So on fiber by overbuilding in the cities, we're doing good. And market shares on copper in other 5 areas are, of course, lower than we represent the 5 areas, but still doing okay. And I think expanding our footprint to 70% and connecting so many households. And at the end, moving up to 85% makes the churn in the copper areas also slowing down. Operator: The next question comes from Paul Sidney from Berenberg. Paul Sidney: A couple of questions from me, please. Just the first one, just perhaps building on a few of the earlier questions around customer behavior. You've made some very positive comments around churn, retention, network quality appreciation, especially interesting given the price increases that you've been putting through over the past few years. But just a very high-level question. Does this really suggest a wider appreciation of the services you provide for consumers and businesses? And the follow-on from that is it feels like there's substantial room for price increases to continue for the next few years. And again, just going back to an earlier analyst comment around the Swisscom move yesterday, it does feel like a bit of a shift, but I'm just interested to hear your comments around that. And then just secondly, Chris, on capital allocation, your decision to return all the free cash flow to shareholders over '26, is it a fair assumption that there is, therefore, no sort of small bolt-on acquisition opportunities on the horizon? And could there be such opportunities perhaps beyond 2026? Joost Farwerck: Yes, Paul, I'll start. Yes. Well, I think one of the most important changes we started in our strategy beginning of '25 was that we said, let's focus more on the customer base. So giving away discounts or Netflix for free or free TV sets to new customers while all loyal customers get a price increase every year is a bit annoying for the customer base. Since we represent the largest customer base, we shifted to building more quality in the base. So Combivoordeel is a service where you can combine your services, you get more loyalty points and at the end, you can get something for free. We launched a free security package for all households, they can activate themselves. We launched a new MijnKPN app where you can really organize everything yourself, order or deorder connectivity or whatever, very simple. So I think the whole message to our customers is we invest in you and we invest in your loyalty. And that, of course, is something you can't measure on a daily basis, but acquisition you can. But after a couple of quarters, we can say the churn is really slowing down. Net Promoter Score went up. So doing things like that hand-in-hand with a price increase works much better. So I think this is an important switch we made, and we will continue to focus on this strategy because it's also far more positive. Hans Figee: Yes. And on the point also on network quality, network stability, we have seen, especially in the Business segment, some corporate customers turning to us recently. So more interest volume-wise for corporate customers to select KPN simply because of network quality, network stability, which I think is a positive, right? That's a payoff. And not necessarily massive pricing power at least give you a volume and competitive advantage in that market. On your second question, returning more cash to the shareholders, that's what we do. We ended the year with a 2.4x leverage below our self-imposed ceiling of 2.5x. We typically, by growing our EBITDA, delever by about 0.1 turn per year, right? But if we wouldn't return our cash to shareholders, we delever faster. But typically, if you grow your EBITDA, you delever by about 0.1 turn per year. That gives a reasonable headroom towards a self-imposed ceiling. So I think, Paul, our war chest is big enough for bolt-ons. That doesn't mean we're going on a massive acquisition spree. But if we bump into something interesting, we have the rooms and means to do it. And obviously, especially for bolt-ons, the first hurdle is, does it create value for us? Is it value creating for shareholders, value creating for the business? How does it compare to buying back shares? We always check whether an acquisition does something strategically and financially and does the stack up to buying back our own shares. But if we find opportunities, we have the room to do so simply because our balance sheet gives us sufficient headroom whilst returning all cash to shareholders. Operator: The next question comes from Andrew Lee from Goldman Sachs. Andrew Lee: I had 2 questions. One was just a follow up on that Chinese -- on the Chinese vendor question that Siyi asked. Could you just help us understand, so does the extent of the risk extend to just you having to fast track the swap out you're doing anyway out to 2027? Or could it mean even greater swap out of equipment? And can you just give us a sense as to the scale of that, if you were to fast track it and do it in 1 year, how much is that -- how much does that cost you? And any help on the scale would be useful. Then just secondly, on the copper migration competition on wholesale that a few questions have been asking around and specifically the ODF and DELTA Fiber competition. Are you getting a sense that now that the build is slowing down or has slowed down, that the ability for those operators to actually win customers is starting to decrease? Or are you seeing no real let up in the near term from their ability to gain customers? Joost Farwerck: Yes. So like I said, Andrew, with respect to Chinese vendors, in particular, I mean, we made good alignment with our government years ago, and we're fully on track to move out like we mentioned -- like we call the non-Western vendors out of the critical systems, mobile core, fixed core; mobile cores, Ericsson; fixed cores, Nokia, that's all known in the market, and we're almost done there. So we're pretty good on track. And we do this, like I say, in the life cycle thing. So when it comes to other assets, we're also good on track. And we do not see any acceleration or uplift in CapEx on any risks. I mean there's a discussion around this Cybersecurity Act, but that's all taking time. And taking into account where we are and our plans are -- we invest, by the way, every year in our mobile network as well. And we have a multi-vendor approach. So we like to not be dependent on one vendor. So I can't give you all the details, but I think what I can tell you is that we're good on track, and we do not see any risks there in CapEx uplifts in the coming years. Hans Figee: Andrew, we have a CapEx envelope and a CapEx level. So if we had to fit it in, we'd make it fit in. So you have to give priority to one project over others. That would be -- so I would say with the visibility that we have today, whatever we have to do, as you said, it most likely fits within our life cycle plans anyway. If we had to fast track it, we'd make it fit into the CapEx envelope and prioritize this thing over something else. On your question on the wholesale and the [indiscernible], possibly probably, yes. So that we are seeing less churn in our business altogether. I don't have a full econometric model explaining it to you, but I do relate to the fact that most people are most -- are effective in getting new customers up on rolling out fiber in the street. So you open the street, people are working in, and that's the moment it becomes visible and the moment you sell. That's the easiest way to sell fiber. So once the rollout stops, actually getting new customers in is more difficult, certainly if you don't have a household brand. And thirdly, also if you see the feedback from some of these parties, their door-to-door sales have not been very effective. So I would say I don't have a full proof, scientific proof for you, but it feels as if that actually -- that helps us. And in the wholesale side, we also see most of our customers not actively migrating customers. So if you don't just start to migrate a customer from one network to another, the churn risk is way too high. So we do see that the end of the rollout of third parties benefits us on the churn side. So long story short. Operator: The next question comes from David Vagman from ING. David Vagman: First one on Mobile. So we recently saw VodafoneZiggo being more aggressive on speed. Do you expect speed tiering to become more difficult to monetize? And does this affect your view on Mobile ARPU evolution? And then my second question on the Glaspoort-DELTA deal, what do you think is the end game here? Have you noticed any progress in the conversation with the regulator? Do they want remedies or something else? Hans Figee: Joost, you want to take the first one? Joost Farwerck: On the first one, on the speed tiering thing, the fact that some of our competitors do not have speed tiering, we don't see this as a sign of strength, the sign of the network from our point of view. So at this point, no feedback on that, no market fallout from that. I think people do value and understand the quality of the KPN network. And quality is more than speed, but it's also coverage, its stability, the risk of disruptions and distortion. So I think in a broader sense, not having speed tiering is not always a good sign because also we signed a deal, we don't have the network to deliver it. But our view is that customers value the KPN network extensively and should be able to defend it off. Yes, so... Hans Figee: Not much of a change there. And on Glaspoort, yes, well, it was since December '24 that we're waiting for our regulator to come up with a verdict. It takes very long. So it's clear that they find it very difficult to give it a go. So we're still waiting. No news there. And I think whatever the outcome will be, we'll decide on the next step. Like we said before, it's not a super significant deal. It's about 200,000 households, which is representing more or less 4 months building. So yes, in hindsight, it took us very long to get where we are today on the discussions with the government or the regulators. So probably they will come up with something coming months. But let's see. It's the Netherlands, everything takes long when it comes to legislation and decision-taking on the government side. So let's wait. Operator: The final question comes from David Wright from Bank of America. David Wright: I just wondered if you could give us a little guidance into the cash flow, perhaps, Chris, just where you're expecting that cash tax to come in. I know previously, you talked about EUR 80-odd million. It looks like that could be a little lighter, where you might expect working capital to show? And any other items that you might just be flagging in advance, it would just be super helpful for the modeling? Hans Figee: David, thank you so much. I've been so much waiting for this question. Let me give you a quick perspective on '25 and '26, right? So '25, we had EBITDA up by EUR 129 million. Operating cash flow up EUR 120 million. Positive on DELTA provisions basically means the cash quality of our earnings went up as well. So basically, more cash earnings this year. And also 2025, interest was up EUR 30 million, taxes up EUR 32 million. So together, interest and taxes took more than EUR 60 million and then working capital was flat. That gave you basically a EUR 50 million free cash flow increase in the year. Obviously, there's some IPR benefits in there as well. So that means the way I look at it from '24 to '26, you get effectively a 2.7% annual CAGR. Next year or 2026, we said EBITDA will be EUR 2.67 billion, obviously EUR 33 million up, but including the fading of the IPR benefit. CapEx is stable. It might be slightly down, expect stable. So that means operating cash flow up about EUR 40 million if you take the guidance. Cash restructuring will be around stable. I would say interest about stable towards this year, possibly a little lower. We're always trying to optimize our interest spend. Taxes, up EUR 40 million, estimate about EUR 225 million to EUR 230-ish million to EUR 25 million next year. Working capital flat, possibly negative. We're cautious with working capital. And then others flat, that gives about EUR 950 million. So just modeling-wise, EBITDA, EUR 2.67 billion. CapEx is stable, slightly down a few million. It gives you operating cash flow increasing of EUR 40 million. Interest stable, taxes up EUR 40 million to EUR 225 million. Cash restructuring stable and working capital flat to a small negative, gives you basically a flat free cash flow, but that includes, of course, the compensation for the fact that we don't have IPR and IP benefits again this year, which means that effectively, we're growing our free cash flow by 2.5% to 2.7% year-on-year from '24 to '25 to '26. So I can't make it more easy for you, David. This is, I think, a pretty clear guidance. Matthijs van Leijenhorst: Okay. Thank you all for your questions. This concludes today's session. In case of any questions, you know where to reach out. Thank you. Operator: Ladies and gentlemen, this concludes today's presentation. Thank you for participating. You may now disconnect your lines. Have a nice day.
Operator: Good morning, and welcome to the Bridgewater Bancshares 2025 Fourth Quarter Earnings Call. My name is Betsy, and I will be your conference operator today. [Operator Instructions] Please note that today's call is being recorded. At this time, I would like to introduce Justin Horstman, Vice President of Investor Relations, to begin the conference call. Please go ahead. Justin Horstman: Thank you, Betsy, and good morning, everyone. Joining me on today's call are Jerry Baack, Chairman and Chief Executive Officer; Joe Chybowski, President and Chief Financial Officer; Nick Place, Chief Banking Officer; and Katie Morrell, Chief Credit Officer. In just a few moments, we will provide an overview of our 2025 fourth quarter financial results. We will be referencing a slide presentation that is available on the Investor Relations section of Bridgewater's website, investors.bridgewaterbankmn.com. Following our opening remarks, we will open the call for questions. During today's presentation, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are predictions and that actual results may differ materially. Please see the forward-looking statement disclosure in the slide presentation and our 2025 fourth quarter earnings release for more information about risks and uncertainties, which may affect us. The information we will provide today is as of and for the quarter ended December 31, 2025, and we undertake no duty to update the information. We may also disclose non-GAAP financial measures during this call. We believe certain non-GAAP financial measures, in addition to the related GAAP measures, provide meaningful information to investors to help them understand the company's operating performance and trends and to facilitate comparisons with the performance of our peers. We caution that these disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP. Please see our slide presentation and 2025 fourth quarter earnings release for reconciliations of non-GAAP disclosures to the comparable GAAP measures. I would now like to turn the call over to Bridgewater's Chairman and CEO, Jerry Baack. Gerald Baack: Thank you, Justin, and thank you, everyone, for joining us this morning. We finished the year strong with robust loan and core deposit growth, net interest margin expansion and higher fee income. Expenses were also well controlled and asset quality remained strong. The successful quarter reflective of the team at Bridgewater Bank. This all comes as we continue to take market share by providing an unconventional reliable experience to our clients. We continue to see opportunities in the Twin Cities for both client and talent acquisition and are taking advantage of both. We also see opportunities to grow the business outside of our market by using the expertise we have developed and expanded across the affordable housing market. Not only did we have a great quarter, but we see plenty of reasons for that to continue in 2026. Revenue growth was a key highlight of the quarter, both from a spread and fee perspective. We saw net interest margin expand 12 basis points to 2.75%, driving strong growth in net interest income. Last quarter, we mentioned that we expected to get back to a 3% margin by early 2027. We are well on track for that and in fact, think we can pull it forward into 2026. Joe will talk more about that in a few minutes. Swap fees, while up and down from quarter-to-quarter were strong in the fourth quarter, driving an increase in noninterest income as well. Core deposit growth of 9% was another highlight of the quarter, which allowed us to produce loan growth of 9% as well. As we've been focused on growing loans in line with core deposits, on a full year basis, core deposits were up 8%, while loans grew at 11% pace, exceeding our mid- to high single-digit guide we had at the beginning of the year. We also continue to feel good about the strength of our asset quality profile even as we saw a modest uptick in nonperforming assets and net charge-offs in the fourth quarter. Katie will provide more thoughts on this shortly. We pride ourselves on being able to produce consistent tangible book value per share growth for our shareholders. This is evident on Slide 4 and was again the case in the fourth quarter as tangible book value grew 16.5% annualized and was up 15.3% year-over-year. This continues to be a unique part of the Bridgewater story and one we are incredibly proud of. Before I turn it over to Joe, I want to take a minute to share some additional updates. First, in late December, we closed 1 of the 2 branches we added through the First Minnetonka City Bank acquisition. The decision was due to having other branches in close proximity. Overall, we were pleased to see very little deposit attrition from the FMCB post-merger. We are also on track to open a new branch in Lake Elmo next month. We're excited about the opportunity that will present as we expand further into the growing affluent East metro of the Twin Cities. Second, we continue to see opportunities related to recent M&A disruption in the Twin Cities, both on the talent and client front. Old National's acquisition of Bremer has been the main one, but the pending acquisitions of MidWestOne and American National have created additional opportunities. Bridgewater is now the second largest locally led bank in the Twin Cities. So we feel well positioned to be the bank of choice for those looking to work or bank local. Third, I'd like to acknowledge the events that have unfolded in the Twin Cities in recent weeks. It's been difficult to watch what's happening across our community. The people and the city are resilient, and we will get through this. In the meantime, we are actively monitoring the impact of these events are having on our team members and clients, and we'll continue to be here to support them in any way we can. Lastly, I want to thank our team for a great year in 2025. With an acquisition, a core conversion, the launch of a new online banking platform and other technology advancements, there are many new initiatives and challenges to work through. I remain impressed with the team and their consistent willingness to overdeliver. The efforts of our entire team continue to be the magic that makes Bridgewater a place people want to work and do business. I'm thankful for their efforts and the overall leadership across the organization. With that, I will turn it over to Joe. Joseph Chybowski: Thank you, Jerry. Slide 5 provides more color on the encouraging trends we are seeing with net interest income and net interest margin. We expected net interest margin expansion to return in the fourth quarter given 3 Fed rate cuts in late 2025. And this is exactly what happened as the margin increased 12 basis points to 2.75%, primarily due to lower deposit costs. With margin expansion and continued earning asset growth, we saw net interest income increase 5% during the quarter. Last quarter, we mentioned that we saw a path to get back to a 3% net interest margin by early 2027. Given the expansion we saw in the fourth quarter and as we look ahead to repricing opportunities in 2026, we are actually pulling forward and believe we can get to 3% NIM by the end of 2026, and this does not assume any additional rate cuts. As a result, we are very optimistic about our ability to continue driving net interest income growth going forward. Slide 6 highlights the declining deposit costs I mentioned, which decreased 22 basis points to 2.97% in the fourth quarter. At year-end, we had $1.8 billion of funding tied to short-term rates, including $1.4 billion of immediately adjustable deposits. As a result, given the Fed rate cuts in September, October and December of 2025, we are able to reprice a good portion of the book lower, driving lower deposit costs and boosting net interest margin. We could see deposit costs move a bit lower in the first quarter as we recognize the full quarter impact of the December rate cut. But absent any additional rate cuts, we would expect deposit costs to begin to stabilize again. On the loan side, we are very pleased to see yields hold steady in the fourth quarter despite the 3 recent rate cuts. This was a function of the loan repricing opportunities we have, which includes $637 million of fixed rate loans scheduled to mature over the next 12 months at a weighted average yield of 5.55% and another $106 million of adjustable rate loans repricing or maturing at 3.84%. With these lower-yielding loans running off the books and new originations in the fourth quarter going on the books in the low to mid-6s, we have further repricing upside ahead of us. We've also been active in increasing the variable rate mix of our portfolio to create better balance across interest rate environments. Variable rate loans now make up 22% of our loan book compared to 14% a year ago. Turning to Slide 7. We continue to see strong revenue and profitability growth trends. In fact, adjusted ROA was just under 1% in the fourth quarter, while total revenue increased 32% year-over-year. Noninterest income also bounced back in the fourth quarter, driven by increases in swap fees and letter of credit fees. After seeing no swap fee income in the third quarter, we generated $651,000 of swap fee income in the fourth quarter. Quarterly swaps have averaged nearly $500,000 per quarter over the past 5 quarters, but continue to be quite lumpy due to the timing and size of the fees. We expect swap fees to continue to be a portion of the revenue story in 2026. But given the shape of the yield curve and the current environment, we would expect them to slow a bit. Turning to Slide 8. Expenses were well controlled during the fourth quarter. Throughout much of 2025, we saw higher-than-usual levels of expense growth as we work toward the systems conversion of First Minnetonka City Bank in the third quarter. Historically, we have seen expense growth align with asset growth over time. With the conversion behind us, we expect it to get back to the pace as fourth quarter expenses, excluding merger-related, were up just 9.5% annualized, which is more in line with our expected pace of asset growth. With well-controlled expenses and strong revenue growth, our adjusted efficiency ratio declined to 50.7%, the lowest level since the first quarter of 2023. It is also worth mentioning that we exceeded our 30% cost savings estimate for 2025 related to our recent acquisition. With that, I'll turn it over to Nick. Nicholas Place: Thanks, Joe. Slide 9 highlights the momentum we continue to have on the core deposit front, thanks to the efforts of our bankers and the opportunities we have in the market. Overall, we saw annualized core deposit growth of 8.8% in the fourth quarter and 7.9% for the full year of 2025. The other notable story here is the improved mix as we saw strong noninterest-bearing deposit growth for the second consecutive quarter, including an increase of $100 million during the fourth quarter, while brokered deposits have been declining. Looking ahead, we continue to have a strong core deposit pipeline, including deposits we gather as part of our affordable housing initiative. However, we would expect growth to be less linear in 2026, given the nature of the deposit base, especially during the first half of the year. To that extent, we will continue to leverage broker deposits if needed, as we have done in the past. But overall, we feel really good about our ability to continue growing core deposits over time. While core deposit growth has been strong, so has our loan growth, as you can see on Slide 10. Loan balances were up 8.9% annualized in the fourth quarter and 11.4% for the year as our pipeline remains robust, and we see continued demand across the market. As we look ahead to 2026, I'm excited about the opportunities that our pipeline and the overall market demand will continue to present. On the other hand, the pace of core deposit growth and loan payoff levels will impact the overall level of loan growth. Considering all this, we believe we can maintain loan growth in the high single digits in 2026. Turning to Slide 11. You can see that the loan growth we saw in the fourth quarter was driven by an increase in originations in spite of an increase in payoffs and paydowns as well. The increase in originations was expected given the strength of our pipeline and some of the deal closings we saw slide from the third quarter into the fourth quarter. The increase in payoffs is due in part to a catch-up from the slower payoff trends we have seen recently as well as the pullback in rates, allowing for more refinances and sales. Turning to Slide 12. Construction was the largest driver of growth during the fourth quarter as an increase in new construction projects over the past year or so have begun funding. A good portion of this construction growth came in the affordable housing vertical. We continue to see great traction in the affordable housing space as balances overall increased $41 million in the fourth quarter or 27% annualized. On a full year basis, affordable housing balances increased 29% in 2025, spread across the construction, C&I and multifamily portfolios. We expect this to be a key contributor to loan growth for us going forward as we continue to invest in this vertical. With that, I'll turn it over to Katie. Katie Morrell: Thanks, Nick. Slide 13 provides a closer look at the multifamily portfolio, which continues to perform well and reflects a long track record of strong credit quality. Since the bank was founded in 2005, we still have recorded only $62,000 in net charge-offs within this portfolio, underscoring the resilience of the asset class and consistency in our underwriting discipline. In addition, multifamily fundamentals in the Twin Cities remain positive, especially as vacancy rates declined throughout 2025 and concessions became less prevalent, leading to increased rent growth. Multifamily sales volume also increased in the back half of 2025, further supporting the positive market trends in this segment. While there are still a few submarkets where conditions have softened, we remain confident about the multifamily portfolio overall and believe it is positioned to continue performing well. On the office side, our exposure remains limited at just under 5% of total loans, with the majority located in suburban Twin Cities locations where performance has been comparatively stronger than central business districts. Turning to Slide 14. Our overall credit profile remains strong. Nonperforming assets increased modestly to 0.41% of assets, driven by a multifamily loan that migrated to nonaccrual after the client's original purchase agreement fell through. The property is now under a new contract, giving us confidence in a near-term resolution. We also recorded $1.2 million of net charge-offs during the quarter related to a fully reserved C&I loan. Despite this, full year net charge-offs remained very low at just 0.04% of average loans. Our allowance ratio declined slightly from 1.34% to 1.31% due to the charge-off and continues to compare favorably to peers. Importantly, the items driving the modest uptick in NPAs and net charge-offs were both isolated issues and followed an extended period of virtually no nonperforming assets or net charge-offs, an outcome that is just not sustainable for a portfolio of our size. Turning to Slide 15. Our classified loan levels remain low at 1.3% (sic) [ 1.2% ] of total loans and 8.3% of capital. Watch and special mention loans are also manageable and make up just over 1% of the loan book. While we continue to actively monitor all loans on our watch list, we did not see any meaningful new migration during the quarter. And as stated previously, we feel credit trends within the portfolio remain stable. I'll now turn it back over to Joe. Joseph Chybowski: Thanks, Katie. Slide 16 highlights our comfortable capital position. This includes our CET1 ratio, which increased slightly from 9.08% to 9.17%. We've been able to regularly build capital through our retained earnings since our acquisition in late 2024. We did not repurchase any shares during the quarter given our strong organic growth pipeline and where the stock is trading. As of year-end, we still had $13.1 million remaining under current share repurchase authorization. In the near term, we expect capital levels to hold relatively stable given earnings retention and our stronger growth outlook. Turning to Slide 17, I'll recap our expectations for 2026. As Nick mentioned, we feel comfortable that we can grow loans in the high single digits in 2026. This will be dependent on a variety of factors, especially our ability to continue generating strong core deposit growth as we look to keep our loan-to-deposit ratio in the 95% to 105% range. From a net interest margin standpoint, we are more bullish now than we were this time a year ago. We think we can now get to a 3% net interest margin by the end of 2026 instead of early 2027, and this does not assume any additional rate cuts. We also expect to get back to growing expenses in line with assets, unlike 2025, where expense growth was a bit higher as we work toward the acquisition systems conversion. We feel we're well reserved at current levels and would expect provision to remain dependent on the pace of loan growth and the overall asset quality of the portfolio. I'll now turn it over to Jerry. Gerald Baack: Thanks, Joe. We are really pleased how we finished 2025 and the catalyst we have to support growth and profitability heading into 2026. On Slide 18, I'll finish up by outlining our strategic priorities we will be focusing on in 2026. These are very consistent with the priorities we set in 2025, but there are some new areas where we will increase our focus. The first is optimizing our levels of profitability growth. In 2025, we were able to get back to the levels of growth we have been accustomed to. We want to ensure that we maintain that with a focus on optimizing profitability. Continuing to align loan growth with core deposit growth while expanding our net interest margin will be key. Second, we want to continue to gain market share in the Twin Cities. This has always been an objective, and we are proud of the progress we have made. Given the M&A disruption, we believe we are the bank of choice for clients who appreciate our local knowledge and commitment. We will look to expand our expertise and capacity across certain targeted verticals, including nonprofits and SBA, areas where we have added some impressive talent. In addition, we implemented an M&A readiness plan in 2025 that positions us well to take advantage of future opportunities. Third is to continue expanding the reach of our affordable housing vertical, both locally and nationally. This includes enhancing our perm product offering, which would help drive additional loan and swap fee income. Last is continuing to leverage technology investments to support growth and organizational efficiencies across the business. This includes leveraging recent investments and developing a more formal strategy around AI. With that, we will open it up for questions. Operator: [Operator Instructions] The first question comes from the line of Nathan Race with Piper Sandler. Nathan Race: Maybe Joe or Nick, I was wondering if you could just kind of unpack some of the deposit growth in the quarter. Obviously, noninterest-bearing had some nice increase quarter-over-quarter. Curious if there's any seasonality in that or -- and just how you're kind of seeing the deposit gathering pipeline unfold with some of the hires you've made recently, just to Jerry's point on some of the M&A-related disruption ongoing in the Twin Cities. Nicholas Place: Nate, this is Nick. Yes. I mean we feel really good about our overall deposit growth, not only for the quarter, but the year. Q4 does tend to be a seasonally high watermark for us. We do have a lot of clients that tend to build balances late in the year and some of those balances do trickle out in Q1. So there was some seasonality there. We feel really good about our deposit pipeline overall. However, we continue to get in front of great client relationships, both locally and nationally through that affordable housing vertical. And the talent we've been able to pick up on both of those fronts has been great. So we do expect, as we've seen over the last handful of years that Q1 and Q2 of the year do tend to be more modest than we've seen even outflows in those quarters in the past. So that does tend to be the low watermark for us on the year, but we feel great about the progress that we're making on growing core deposits. And should we need to, as we've said before, I mean, we will supplement with broker deposits if loan growth is robust in the quarter and some of that seasonality is impacting the pace of core deposits. So overall, we feel really good about where we're at. Nathan Race: That's helpful. Maybe for Joe, with the $743 million of loans that you have fixed and adjustable rate repricing higher over the balance of this year, can you kind of just speak to the cadence of that? Is there any kind of lumpiness quarter-to-quarter? Is it pretty spread out just in terms of thinking about that as kind of the main driver to get close to a 3% margin by the end of this year? Joseph Chybowski: Yes, Nate. No, it's -- as you said, it's pretty well laid out. I mean it's not like there's super concentration one quarter versus the other. So we feel good about just kind of continued repricing higher. That will be the biggest driver the NIM guide to 3% is really on the asset side. And I think just given that roll-off and given where we're originating loans today, we feel that's very achievable. Nathan Race: Okay. Maybe one last one for me on expenses. I appreciate the commentary or outlook there is pretty consistent with asset growth. So is it fair to expect 2026 expenses in that high single-digit range? Or is it maybe kind of more of a low double-digit expectation for this year? Joseph Chybowski: No, I think high singles, like you said, I mean, asset growth, we expect grows in the high singles. And so as we continue to invest in the business, people and technology, we will manage that the same. And like we said, '25, obviously, given the acquisition was a little outside of the norm. But I think if you go back further look, I mean, we've historically always operated that way. So we feel good about it. Nathan Race: Okay. Great. And sorry, just within that context, I mean, does that contemplate any additional production-related hires? Obviously, there's been a theme on this call in terms of some of the M&A-related disruption. So just curious what type of conversations you're having and kind of what the magnitude of additional opportunities to maybe add production talent? Or do you think the existing team has plenty of capacity just to grow with some of the disruption ongoing? Nicholas Place: Yes, Nathan, this is Nick. Yes, we can continue to get some operational leverage out of the team. I think we're evaluating not only the capacity of the group, how portfolios are allocated, but really our internal processes to streamline things. So we're certainly looking in the business as well to gain some leverage there, while we will be opportunistic on the hiring front. We've been able to pick up some people here recently, and we will always be opportunistic on the hiring side. So as it relates to expenses, I think that could be difficult to predict. But overall, we really are excited about our prospects to drive that growth, both with the staff we have and the talent that we're bringing in. Nathan Race: Okay. Great. I apologize. Actually, just one more, Nick. To your point, are there any non-solicits in place with some of the hires that you've made on the production side of things lately? Nicholas Place: It varies from person to person, but surprisingly, most of them have not had non-solicits. Operator: The next question comes from Brendan Nosal with Hovde. Brendan Nosal: Joe, maybe starting off for you with the margin outlook. Totally get it's a more bullish outlook. You're pulling forward the 3% margin. Can you just help us with kind of the apples-to-apples given you pulled out the rate cuts? Like if you do still get the 50 basis points of cuts across 2026, like how does the margin compare to the current 3% expectation by year-end? Joseph Chybowski: Yes, Brendan, I mean, it pulls it forward. I think this last quarter is a prime example where you get 3 cuts. We really -- fourth quarter with the rate cut in third quarter in September, you really started to realize that in fourth quarter. You get one right in the middle of October and then you obviously get the one in December that we expect to kind of reap the benefits here in the first quarter. So I think the deposit cut story, I mean, if you do get 2 rate cuts, it just pulls forward that 3% kind of target. I think the asset side is much more obviously reliant on slope in the curve and the repricing story. So I just think the deposit story, if we don't get those cuts, we expect cost to somewhat stabilize kind of middle part of the year. But I think, yes, if you do get kind of an implied rate scenario and 2 cuts this year, that just pulls that forward and directly impacts deposit costs. Brendan Nosal: Okay. Perfect. That's helpful. Maybe turning to asset quality. Can you folks just update us on that CBD office loan that slipped to nonaccrual earlier in the year? Like where are you on kind of work out? And what are expectations around that credit? Katie Morrell: Brendan, this is Katie. We've mentioned previously, we expect that to be a longer-term workout. We've given the borrower time to re-lease the vacant space there. So that we still have a specific reserve on the loan and expect it to be a longer-term workout. Brendan Nosal: Okay. All right. One last one for me. Jerry, a lot of good organic trends at the bank in 2026. But would love to hear your take on the M&A environment and your own appetite for potential tuck-in acquisitions as you look over the year ahead. Gerald Baack: Brendan, really just more of the same of what we've talked about in the past, and we're always talking to local owners of banks and continue to have those conversations and hope would have something similar to what the First Minnetonka City Bank did for us. So I mean, again, we always say and we mean that if we wake up every day and we look at the business organically and what we can do organically and take market share and the M&A strategy is really second place to that. But we continue to be optimistic that over the next few years, a couple more deals might come our way. Operator: The next question comes from Jeff Rulis with D.A. Davidson. Jeff Rulis: I wanted to check in on the affordable housing vertical. Just kind of wanted -- in your discussions, how big could you -- or do you intend to grow that? Is there a cap on the size of that, I think, around -- I think you mentioned [ 650 ] now. But just wanted to see what the -- if there's a concentration size that you'd like to keep it to? Nicholas Place: Jeff, this is Nick. Yes, I mean, we really like the space. We do like the diversity in the geographic locations of some of the clients and projects that we're financing. We appreciate the diversification in the product type. Some of it lands in our construction bucket, some is in sort of stabilized multifamily. There's some land transactions in there. There's C&I. So we appreciate what that can provide for us, too. It's roughly 15 or so percent of the book today overall. We feel really good about where that's at and continuing to grow that over time. We believe in the short term, it will -- the pace of that portfolio growth will outpace the overall portfolio growth. So we expect that to increase as a percentage of the book overall here near term. We haven't set any specific parameters around how big we want that to get, but we're being methodical about how we're growing it and overall, feel really good about the space. Jeff Rulis: That's great. And then I can't remember, Nick, if it was you or Joe, on the swap fees, any -- we know these are going to be lumpy, but trying to model that. I think there was some mention of maybe that maybe cools off a bit. But for a full year, is that somewhat concurrent with growing the affordable housing vertical in terms of swap fees going forward? Nicholas Place: Yes. I mean there's certainly opportunity within the affordable housing vertical to drive some additional swap fee revenue over time, and we're actively building out a plan for that and a pipeline for those. That said, the swap market was a bit sort of dislocated with treasuries for a while there last year that did provide a bit of a boost in attractiveness of that product and to some degree, drove additional swap transactions in 2025. So that market is more in line with sort of its historical average today compared to treasuries. And so that does make those transactions a little less competitive. But we're really pleased with the progress that we've made just on educating the banker teams on how to sell through that product and educating our clients on the benefits of leveraging interest rate swaps on some of their transactions. So we expect it to be a bigger piece of the business overall. But the last 4 or 5 quarters, we probably averaged $500,000 a year, even though it's been lumpy. I would expect it to be a bit inside of that here this year, just given some of that swap spread to treasuries kind of being more in line with historical average. Jeff Rulis: And then one other one for Katie on the credit side. Just checking the -- what you said on both the nonaccrual was really one multifamily loan and the increase in net charge-off was a C&I loan. Katie Morrell: Yes, that's correct. Both of those upticks were directly tied to sort of isolated loans. So we feel good about the portfolio overall, and it's really just more of a timing issue. Jeff Rulis: Got it. So it doesn't sound that systemic in multifamily. I guess are you seeing any -- where you see pressure? Is it rate reset kind of one-offs? Or where are the pinch points on multifamily when you do see some issues crop up? Katie Morrell: Yes. I think overall, we feel really good about our multifamily portfolio. As I mentioned in the prepared remarks, there's certainly still some pockets that are more challenged. So I would say that's what drives some of the challenges still. But overall, I mean, the market fundamentals are improving. Property performances individually are improving. So the trends are all positive. Jeff Rulis: Katie, when you say pockets of challenges that the geographic location, the type of building... Katie Morrell: Yes, geographic pocket. Operator: [Operator Instructions] The next question comes from Brandon Rud with Stephens. Brandon Rud: Most of my questions have been asked. I guess I'll maybe start with a question on Slide 18, the modernizing the core banking system. I guess can you just maybe provide a general time line for that? Is that something that can be completed in 2026? Is there -- or is that more of a multiyear project? And then two, is that more a what I'll call it a quality of life improvement from the client-facing side or something that can be an expense saver over the longer term? Joseph Chybowski: Brandon, this is Joe. I think -- I mean, to all your questions, it's really all of the above. We're a Fiserv bank. So historically, we've -- and still today, we -- our core runs through Fiserv. And I think some of the technology innovation 5, 7 years ago was reliant on really Fiserv and their innovation stack. So the last couple of years, we've really spent a lot of time evaluating how can we position ourselves to take a better advantage of kind of emerging technologies and set ourselves up to somewhat decouple from Fiserv's innovation. And so I think that modernizing core banking is really a lot of that. I mean it's everything from efficiencies internally and how we book loans and deposits, but ultimately, how do we best serve our clients. So how do we stay in front of emerging technologies trends, it's moving so quickly. And so I think at the end of the day, the core banking stack is more of a custodian of information. And I think we really want to be set up such that we can flex and we can innovate with the space. So to your point, it's a longer-term initiative, certainly, and it's not one that's just begun today. We've been working on it for years now. And so we're just excited for the position that we're in and really the optionality that we have. Brandon Rud: Got it. Okay. I appreciate that. Maybe just a last one here on the increased competition in Twin Cities. Are you seeing that have any impact on loan spreads or new deposit rates? We've heard from a few other banks that there are some irrational competitors out there. I'm just curious if that increased competition is impacting that at all. Nicholas Place: Brandon, this is Nick. Yes, we definitely saw increased competition, particularly on the loan front throughout 2025. I think a lot of banks have built up some liquidity as they sort of retrenched after 2023 and have better line of sight on where sort of rates are stabilizing out at. And so a lot of banks kind of got off the sidelines and we're back in the market. I see that as a good thing overall. I think having a healthy banking economy is good for our local economy and ultimately will just benefit all of us. So -- and our pipeline, albeit probably peaked out in third quarter of last year, still remains really strong. I mean we're probably 75% to 80% of where we were at the peak. So we feel really good about our prospects to continue to grow in spite of some of the increased competition. And we'll let some of those transactions that people want to go out and buy, they can go ahead and do that, and we'll keep -- we'll move on to the next opportunity. Operator: This concludes our question-and-answer session. I will now turn the call back over to Jerry Baack for any closing remarks. Gerald Baack: I just want to say thank you, everyone, for joining the call today. We're very excited about 2026 and the future here at BWB. And part of that is the strategic leadership team that we have now and my confidence in them moving forward. I just want to thank our incredible team members here at Bridgewater Bank. Have a great day. Thanks. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.