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Operator: Welcome to the HMS Networks Q4 Presentation for 2025. [Operator Instructions] Now I will hand the conference over to CEO, Staffan Dahlstrom; and CFO, Joakim Nideborn. Please go ahead. Staffan Dahlstrom: Thank you. Good morning, everybody. We are standing here from a beautiful winter Stockholm with snow on the street. It's a fantastic day. And we also have some good news to present quarter 4 report. Myself, Staffan Dahlstrom will start, and Joakim will take the following sessions about financial summary, and then we end up with a Q&A. So just a quick highlight. Quarter 4, we are quite happy to see a very good development on net sales, organic growth, 23% and that's good, we think. On the order intake, we see organic growth, but it's -- we see also that the market is still a little bit soft, a bit hesitant. We're happy to get to 3% growth, but we're also waiting for the pickup that we've been talking about, and we hope that this will come 2026 instead. Very good development on all our profits, depending on which line you look at, it's either 50% or 100% up. So it's -- we really see a good development. Good gross margin, good profits, and this lands in an adjusted EBIT margin of 28%, slightly higher than our target in combination with a good cash flow. And we are very happy to see this. And this -- Joachim will talk more about our net debt and things like that, but this really plays out with a good adjusted EPS of SEK 4.17. So we closed 2025 as a quite good year. Net sales, we are growing after quite a lot of years of inventory reductions and things like that. We are back in good shape again. We see the order intake has been growing organically by 10%. So the market is not great, but it's not that bad either compared to 2024. And SEK 911 million as the adjusted EBIT, and we see also at the end that we are doing a good adjusted EPS, SEK 13.73. And this also means that the Board proposed the highest dividend so far, SEK 4.80 per share for the meeting in April. If we look on the markets, we see in quarter 4, a small improvement in Europe, also in Germany, we are growing compared to last year. So even if the data isn't great for Central Europe, we're seeing that it goes in the right direction. We had a fantastic year in North America, but a little bit of softer market in quarter 4, especially for this larger project orders in infrastructure. We're also comparing ourselves with quarter 4 where we've got some really nice orders in North America. But we are quite sure that North America will pick up again. So we think this softer order intake is a temporary effect in North America. We also made a lot of changes in the Red Lion, and we got this new factory when we acquired this, where we keep on investing. We are seeing a much better delivery performance. We're not fully yet completed there. But so far, we are seeing that quarter 4, we're delivering a lot from the order book, and we're getting back into relevant lead times, and we hope to be fully in shape here in quarter 1. So that's good. We also keep our flag high when it comes to sustainability. So our planet target is important for us, and we got approval from Science Based Targets, a significant milestone for the company in our reduction of both reducing our own CO2, but also being active partner with our customers to help them reduce their CO2 impact for the coming years. So now we are committing to the 2030 targets, and then we also have the long-term targets for 2050. We made a small acquisition. We signed it last quarter, and we now 2nd of January, closed the acquisition of Molex Industrial Communication, a business that we are integrating now in Industrial Network Technology, INT division. And I just would like to show 2 slides to describe this acquisition. Molex is a gigantic private owned company by the Koch Industries family. They were saying that what we have in industrial communication, it's not bad, but we don't really have the ability to -- the size we have to really focus on it. And they were asking us, maybe HMS can take this and revitalize the business. They also felt that the main business for them is cables, connectors and these kind of things and these active components with software and hardware was difficult for the sales -- big sales teams to sell because it's very complex products. So we made a deal with them to take over this asset. So we get 2 R&D teams, 1 in Canada, 1 in France, 31 R&D engineers, very happy to get this. We are investing more in R&D. So getting more resources here is very good. But we also get complementing products and technology. We get large customers in mainly U.S. and Japan. Some of them are already HMS customers. But with this offer, we also can make a more complete solution. We paid USD 7 million, and we expect this to be north of USD 10 million in annual revenue. And what we do here is that the Molex products compared to HMS products, HMS is really working with what is called adapters. These are all the thousands of devices inside a factory that is sitting into robots or drives or sensors and these kind of things. And all these things are connected to the controllers of the network. So the high-volume products that HMS has been focused on, that is more than 90% of all devices, that's relevant for our current offer. But the network controllers where Molex is very good, they are less in volume, but higher in complexity, higher in price and making both these things are very important. And you see the examples here with our robot customers where we've been connecting the robot to the network, but also around Molex, we can also do sub networking around the robots, and we think this is a very good step for the division INT. And we are quite excited about how we can develop this together with the teams in Canada and France here. So a lot of things is happening. And Joakim, let's move into some numbers. Joakim Nideborn: Yes, let's do that. We will start with having a look at the order intake. And as Staffan already said, we do see a small organic growth of 3% on the orders. And if you see on the graph to the upper left, you see that we had a really strong Q4 in 2024, where we had some good project orders in the IDS business. And therefore, we think that 3% is not so bad actually, even if we strive for more than that, given the comparable, that's a fair number. You also see that there is a massive currency effect with a 10% negative effect from currency movements, where we see that especially the U.S. dollar, but also the euro versus the SEK is continuing to be weaker and weaker, and we've been seeing that also after the period ended. If we look on the different markets, we do see Europe continuing slowly but safely in the right direction. It's been improving throughout the year. And upfront, we thought this would be a little bit of a quicker recovery, but we still see it going in the right direction. So we think that is a little bit positive after all. And Staffan also mentioned that we had a bit of a weaker market in North America in the fourth quarter. Looking at the pipeline and so on, we believe that this is a temporary decline that we're facing. So we think that there is potential to improve a little bit from those levels going forward. If we look in Asia, we've been having a bit of a slow market in Japan for us, where China has been growing well the whole year. And now we do see a bit of a recovery in Japan. It's related a lot to INT business and some of the big customers coming back and placing some orders. This inventory buildup situation with our customers have been the largest in Japan, and that's why that's been taking a bit of more time. And overall, if we lift the view to a higher altitude, we see that for the full year, we see organic growth now in the orders of 10%. So it is moving in the right direction, and I think 10% is a decent place for us to move forward here. Going over to sales, a little bit of a different situation. We have very good deliveries in Q4. So we reached SEK 951 million in sales, organically plus 23%. And the reason -- the story behind this is basically what you saw in the order intake in Q4 2024 and Q1 2025, when we had a lot of good project orders where the bulk is delivered now in Q4. So we managed to deliver out on that nice backlog, and we've been fighting a lot in our delivery -- on our delivery sites, especially in North America, to get all the goods out. And I think we managed to catch up fairly well in Q4 to what we're supposed to deliver and try to keep our customers as happy as possible here with the lead times. Looking for the whole year, we've been struggling a little bit in the first quarter, also due to pretty strong comparables in 2024. And now we actually turn the whole year positive growth, organic growth of 3% with the strong ending of the year. So of course, we would like to show more than 3% growth for the full year, but it's good that we can turn this around and show a positive development. It's been a bit of a bumpy road for the last year for us, and we've been having maybe a little bit more than the industry average, having the inventory buildup during '22 -- '21 and '22 and then the reduction in '24 and maybe partly in '25 as well. So all in all, showing growth is good to see. The drivers of the growth is a lot the IDS division and the North Americas market, where we're doing those good deliveries in the fourth quarter. We also see on the sales side, continued recovery in Europe, same as on the order side, slowly but safely better, that's not the main driver in the quarter, but it's going in the right direction. And of course, also here, you see overall that the currency is playing a big role. So it's a pretty big difference on the reported and the organic numbers. For the full year, you also see that we have a pretty big acquisition effect with 18% growth from the Red Lion and the PEAK acquisition. A few words about the divisions. You have first IDS, Industrial Data Solutions, where I think you see in the graph, you see the story that I was talking about with really good order intake in Q4 and Q1 -- Q4 '24 and Q1 '25. And then you see the sales graph is improving in Q3 and especially in Q4. So I think those project orders that were received in the end of '24 and beginning of '21 -- sorry, beginning of 2025, you should maybe see that more of the sales graph that it's evening out a little bit over the period. And with that strong comparable, obviously, the order intake is down now 15% organic. We would love to see a little bit more than SEK 374 million, and we think that we have a good chance to improve going forward here. And on sales, of course, a very nice number, SEK 481 million, and as I said, deliveries of these big projects. So I think we're very happy about the delivery in IDS. We do almost 29% margin in Q4, which is extremely high and not something that we probably will show going forward. For the full year, we are now at 24% in this business. And then with 2/3 roughly coming from the Red Lion acquisition, we're very happy with that development that we've had over this period within the HMS family. And this, of course, is a big contributor to the overall strong profitability in Q4. Then over to INT. And here, we see pretty clear this gradual improvement that we were talking about. You see on the order side, now we have 17% growth that we present. Organic, this is 27%. So in that pretty big currency headwind, we're still managing to grow this in a good way. And the main thing we see here is that some of the bigger customers are coming back, filling up their inventories and also the European market, partly also the Japanese market are now coming back and placing orders. So this is very positive, we think. And you see not maybe the full thing converting to sales, but also sales is moving in the right direction and showing a 13% organic growth. As you know, this is our cash cow, delivering really solid margins. We do 31% margin in the quarter and almost at that level for the full year. So this is a very solid business. And the team now will have their hands full with integrating this Molex acquisition and also delivering on the strategy for 2030. So it will be an eventful year 2026 in INT. And then we have New Industries. Also solid development, both on the orders and on sales. Organic orders, 18% up; organic sales, 12% up, and an okay quarter. We would maybe like to see a little bit higher margin, but 22.7% is an okay level. We had, in Q3, a very good development in building automation. Now it's a little bit softer in building automation, a little bit better in vehicle communications. So it's good that those parts are complementing each other and smoothing out the curve for us. Over to the profitability and obviously, a record profitability in the quarter, SEK 268 million in the adjusted EBIT, a 28% margin, which is, of course, strong for us. And for Q4, it sticks out maybe even more where we normally have a bit of a higher cost in Q4. And we don't see the same increase on the cost side in Q4. We are starting some of those development projects that we presented earlier this year on the Capital Markets Day. We will see those projects coming rolling into 2026 and onwards with us trying to deliver those 2030 strategic plans. So all in all, over SEK 900 million, SEK 911 million for the year, 25.5% in adjusted EBIT margin. I think that was good to see that we managed to beat the long-term goal of 25%, and this puts us in a good position for the future as well. The good profitability comes from primarily the volume increase. The gross margin is stable at 63%, in line with our own expectations, and we think that's fairly where we should be with this constellation that we have in the group. And maybe the other thing that sticks out a little bit is the lower OpEx, where I think we've been still being a bit careful on the cost side. And as I mentioned before, we will start doing a bit more investments going forward. Maybe to mention also on the FX side, we've been having a -- you've been seeing the FX effects a lot on the top line, not to the same extent on the bottom line due to some good hedges throughout the year. We're starting to see that effect wearing off a little bit now. The hedges are not as good as they were before, not the same high rates. And we do see an EBIT impact of minus SEK 15 million due to currency, which is a bit more than what we've seen earlier this year. And yes, with the recent development of currencies, I think this is something that we need to keep an eye out for in 2026. So there will be a bit of an impact from this going forward, obviously. And then to our EPS. And I'm showing in the graph here an adjusted EPS of SEK 4.17, which is in itself very nice. The reported EPS is a lot lower, SEK 1.44 compared to SEK 1.49. And then obviously, we have the net financials and all that is nothing strange. But we also have a nonrecurring tax effect of SEK 104 million, which is related to the Red Lion acquisition, and we elected to do a so-called 338(h)(10) election. And that basically means that we're treating for tax purposes in the U.S., we are treating this acquisition as an asset deal. So we have an amortization of the -- all those assets that we got in the deal, which will lower our tax in the U.S. for the coming 15 years. And that is giving us now a positive effect to make this election. We need to pay this onetime tax, but we will have a pretty big upside for the coming years. So the net present value of the tax saving is a lot bigger than this cost that we take in Q4. This is really complicated and complicated material and very special U.S. tax laws that we're working with here. So this is the situation, and we're going to look into this forward if it's really right that it should be SEK 104 million. Looking for the full year, we do SEK 13.73 in adjusted EBIT (sic) [ EPS ]. It's plus 42% compared to a year ago. And the Board, as Staffan mentioned, also proposes a dividend of now SEK 4.8. And the reason it was 0 last year was not that we didn't make any profits, it was that we made 2 really big acquisitions and to not having to take in more new shares, we elected to cancel the dividend for a onetime thing in 2024. And then over to the cash flow. So here, we have continued improvements on working capital and inventory reductions. So we've been now reducing our inventory for the full year of SEK 207 million. And that is, of course, helping the cash flow a lot. We do SEK 231 million in the quarter and SEK 877 million for the full year, which we are very happy with. And the cash conversion is still quite good, 82% for the full year. And obviously, this onetime effect in tax is holding back the cash flow with SEK 104 million. So without that, you would have seen a record cash flow for the group. And for the future, we still believe that we are in a pretty good situation here. Even if we grow in 2026, we believe that we should be able to keep working capital neutral, maybe even reduce a little bit of inventory further. So we should be able to show a good cash conversion also for the coming year. And then to -- I just love this graph to the left, the net debt graph. It's continued to be reduced. And we were in a situation a year ago where we took on a lot of debt to make these 2 acquisitions in 2024. And of course, in my role, it's really nice to see that we are following the plan and managing to close the year net debt-to-EBITDA pre-IFRS 16 of 2.13. And we said here before that we should be in line with our long-term target to be below 2.5 and that we can also deliver that is very good to see. And of course, has a lot to do with the good performance and the strong cash conversion throughout the year. In Q4, when we have now a new strategic plan in place, we also signed a new financing agreement in December here with 2 Swedish banks for the coming years to be able to finance our expansion plans in the 2030 strategy plan. Finally, to -- before we'd like to open up for questions, some takeaways for the full year, if we look what's been happening. From an internal perspective, we've been making a big change from the 1st of January 2025 with a completely new organization, a pretty big change actually going into 3 divisions with now full accountability of strategy, resources, finances and all that comes with that. And the reason for that was to get the full customer focus throughout the whole organization from sales, from R&D, from product development and all this. And I think with the performance in the year, we are quite happy how this has been actually playing out in real life as well, taking it from the plan to reality. And as a step in the new divisions, we also worked with the 2030 strategy. All divisions have set their own strategy for 2030 here that we presented in September. Performance-wise, we still managed to deliver some organic growth in what we say is a bit of a challenging or a bit uncertain market with a lot of macro challenges being -- that's been playing out throughout the year. We grow now the orders by 10% and sales 3% for the year. And we managed to also to lift the profitability and show a really good cash flow with an adjusted EBIT that is up 37% in the whole year, delivering 25.5% margin. And solid cost control is, of course, a good part of delivering that good results. And also, as I mentioned before, the cash flow that we managed to convert those profits into cash is, of course, very key for us. So all in all, a solid year. And with that, we are sure that there are a lot of questions from the group. So feel free. Operator: [Operator Instructions] The next question comes from Simon Granath from ABG. Simon Granath: Congrats on the very impressive margins here. I'd like to start on the supply chain and see if you could help us understand the impact, if so, from rising memory prices. How much is memory prices of the bill of materials? Can you pass this through to customers similar as you have done in 2022, but also in 2025 after Liberation Day? Or should we assume any margin headwind ahead? Staffan Dahlstrom: Actually, in our more embedded electronics, the portion of our material cost for memories is not that significant. So our products are not memory intensive. So this is not something we worry about. Maybe the only benefit with a weaker U.S. dollar for us is that many of the electronics components are based in U.S. dollar. So may we get a little bit of tailwind there. But all in all, this is not something we worry about for our products. Simon Granath: Very clear. And on orders, you mentioned that you think the weakness in North America is temporary. Could you shed some more light on what indicators you see that makes you anticipate that? Is it perhaps connected to customer dialogues or similar? Staffan Dahlstrom: I think many of these larger projects we had last year in quarter 4, they are large and also difficult to predict when they land. So we are seeing still good activity, but we haven't really seen that we had closed any larger of these orders as we expected. So I think this is just delays, and we expect this to be temporary. And since it's a few larger orders, it's also difficult to predict the effects. So we think activity is still good in U.S. And if we here in Europe are concerned about the uncertainty, we don't feel the same kind of uncertainty in the U.S. market. They keep on investing in infrastructure and automation over there. So it will come back in U.S. Simon Granath: Sounds very encouraging. And just a final question for me. I know that Joakim mentioned or did make one comment around the cost, given your comments at the CMD of gradually increasing investments ahead. How should we think about this? Is it fair to assume that this will be more back heavy in 2026? Or can you give us any more light on timing consideration about these growth initiatives? Joakim Nideborn: Absolutely. So I think you will be seeing a gradual increase in the OpEx throughout 2026, starting ramping up pretty much now, and then it will probably increase throughout the year, with us adding some extra resources to carry out those plans. So it's -- maybe that's good enough for you. I don't know what you're after, but it's -- you'll see gradual improvement and exactly what percentage is up, I think we keep for the time being. Simon Granath: Congrats again on the strong results. Operator: The next question comes from Gustav Berneblad from Nordea. Gustav Berneblad: It's Gustav here from Nordea. Maybe just to build on Simon's question on costs and the OpEx there. I mean, looking at your administrative expenses, I mean, if we look at the sequential delta from Q3 to Q4 last year, these costs were up SEK 18 million. Looking at the delta this year, it's down SEK 20 million from Q3 to Q4. So can you just help us understand this effect? And is this the new base? Or is there something extraordinary here impacting this quarter? Joakim Nideborn: Maybe just first comment. I think what is -- comparing 2024 to '25 is very difficult to do on a line item base. Since when we made a new organization change, we completely changed the classification of the cost. So it's very clean. Now everything that has to do with something around admin is in admin, even if it's a sales admin person. So maybe that's a clarification, first of all. And then the reason for being a bit lighter in Q4 is that we've been doing some of the investments on the ERP side throughout Q2 and Q3. That is now done in Q4. So that has taken down the admin burden a little bit on the ERP development or the rollout in the U.S. And also the integration project is more or less done when it comes to -- fully when it comes to Red Lion and to the largest extent when it comes to also to PEAK. That's maybe the 2 main things that is taking down this cost level. Gustav Berneblad: Yes. Okay. Got it. But I mean, the first part there, I mean, that would likely increase the admin expenses because you have moved the cost from selling expenses to admin, right? So that would be sort of contradictionary or... Joakim Nideborn: It's -- so in admin now is a larger share than what it was before. And then, of course, there is a reduction compared to 2024 in the overall cost base. I mean we're growing, what do we say, 3% organically in Q4 on the cost side. So we've been -- only been adding 3% organically. And then you have the FX effect on that. So in reported figures, it becomes less than it was a year ago. That makes sense? Gustav Berneblad: Yes. Okay. Perfect. And then yes, yes. Maybe then, is it possible to say anything how demand has continued here in the early start of January? Joakim Nideborn: So just to clarify the last question as well. If you're talking about the development from 2024 to '25, the main reason for the decline is, of course, the currency. But I think your question was about why it's lower than in Q3, right, in this year. So I think the ERP is the answer for why it's lower compared to Q3 this year and otherwise, it's a currency. Gustav Berneblad: Okay. Perfect, Joakim. And on the start here in early January, is it possible to say anything there? Staffan Dahlstrom: It's, I mean, very early. We keep on tracking. Joakim Nideborn: That's pretty much the same pace as you see in the quarter. Gustav Berneblad: Okay. Perfect. And then just the final 1 here on the order backlog. I mean, it has been reduced as we've seen here in Q2, Q3 and Q4. So do you still see that you have excess orders to deliver on here short term, would you say? Or is it sort of stabilized at lower levels now? Joakim Nideborn: It's pretty much stabilized. We do have a couple of tens of millions left, but it's been really important for us to reduce this backlog because the customer wants the goods. So that's why we've been struggling or fighting in Q4 to be able to actually reduce the backlog and get the deliveries out to our customers. But from now on, I think you can expect that I've said it a couple of times before, and I think now is another one of those situations where we need to get in when we're going to deliver out pretty much. So book-to-bill should be around 1 or maybe increase higher than 1 in 2026. Staffan Dahlstrom: I think in addition to this, we are during quarter 1 here, completing all the investments we've done to making sure that our new factory in York, Pennsylvania becomes state-of-the-art high-tech manufacturing. We've done a lot of things there. So the capacity will increase. We see it already in Q4. We see another expansion in Q1. So from Q2 and onwards, we will have better delivery capacity. So of course, we are open for more orders because we can't ship. So it's a big focus also to make sure we fill up the order pipeline as well. Operator: The next question comes from Erik Larsson from SEB. Erik Larsson: A follow-up on North America and the project orders. So is it a fair observation that in 2025, you really only had project orders in Q1, whereas Q2, Q3, Q4 was a bit slower? And had just another question on that topic. How would you look at project orders in 2025 versus previous years? Is it lower or higher than usual, et cetera? Any flavor there? Staffan Dahlstrom: I think many of these project orders, if I start, Joakim, is related to Red Lion. So it's quite new for us with this kind of larger project orders. And we see that since it's large and not so many, it's a bit bumpy. And I think Q4 2024 and Q1 2025, we got better-than-expected orders. Since then, it's been I guess, lower than expected. Joakim Nideborn: I think maybe the main difference is the size of the orders. We do get a lot of product orders, but the size that we had in Q4 and Q1, that's kind of unusual. And that size we haven't seen since then. Erik Larsson: All right. And then second and final question, I just noted your peer, I guess, Ependion established a business unit within defense with pretty high ambition. So I'm just curious if you have any defense exposure, if you've thought about this, any opportunities or so? Staffan Dahlstrom: We got a lot of questions from investors about this. We have quite little. I mean, could it be less than 1% of revenue will end up in defense applications. And mainly, it's not really in, I would say, more in application where you have automation of these things. Most if you look on Swedish factories, for example, as one big factory up in Örnsköldsvik making tanks for BAE. I mean this is not high-volume manufacturing. We are looking into some customers where there is more ammunition and there's more automation. It's a new field for us. We have very little business. Maybe it's potential there. But yes, for us, it's a small market today. Operator: The next question comes from Fredrik Lithell from Handelsbanken. Fredrik Lithell: I would like to have a little bit of discussion hearing your views on the very strong margin progress you have in IDS. I understand it's probably driven a little bit by Red Lion. So if you could sort of explain a little bit what you have done in Red Lion and what that brings to the table would be very interesting. Joakim Nideborn: Of course, we'll try to cover that. It's a couple of things. Now of course, if you look in the quarter in itself, it's obviously a lot driven from volume. But over the year, as I said, we've pretty much taken the business from like a 20% business to now maybe 24% for the full IDS, where 2/3 of IDS is now Red Lion. There are a couple of things we've done on the gross margin side. We've been doing -- we're now through all the investments in the manufacturing that has been helping a lot. We've been looking into the distributor and reseller structure and change the discount programs a lot. So the ones that actually promote our products will have high discounts and the ones that do not, they will have a reduced discount. So doing some cleaning on pretty simple things. I think that's maybe the main thing. And then we've also been looking into the cost structure a little bit, taking out more or less a layer of management and now been making also the ERP investments to be more efficient and be able to use the back-office functions of the whole group around the world. So it's a couple of different things that we're doing to get to these improvements. Staffan Dahlstrom: And Joakim, when we acquired Red Lion, one thing we identified when we start meeting them was that they didn't really have the ambition to improve their margins, and we saw some real low-hanging fruits, but there were no push for picking it. So I think also we've just been executing on some of the things we saw when we acquired them. So it's not really complicated. The discount changing -- implementing our manufacturing system where we have some things in-house, something outsourced to partners. So I think all this is falling into the right places at the moment. Joakim Nideborn: And maybe 1 final thing to get also our sales team some credit. We have been seeing now some cross-selling as well that is helping this, a couple of million dollars. So that's also been good. Fredrik Lithell: Would you say that you now are on the right level? Or do you still have maybe not low-hanging fruits, but do you still have structural improvements that will continue to push the margins higher over time the work on Red Lion. Staffan Dahlstrom: I think we don't want to get inflated expectations. But of course, we also have ambition internally to drive this. So we're a little bit careful about how we answer this. But there are more things we can do, but the fruits are higher up in the tree now. Fredrik Lithell: Okay. My second question is the 338 tax sort of application that you did send in and that gave you a charge of SEK 104 million in the quarter. Is it possible to somehow gauge sort of the benefits you see over time sort of a net between the 2? Is it very big compared to the SEK 104 million you had as a charge in the quarter? Or is it closer to? Joakim Nideborn: So it's a super relevant question. And if I would have been 100% certain of the full impact, I would give a very clear answer. I'm not 100% certain. I can give you some direction. So what it will mean, you will not see anything in the P&L. So the tax cost will still be there. But cash flow-wise, there will be a part that is not payable. So it's -- overall, I think that the potential will be around 2% of the group tax cost for the full year. That's around the upside that we will see yearly. But you will not see [indiscernible] and this is -- everybody loves IFRS, right? And this is a rather technical thing. Fredrik Lithell: Yes. All right. Understood. Final question. You talked a little bit about your ERP implementation. Could you describe a bit wider where you are in that process on a group basis and what you have in front of you in terms of the various parts of ERP project would be interesting also. Joakim Nideborn: Yes. So we started this project in 2023. And since then we rolled out the same ERP and more or less the full group. And during 2025 and up until Q3, we also implemented this in Red Lion. So we have now one common ERP, one common CRM, which we think is great for enabling all the cross-selling and see all the customer activities in one system. What is left is the sales entity in Australia and also now the new acquisition with PEAK. And the Molex acquisition, since that was an asset deal, we cannot get that implementation for free. So that is already done. It's already working in the new system. So it's not a lot left for us to be in this structure. And it is, of course, a big project that has been going on for now some years with different intensity throughout the different quarters. But it's an investment we've been taking. And I mean we've been seeing -- you see also in the admin cost this year that we do see a payoff from that investment. So soon we'll be there with the full implementation, and then I'm sure we'll have acquired something else to keep it going for the future as well. Operator: The next question comes from Joachim Gunell from DNB Carnegie. Joachim Gunell: So we can perhaps start with where we left off. So in light of the stellar deleveraging progress here and the financing agreements in place, can you just talk a bit about your appetite when it comes to go back into more an active acquisition mode, I mean, Molex aside? Staffan Dahlstrom: I think we are feeling that we have good financing. We have a debt level that is good for us even after this dividend we do. So I think we are positive and we see continued strong cash flow going forward. So we have an appetite. We work mainly now in each division. And in each division, they have their own pipeline and looking for this. But of course, it's not easy to find this. It's always long processes. Most of the companies we look at have been private or privately held. That's a very long process. So we have the appetite. The challenge is to really identify and take these processes forward. So I think that's where we -- it's difficult to find and it's long processes. So -- but appetite is there. Joachim Gunell: Understood. Perfect. You talked a bit about the -- an update on the York facility investments here. But can you mention just a bit where you are in terms of capacity utilization in your U.S. operations? Staffan Dahlstrom: Are we? Yes, if you -- maybe quarter 4, we felt there's some general things in ERP and stuff like that. If we look more on the things we love here with machines and stuff like that, I think quarter 4, we were halfway and quarter 1 will be the full way in equipment and the software and all these things we do. And actually, what we have done is that we did not move to a new factory. We refurbished what we had. So it's been a bit of -- we're talking about a factory that had not been getting a lot love in the last 15 years, I think. So there's been a lot of -- it's from changing lightning in the facility to change new concrete floor. It's really been starting from the beginning. But what we see now is something that looks really great, and we hope that this can also be like a way a showroom for customers to see that for -- this is how we should do manufacturing. And it's not so common in U.S. to have this kind of modern manufacturing. So we hope that this can also be a showroom to customers to show that automation is the way forward also in U.S. So we are, yes, halfway there. Joakim Nideborn: I think you can say maybe in Q4, SMT was capacity constrained in the U.S. And now with the new investments in place, it will not be capacity constrained going forward. Joachim Gunell: That's clear. And then the INT EBIT margins were strong here again despite volume, call it, perhaps being slightly low and then also the FX headwinds. So what's your confidence on maintaining this high level of profitability in this division as the volumes potentially recover? Staffan Dahlstrom: For INT, I think we have some small customers and some large customers. What we are waiting for is the bounce back at some of the large customers that we -- in Japan, we see still some inventory at some INT customers. But what's different here is that the product mix per customer generate different gross margins. So here, we see a little bit of disappointment on the revenue, but very good gross margins. But if revenue have been increasing on these large customers, we would see slightly lower gross margins as well. So that's -- it's not easy to --... Joakim Nideborn: I think there are 2 -- maybe 2 things. One is what Staffan said, that we might have a bit of a gross margin pressure in INT with the large volumes coming back. And then we should also keep in mind that this Molex acquisition is fully integrated in INT and we'll have a little bit of dilution affected margins. We will still expect it to be good, but it might be a little bit down from what you see in 2025. Joachim Gunell: Lovely. And just to end, just on this -- the customers' conversations and how they are evolving, in particular the U.S., you mentioned the broadening and deepening here. Can you just talk a bit about what that means for you? Staffan Dahlstrom: Yes. I think what we say here, we feel good activity. We have not seen so many of the larger projects. But in general, it's a solid market. We think we have good access to customers and doing the right thing. We have a very motivated and well-integrated sales teams now. We have a good relationship with our distributors, so highly motivated. So I think we are we are in a good situation. The market is not great, but it's good in the U.S. There are investments. People are quite optimistic, and we also see many companies who want to have more manufacturing in at least North America, which drives the investments in Mexico and other places, but also in domestically in U.S. So we think it's a good market, and it will bounce back for us after quarter 4 here. Operator: [Operator Instructions] The next question comes from Gustav Berneblad from Nordea. Gustav Berneblad: It's Gustav again from Nordea. Just 1 follow-up, sorry. Because in Q3, you guided or commented on a potential negative impact here in Q4 from production upgrades. I guess that's related to IDS here. But just a clarification, is there any negative impact here on IDS that you're not discussing? Joakim Nideborn: You mean in the gross margin? Gustav Berneblad: No, on just on the EBIT margin that you report here on 28.9%. Joakim Nideborn: I think what we probably were talking about in Q3 is since we went into this upgrade of facilities, we would maybe have a bit extra challenges to deliver. I think that's what we've been talking about that we've been really -- I think the team has been doing a great job to get all the volumes out. And there is maybe a little bit on the OpEx, but it's minor. I mean the most part is CapEx in that upgrade of facilities. So maybe SEK 1 million or SEK 2 million in OpEx, but the vast majority CapEx. Staffan Dahlstrom: I would say rather opposite, I think, Q4 was in IDS was better than expected. We are quite impressed about the team here and we saw some risks go into Q4, and they've really been managing this well. So it's been better than expected. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Staffan Dahlstrom: Thank you. All right, everybody. Thanks for joining this call and helping us to close a good year 2025. We're very happy to see the good development of our organic growth coming back again. And of course, also the integrations of Red Lion, PEAK, that's been instrumental for our growth going forward. I'm also very happy to see that we have the new acquisition INT coming in, and we are quite excited about 2026. Of course, we live in a world that is quite uncertain, but we think we are at a good place in our market, and where we see continued future for investments in automation and this regionalization. So we remain fairly optimistic about 2026, I think, and, of course, it's good to also close the year with good cash flow and solid net debt and stuff like that. So we feel that we are in a good place for the coming quarters. And we hope you join us for the coming quarters and look forward to talk more about this after quarter 1. All right. Have a good day. Thanks, everybody.
Louise Tjeder: A warm welcome to Sandvik's Presentation of the Fourth Quarter Results 2025. My name is Louise Tjeder, Head of Investor Relations. And beside me, I have our CEO, Stefan Widing; and CFO, Cecilia Felton. We will start off with the presentation. Stefan and Cecilia will take you through the highlights of the quarter and the remaining time we will spend on the Q&A session. So, let's start. The word is yours. Stefan Widing: Thank you. And also from my side, of course, a warm welcome to the fourth quarter report in 2025. If we summarize the quarter, we see a strong ending to the year with double-digit order intake and revenue growth. We see a strong demand in mining and infrastructure is continuing to improve. There's a mixed demand in cutting tools with strong demand in, for example, aerospace and defense, while automotive remains weak. We also see a strong demand in both software solutions and powder solutions. Total order intake grew by 4%, and the organic order intake growth was 15%. Revenue increased totally by 1% and organically by 12%. We also see a stable margin on the significant currency headwinds. Adjusted EBITA came in at just below SEK 6.4 billion, corresponding to a margin of 19.6%, which is a slight improvement versus last year, even though the figures round to the same number. On the rolling 12 months basis, the margin is 19.3%, up from 19.2% in the year before. The savings in the restructuring programs had a positive bridge effect of SEK 131 million in the quarter. And the adjusted profit for the period came in at SEK 4.2 billion, up from SEK 4.1 billion. We also had a strong free operating cash flow of SEK 6.7 billion, corresponding to a cash conversion in the quarter of 110%. A couple of strategic highlights, as always. We continue to see strong momentum for digital solutions in Mining. In the quarter, we booked two large automation orders, which were significant. We also see strong growth in our software offering in mine planning. And overall, Digital Mining Technologies booked good double-digit order intake in the quarter. And for the full year, the business also grew in the double digits. In Intelligent Manufacturing, our Metrologic business unit launched a new version of their software, where we now include our Copilot AI technology also in this software. They also launched a New Machining Module, which is important for us because it means that the Metrology software will, based on the measurement, recommend machining process updates to ensure that the component is more aligned with the intended design. So, we start to connect the loop between metrology and machining. Rock Processing launched a new Jaw Crusher platform with significant new automation features, also significant productivity gains and longer service life. And this platform also received Sandvik's Internal Innovation Prize Award in 2025, because of the significant improvements in the product. If we look at the market development, and we start with a geographical perspective, Europe was up 13%. And here, cutting tools was up in the mid-single digits. North America, up 9% with cutting tools up in the high single digits. Asia up 14% and China cutting tools up in the double digits. And then mining markets, Africa, Middle East, up 5%, Australia, up 43% and South America up 13%. So, solid growth across all geographies. If we then go to mining, as I said, we continue to see strong demand basically across the board. General engineering, here, underlying, it's stable, but we do see low double-digit growth, driven then by good double-digit growth in China. Europe up low single digits and North America up mid-single digits. In infrastructure, we see continued improvement in particularly driven by North America. But overall, on a global scale, we still characterize it as a fairly stable development. We also see some signs of improvement in Europe. Automotive is a bit weaker, overall, up in the low single digits. Europe is flat. North America up mid-single and China is down high single digit. Aerospace, strong, up in the double digits, and both Europe and North America is up in the double digits, while China was down in the double digits, primarily driven by timing of orders. In the other segments, we are up high single digits. Europe is up high single, driven then in particular by defense. North America is up mid-single, while China is flattish. Summarizing then the order intake and revenues. We booked orders in the quarter of SEK 32.7 billion, revenues SEK 32.5 billion, and this is a positive book-to-bill of 101%, which is fairly unusual in the fourth quarter where we typically have strong deliveries of equipment. But thanks to the strong order intake, we still maintain a positive book-to-bill also this quarter. Looking at this from another angle, we can see the order intake continues to be strong in the solid double-digit space. We also see revenues picking up also now in the double digits. And this is, of course, a consequence of that we are also now delivering and invoicing mining equipment at a higher level than before, showing that we have managed to ramp up production to meet demand in a good way. Adjusted EBITA improved by 1.4% in absolute terms, SEK 6.4 billion almost, up from almost SEK 6.3 billion last year. This corresponds to a margin of 19.6%. And here, we see solid leverage on the higher volumes. We also have good price execution and good savings, but then offset by the strong currency headwinds. The currency impact came in at almost SEK 1.2 billion negative, a dilution of 130 basis points. And as you know, this is a more adverse headwind than we had guided for when the quarter started. Of course, driven by a continued weakness of the U.S. dollar and a continued strengthening of the Swedish SEK. Rolling 12 months then a margin of 19.3%. Going first into the Mining business. We continue to see a strong momentum with strong demand both for our underground and our surface solutions. We see a double-digit organic growth across all our equipment divisions as well as Parts and Services and Digital Mining Technologies. Total order intake increased by 5%. The organic growth was 17% and the growth of equipment was up 39%. Excluding major orders, we were growing organically by 12%. The adjusted EBITA came in at just below SEK 3.4 billion -- sorry, SEK 3.8 billion, corresponding to a margin of 21.5%. We have good leverage on the higher volumes, but it is offset by the very negative currency. The operating leverage was 32%, which we are satisfied with in this business. The currency then was negative by over SEK 700 million year-on-year, corresponding to a dilution of 120 basis points. Rock Processing. Here, we saw order intake in the mining part of the business declining year-on-year on tough mining comps. The underlying market demand was robust. We saw solid demand in infrastructure, driven in particular by U.S. demolition and recycling as well as for the first time in a long time, I would say, an improvement in aggregates. And we also see positive signs in Europe. Total order intake declined by 9%, but organically, it was a black 0%. And excluding major orders, it was an organic growth of 2%. Adjusted EBITA came in at just below SEK 400 million. This corresponds to a margin of 14.5%, slightly down from 14.6%, but a strong operating leverage of 41% with good savings was offset then by a very negative currency impact, almost SEK 100 million negative impact corresponding to a dilution on the margin of 170 basis points. And then Machining and Intelligent Manufacturing. Of course, the last quarter, we will present this in this form. Going forward, you will see these two businesses being reported separately. We see a mixed demand for cutting tools between the regions and segments. Strong demand in aerospace and defense, as I've said, while demand in general engineering improved, but it was primarily then driven by a strong development in Asia and China, while automotive remained weak across more or less all the regions. Orders in cutting tools overall increased in the high single digits. It's partly due to low comps. Remember, for example, that Boeing was on strike in the fourth quarter of '24, but also positive contribution from price and tariff surcharges. We see a double-digit growth in intelligent manufacturing and also in powder solutions. And total order intake increased by 5% and the organic increase was 15%. If we look at the start of January, we continue to see a stable development compared to the fourth quarter if we look at the daily order intake and take normal seasonality into account. The adjusted EBITA came in at SEK 2.4 billion, corresponding to a margin of 19.7%, which is up from 19.4% in the prior period. We see good price execution, very good savings and also structure supporting margins, then partly offset by a negative currency. The savings had a positive effect in the quarter of SEK 103 million. Acquisitions had an accretive effect of 20 basis points, while currency then had a negative impact of SEK 330 million, corresponding to an 80 basis point dilution. With that, I'll hand over to you, Cecilia, to take us through the details. Cecilia Felton: Thank you, Stefan. Hi, everyone. All right. So, as usual then, let's start with the growth table on the right-hand side here. As Stefan mentioned, we had very strong organic growth. Orders grew by 15% and revenues by 12%. Structure was neutral on both orders and revenue, while currency had a significant negative impact, minus 12% on orders and minus 11% on revenues. All-in-all, though, total order growth of 4% and a revenue growth of 1%. Adjusted EBITA increased year-over-year to SEK 6.4 billion, corresponding to a resilient margin of 19.6%. Net financial items continued to trend downwards year-over-year. I will show you a few more details around that in a few minutes. The tax rate, excluding items affecting comparability and also on a normalized basis was 24.4%, so within our guided range. Net working capital also continued to gradually trend downwards. We ended the year on a 12 months rolling basis at 28.7%. So, an improvement of 1.2 percentage points compared to last year. As Stefan mentioned, strong cash flow in the quarter, SEK 6.7 billion, corresponding to a cash conversion of 110%. Returns improved year-over-year and adjusted EPS grew to SEK 3.38. If we then continue with the bridge. And as usual, starting with the organic column, you can see that revenues grew by SEK 3.9 billion, and that generated an EBITA of SEK 1.2 billion. So, solid leverage of 31%, which was accretive to the margin by 1.3 percentage points. Significant currency headwind, both in absolute numbers, as you can see here and a dilution to the margin of 1.3 percentage points, and structure was slightly accretive. But all-in-all, resilient margin and good development considering the currency headwind. If we then continue down the P&L, looking at the finance net, it came down year-over-year, and this is mainly driven by the lower interest net. You can see it on the first row here. And that's the result of both lower yield cost but also lower borrowed volumes. Reported tax rate came in at 24.5%. Items affecting comparability had a small impact in the quarter. So, excluding items affecting comparability and also on a normalized basis, the tax rate was 24.4%, so within the guided range. As I said, working capital continued to trend downwards, an improvement of 1.2 percentage points on a 12-month rolling basis. So, a good achievement this year, but also a continued focus area for us across the group. And on the right, you can see that the net working capital improvement was driven by Mining and Rock Processing. In the bars, you can see that it was a strong cash flow quarter, as we said, 110% cash conversion. In the trend line, you can also see that for the full year, we had a cash conversion of 95%. If we then look at the year-over-year development, earnings adjusted for non-cash was higher. CapEx was a little bit lower and a positive impact from net working capital was also a little bit lower compared to last year. But all-in-all then, an increase in free operating cash flow to SEK 6.7 billion. The positive cash flow also resulted in a reduction in financial net debt, which came in at SEK 27 billion. And in relation to 12 months rolling EBITDA, we're now at 0.9. Capitalized leases and the pension liability came down a little bit sequentially, which resulted in a net debt of SEK 34 billion. Looking then at outcome versus guidance. Currency, as Stefan mentioned, came in at SEK 1.2 billion, a bit higher than our guidance of SEK 1 billion that was based on the rates at the end of September. CapEx for the full year, a bit lower than guidance. This is partly driven by currency, but also timing of some projects and initiatives. The interest net and the normalized tax rate came in, in line with guidance. And looking ahead then at the first quarter and the full year. If we start with currency. Here, we expect the significant currency headwind to continue into the first quarter, both on top line and also on EBITDA. And as you know, from a seasonality point of view, Q1 is also typically a low invoicing quarter. Nevertheless, unexpected negative currency impact of minus SEK 1.4 billion, and this is now based on the currency rates as of the 23rd of January. Then if we look at full year, we estimate CapEx to come in at between SEK 4 billion and SEK 4.5 billion. We expect the interest net to continue to trend downwards with a guidance of SEK 0.6 billion. And for the tax rate, we have left the guidance unchanged. And with that, I will hand back over to you, Stefan. Stefan Widing: Thank you. So, if we go into the conclusion, we see a strong financial performance, both in the fourth quarter and in 2025 overall. In the fourth quarter, we have double-digit organic growth in orders and revenue and improved margin and strong cash conversion. For the full year, the organic order intake and revenues increased by 11% and 5%, respectively. And the margin came in for the full year at 19.3% despite tariffs and significant currency headwinds. We also continue to make good progress in our strategic priority areas. We have a continued good innovation pace, and we welcomed several new companies into the group. We see strong progress in our digital offerings. Strong growth in both Intelligent Manufacturing and Digital Mining Technologies. And in my view, this has been the strongest year we have had when it comes to the development of our digital businesses, both in terms of financial performance and the strategic progress we have made. We also continue to make successful traction in the surface mining business, and we see strong growth in important regions in Machining such as India, and the local premium segment in China. And for us, this is not only the last quarter of the year. It's also the last quarter of our 5-year strategy period, the shift to growth strategy period. And if we summarize this period, we see a strong and good financial performance throughout the period with strategic progress despite the significant macro and geopolitical challenges that we have managed throughout the period. We have strengthened our offerings. We have gained traction in important growth areas and also introduced many leading solutions. So overall, we go now into the new strategic period, Advancing to 2030 as a stronger group. Thank you. And let's go to Q&A. Louise Tjeder: Thank you, Stefan, and Cecilia. Yes, it's time to move on to the Q&A session. So operator, please, we can take the first question. Operator: [Operator Instructions] The first question comes from Gustaf Schwerin from Handelsbanken. Gustaf Schwerin: Yes. I have a question on the cutting tool growth. The positive trend you're calling out for general engineering in Asia, is that mainly an effect of pre-buys in China on the tungsten prices? And secondly, given the spike now in price, do you have any evidence at all that customers and other markets have been building inventory as well? Stefan Widing: On China cutting tools, it's a combination. We see an underlying growth in the demand picture. But we also see an effect from pre-buying, not because we are raising prices, sort of, here and now. But because of the increased tungsten prices some customers are buying or they're increasing their inventory levels basically to, because you anticipate some level of price increase. We are not seeing it anywhere else. It's a dynamic we have seen in China specifically. Operator: The next question comes from Chitrita Sinha from JPMorgan. Chitrita Sinha: I have three, please. My first question is just on mining demand. So 17% order organic growth is obviously a very strong result. But could you provide more color on the demand by commodity and whether you're seeing anything incrementally different given where gold and copper prices have got to the start of this year? Stefan Widing: I wouldn't say, we have seen any specific change throughout, sort of, the past quarters. Of course, gold and copper are key drivers. They remain above 60% of our total exposure. But of course, we are also seeing many other commodities, silver, palladium, et cetera, that are strong. So yes, maybe led by gold and copper, but a strong demand across the board. Chitrita Sinha: Very helpful. And then, my second question is just on the margin in mining. So, operating leverage was obviously very strong this quarter. But how should we think about the margin heading into 2026, especially if we expect equipment deliveries to pick up? Cecilia Felton: For mining, we have a margin corridor of 20% to 22%. And we also have a normal leverage of around 30%. So that gives a rough framework of where -- what we are aiming for in terms of the margin. When it comes to higher equipment growth, there, you need to look at the incremental leverage of those additional equipment sales. So, even if you look at the full margin of equipment versus aftermarket, of course, equipment has a lower margin, but the incremental margin that we get on additional equipment sales should not be dilutive. Stefan Widing: And just to add to that, I mean, this is something we have been talking about for a few years based mainly on comments from other in the industry. If you want proof that what we just say is correct, and just look at Q4, we had significant increase in equipment deliveries and we see a solid operating leverage. So, no negative mix impact. Chitrita Sinha: Perfect. Very helpful. And then my final question is just on Machining and Intelligent Manufacturing. So, comps were slightly easier in Q4 than Q3, especially in software and aero, as mentioned. Can you please explain the moving parts heading into Q1? And is there any easy or tough comps to be aware of? Stefan Widing: I think the main thing that impacted, sort of, from a comps point of view was that we had a dip in aerospace in Q4 in '24. As I said, there were strikes in the U.S. in particular. And then there were maybe a few other segments that were on the weaker side. The fall of '24 was a little bit weaker. It jumped up a little bit in Q1. So sequentially, so to say, on a dailies perspective. But that's the only thing I would call out. Operator: The next question comes from Edward Hussey from UBS. Edward Hussey: Maybe just a couple, if I may. So just firstly, on the organic drop-through in Machining and Intelligent Manufacturing of 28%. I mean, clearly, a strong drop-through. However, my understanding was that when volumes returned in metal cutting, we could be looking at drop-through closer to 40% or 50%. Could you maybe just talk through the delta between the two? I mean, is 40% or 50% organic drop-through an unrealistic expectation? Or has tungsten been a headwind to achieving that level? Cecilia Felton: No. We still stick with the assumption that around 40% is a realistic leverage for the machining business long term. Now in this quarter, a lot of the growth was driven by price to offset inflation, we have tariffs surcharges and so on. And when you have a very high component of the growth driven by price, then to mitigate these type of effects, then we are protecting our margin. We're not expecting an incremental margin of that -- on that type of growth. So, that's why it's a little bit lower in the quarter. Edward Hussey: Yes. That's very helpful. And then just maybe -- I mean, you might not be able to answer this, but I mean, do you have any concerns around the tungsten price? I mean, do you see any risk that it might pull back this year? I mean, for example, if new supplies brought online, if the pre-buying, sort of, stops or if China relaxed export restrictions. I mean, what's your kind of base case at the moment into 2026? Stefan Widing: I can start with that. No, but I mean, there are several dynamics driving this. One, as you say, is sort of some type of constraint of supply from China. That is, of course, possible that it's being reversed quickly and then that can have an impact on the prices. There are other dynamics as well, such as the growth in defense industry, which is also driving demand for tungsten. And then, you have tariffs and so on, that comes into the picture as well. So it is a complex picture. Tungsten, historically, has been volatile. So we are prepared for all, sort of, eventualities and scenarios. But yes, currently, the momentum is positive, at least. I don't know if you want to add. Cecilia Felton: No, I think you summarized it well. Operator: The next question comes from Alex Jones from Bank of America. Alexander Jones: Two, if I can. The first, just on the capacity ramp-up in mining as you, sort of, start to deliver more equipment, clearly, strong revenue growth this quarter. Could you just give us an update on that capacity ramp-up and whether you've encountered any bottlenecks or it's all going smoothly so far? Stefan Widing: Yes, I think it's going well and very happy with the strong deliveries in the quarter, which I think is a testament that -- I mean, when we invoice, it means we have produced them maybe 3, 4, 5 months earlier, and then it takes a while to get them to customers and do local adaptations and so on. So this shows that a while back, mid-year production levels were starting to ramp up and reach higher levels, and then it has now taken a while to get it out to customers. And of course, now we have a continuous feed of new equipment on its way to customers. We are continuing to do adjustments to the production plans and so on as we speak. But I think the step change has been managed. And we can also see it on the lead times that we are managing to keep the lead times under control despite the high order intake, which I've said has been a high priority for us, because we have seen in prior upturns that if the lead times becomes too long, you start to lose business on lead time, and we have really wanted to minimize the risk of that. Then of course, as Cecilia mentioned, we have a bit of seasonality in the business, as you know, with Q1 being typically a little bit lower invoicing, simply because you have the southern hemisphere with countries being on holiday in the beginning of the quarter. But yes, I'm happy with the ramp-up, and I cannot say we -- there are anything I would like us to have done differently or more. Alexander Jones: Great. Okay. And then, one just on capital allocation. Could you give us any color or update on, sort of, the pipeline for bolt-on opportunities in the various areas you outlined as strategic priorities at the Capital Markets Day last year? Stefan Widing: Yes. I mean, if we start with -- I mean, as we have seen here, the cash flow is strong and the net debt-to-EBITDA is coming down. We've always said we want to be maybe slightly below 1, and that's where we are now. It also means that we have given green light since a while back to most of our divisions to pursue M&A in the strategic areas. It takes a while once you have taken a little bit of a pause to get back and, sort of, make the pipeline active again. But I would say across the areas we did identify, we have ongoing conversations. And then it's always a matter of right price, right timing. But we have an active pipeline, and I would expect more M&A to come in this year than in '24 and '25. Operator: The next question comes from Klas Bergelind from Citi. Klas Bergelind: My first question is on the growth in cutting tools of 8%. How much was pure pricing out of the 8% growth, so not tariff surcharge of 1.4%, but the pure price component. And when you look at this running quarter, the first quarter, Stefan, I would assume that you will push prices further. You are -- I think, correct me if I'm wrong, but I think that you are 15% to 20% self-sufficient on tungsten. So obviously, the cost headwind should grow. So I would assume that the pure price component should move up even more into the first quarter. Interested in the dynamics there. Stefan Widing: Do you want to take the price first? Cecilia Felton: Yes. When it comes to pricing for the cutting tools, we don't give a detailed breakdown in terms of the specifics. We had slight volume growth. And then, surcharges related to tariff and the rest is price, but we cannot, unfortunately, be more specific than that. Stefan Widing: Then it was a little bit difficult to hear you, but were you talking about the pricing dynamics coming into 2026? Klas Bergelind: Yes. On the back of that, obviously, you have your own mind, Stefan, but you're not that self-sufficient, right? Stefan Widing: Yes. I mean -- okay. So I mean, tungsten prices, of course, continue -- have continued to go up, scrap as well, which means there will be a continued price dynamic here. On the powder itself, we are adjusting prices on a regular basis, basically on a monthly basis, depending on the latest APT notation. And then, when it comes to our other products, cutting tools or drill bits and so on, then of course, we adjust prices when needed to compensate for the increased raw material costs. But I cannot give more specifics. Other than that, we are -- if tungsten prices continue up, we will, of course, have to continue to do price adjustments for that. Klas Bergelind: Yes. My second one, and I hope you can hear me, is on the demand in Europe. So if you look at construction, you're saying that there are positive signs, but you didn't move the arrow upwards on infrastructure in Europe. And then, on -- if you can comment, Stefan, on general industrial demand in Europe through the quarter, it seems like there is a little bit of, sort of, green shoots, but I'm interested to hear across what products and countries that you see this development? Stefan Widing: Yes. No, you're right on the infrastructure. We say there are positive signs, but it hasn't really translated into order intake increasing to a level where we put our arrow up, but we are positive. We are seeing a little bit more activity, quoting, stock levels coming down and so on. So, it is a positive trend, but not yet visible in our order intake in Q4. Of course, Q1 will be important. As you know, it's the order where you typically get the orders for the summer season, construction season. So, we will have to see in Q1 if we can continue with this trend. For general engineering, yes, we say it's in Europe, it's stable. You are right. I would also say that there is a little bit of also positive sentiment in some areas, in particular, certain countries where maybe we have seen a little bit more positive development, some of the larger continental European countries. But also here, not something we can really claim is visible in the numbers, and PMI is hovering around the 50. There is still uncertainty. So, I would say the jury is still out on, sort of, more broad-based recovery. Operator: The next question comes from John Kim from Deutsche Bank. John-B Kim: A couple of questions, if I may. Staying on the topic of visibility and demand. What are you seeing, if anything, from stimulus programs, particularly in Europe? Or any early signs there? Stefan Widing: No, I wouldn't say -- I mean, some of this infrastructure, sort of, positive sentiment is, of course, also coming in Germany where there is a big package. And even if it hasn't, sort of, come through yet, it means that some dealers or customers are maybe preparing for higher demand picture. So in that sense, indirectly, it might impact. But otherwise, I cannot point to any specific, sort of, stimulus outcomes. Unless you count -- sorry, unless you count defense into the stimulus package, of course, but that's -- I put that in a different category. In defense, we indeed see, of course, significantly increased demand. John-B Kim: Okay. And if we -- zero in on the SRP division, the comments indicated that you saw some good activity in demolition. I'm wondering if you could give us some color here, whether that's more infrastructure or construction related. Stefan Widing: So demolition and recycling for us, that's our attachment tools, and they go into things like civil construction projects, also infrastructure projects. So it's a mix. We also say we see an improvement in aggregates, which is more, kind of, infrastructure, road building and so on. So I would say, if you look at the U.S., we are positive in infrastructure more generically right now. We did get -- for a couple of years, we haven't really seen, sort of, dealer orders coming in, in anticipation of the summer season. But in Q4, we started to get some dealer orders for that, which is a good sign. We'll see if it continues into Q1. John-B Kim: Okay. Great. Last question, if I may. Any color on the CapEx focus for this year? Cecilia Felton: On CapEx focus, well, we gave the guidance. Typically for us, the larger share of our CapEx is maintenance or replacement CapEx. But then, of course, we also have expansionary CapEx built in there, and that's mainly for the mining business. Operator: The next question comes from Rory Smith from Oxcap. Rory Smith: It's Rory from Oxcap. Hopefully, you can hear me okay. My first question is just on the breakdown of order intake in mining between brownfield, greenfield replacement, or cutting it a different way, between surface and underground, is that something that you could comment on? Stefan Widing: Yes. If we start with the first one. It was pretty similar to prior quarter and also the, sort of the, full year picture, meaning brownfield is the majority, slightly over 50%, replacement is about 1/3, and then the remaining being greenfield. And that's been fairly consistent besides certain quarters when we have received a large greenfield orders such as the second quarter. But that's a general trend, I would say that's been there for a couple of years. Which actually means, if you look at the growth that it is a broad-based growth because that, of course, means that everything is growing since the ratio is the same. On underground versus surface, I would say and as I mentioned earlier, we see solid double-digit growth in all equipment divisions, meaning both surface and underground. If you take more specifically, for example, the rotary business, I would say we see growth that is higher than the average for our business. But in general, surface and underground are equally strong. Rory Smith: That's great. And then my second question, and apologies, this is quite short term in nature, but just looking at 1Q '26, is there any reason to believe that, that operating leverage in machining is going to be any different to the sort of 28%, 30% level seen in Q4? Cecilia Felton: I mean, we cannot say too much, but I think the main driver for it being higher than around 20%, 30% now, it would be if we would have a volume recovery. And that is, of course, something we do not give guidance on. We said Q1 started at a stable level compared to Q4. Rory Smith: I understand. That's helpful. And then just finally from me, maybe I misunderstood this, but I was -- given the tungsten price action last year and the Wolfram mine that you own, maybe I misunderstood this, but I was sort of expecting to see slightly better margins in Rock Processing. So I was just wondering if there was, A, have I misunderstood that? Or if there's any, sort of, comment you could give around the breakdown of the margin outcome in Rock Processing? Cecilia Felton: Yes. The tungsten, the prices don't really impact the Rock Processing business. When we look at the margin development for this year, it's driven by a positive price versus inflation last year with a weak comparable. We had some price pressure in wear parts last year. Then we have good leverage on the higher volumes. We have the positive impact from savings, but then a significant currency headwind of 1.7 percentage points. So those are the main components for the margin development within Rock Processing. Stefan Widing: The tungsten dynamics will be in the machining business. That's where we have it. Operator: The next question comes from Vlad Sergievskii from Barclays. Vladimir Sergievskiy: Thanks very much for taking my three questions. I'll ask them one by one. First one, could you give us an idea on what was the share of growth projects in the new equipment mining orders specifically? I suspect the share of total orders that you provide also includes aftermarket, which is, of course, the reflection of historical installed base. What would be interesting is to see the proportion of new mining demand coming from [ coal ] customers specifically. Stefan Widing: Yes. I mean we will -- you will get an updated figure with the annual report, but I don't think we give quarterly breakdown for commodity. I'll look at you, Louise. Louise Tjeder: No, I think we can wait. Stefan Widing: Yes. What I can say is that, of course, copper and gold are -- have been a bit stronger than the average that you would see in 2024. But as I also said, it is a broad-based demand picture. I mean, we have a good business within silver, palladium and so on as well. So slightly higher than the historic average, but yes, not materially higher. Louise Tjeder: I think it's a fair reflection that the quarter looks quite similar as the -- on a full year basis. Vladimir Sergievskiy: Understood. That's very helpful. Also, is there a reason why orders from mining customers in the Rock Processing were down? Is it a function of commodity mix over there compared to your main mining business or something else? Stefan Widing: No, actually, the main reason this quarter was high comps. They had some larger orders and a strong demand in Q4 of '24. The underlying demand, as we see it, is unchanged. Then of course, if you compare to our mining business area, they don't have the same dynamics in the sense that their largest commodity exposure is to iron ore, where you have a lot of crushing and screening. And iron ore, of course, is at decent levels, but it's not at the gold, copper, silver type dynamics there. And then finally, downstream' mining have a different -- slightly different cycle than upstream' mining. It tends to be a little bit more late cycle. You need to first ramp up production enough to hit your thresholds for the processing plant capacity before you do additional investments there. So, it is a little bit of different dynamic. But overall, the mining demand in Q4 also for Rock Processing was robust. Vladimir Sergievskiy: Excellent. My final one would be on cutting tools. You mentioned some pre-buying effects in China because of the tungsten price. Why do you think you are not seeing those pre-buying effects outside of China? I assume your customers can see what's happening to tungsten price and can anticipate what will happen to cutting tools price later on. Stefan Widing: I can start, and you can see if you want to add something. Yes. Of course, it's -- we don't have a straight answer to why we see a different dynamic. But one reason is that the pricing dynamics in China is different. In China, the pricing for cutting tools are also more directly linked to the tungsten price. While in the rest of the world, it is, sort of, embedded into a normal list price. So I think it's, the visibility is much higher. And also, I think the way they operate is a little bit different as well, but it's difficult to say, but that would be my speculation. Cecilia Felton: And maybe also another factor that could have an impact is we haven't had price increases in China for a very long time. So this is a little bit of a new phenomenon. I think in the rest of the world, Europe, U.S., we have had continuous price increases for a long time now. So, I think that could also feature into the dynamic. Stefan Widing: I think it's a very good comment. I mean, we have had many years in China where price increases has been off the table completely. Now also our local competitors, which have been operating at very low margins are -- have to raise prices in line with the tungsten increase, which maybe creates a broader market dynamic anticipating this phenomena, so to say. Operator: The next question comes from Daniela Costa from Goldman Sachs. Daniela Costa: I have two. One is a follow-up on this tungsten debate. When we think about the technologies it gets used on, is there any potential substitution? Have you seen that in the past when tungsten prices went up a lot? Or is it just simply not possible and customers are just going to have to eventually weather the full price increase? That's my first question. I'll ask the second once you answer this. Stefan Widing: There is, to my knowledge, no substitute, unless you go to even more advanced materials such as diamond-based materials and so on, which is even more expensive. Daniela Costa: Got it. And then one other thing, I guess, that we have, sort of, started to hear about is more and more, sort of, memory chip shortages, I guess, throughout your portfolio, be it in metrology or in some of the automation that you have on mining, I'm not sure. Can you talk through like how significant a user you are of this and whether you see any tightness? Or how are you prepared for potential tightness there? Stefan Widing: We see no impact from that. And I mean, overall, we have, of course, it's high mix, low-volume products that we have in this area. So our volumes are -- we tend to not feel this kind of dynamics since we can always, worst case, find things on the spot market since our volumes are so low. Operator: The next question comes from Sebastian Kuenne from RBC. Sebastian Kuenne: Thank you for taking my two remaining questions. One again on tungsten. You got your own mine, as mentioned. Can you confirm that it has about 1,000 tons of tungsten output per year? And then I would like to know if your priority is to maintain the margin in the tooling business or to kind of take a little bit of market share, because you can be less aggressive on the full price increases? Or if you go with the same price increases as your competitors and therefore take a bit more profit? I would just like to understand a little bit more your thinking here. Stefan Widing: I think the last question, I think we got it last time as well, and my answer is the same. I mean this is, let's call it, the business tactics or business secret. We will not give that away to the audience. So we will manage that tactically as we feel gives the most value to the business. Sebastian Kuenne: I think you mentioned earlier something like flat margin if volumes are not increasing, when it's were to increase, you get some operating leverage in the tooling business. Cecilia Felton: Yes, that will come with a -- yes, just because we would have better cost absorption with higher volumes, that is what will drive a higher -- a more normal leverage around 40% as opposed to the 20%, 30% we're seeing at the moment. Stefan Widing: And on the mine output, I don't have a ton for you. But what we can say is that for -- in terms of the overall production of powder, the mine is roughly or just over 10% of our supply. And then 55% roughly is recycled material from buyback programs, and the rest is sourced from other sources to make sure we have a diverse supply base. Sebastian Kuenne: Understood, okay. And then, my second question is on mining OE. You mentioned that you plan to increase capacity this year for obvious reasons. And in what areas do you see bottlenecks specifically on the supply chain at the moment? Stefan Widing: I mean, historically, we have typically seen bottlenecks with major components such as engines or certain drivetrain components. We worked fairly diligently about a year ago to get ahead of that this time. So at the moment, I mean, we can produce as we have planned to produce. No specific bottlenecks. We have, of course, been helped, A, by the fact that we were early out here. And secondly, that we don't -- I mean, in general, we don't see this type of, let's say, increase in production in adjacent industries. So, we have -- we can get what we want, so to say, for the moment. When it comes to assembly and these kind of things, we can scale fairly straightforward with partners, our own people and also the fact that we have said before that we have also new sites coming online in Asia, both in India and Malaysia. So it's -- we can produce what we have or want to produce right now. Operator: Next question comes from Max Yates from Morgan Stanley. Max Yates: Just two quick questions from me. Just the first one is on the aftermarket side of mining. I guess, we're kind of used to these businesses growing mid- to high single digits and some people would make the case that given the commodity price backdrop, there's a huge amount of incentivization to get stuff out of the mines by the customers. But that's also been happening already. So, I guess my question is simply kind of from those, sort of, 8% growth rates that we're seeing now, is it actually possible for the business to grow much faster than that given volume production rates, what the customers are doing already? Or would we think that is a very good growth rate historically and therefore, kind of any acceleration or meaningful kind of next step-up has to come from the brownfield and greenfield? Stefan Widing: I mean, we stick to what we have said in terms of long-term growth rate should be high single digits. Now in this quarter and some quarters in '25, we have been in the double digits. And that is maybe a bit of an acceleration driven by the commodity prices and the fact that customers want to push even harder. But I think the long-term trend, we believe it should be high single digits. And it's driven by a number of factors. Our fleet size continues to grow. That obviously drives aftermarket growth. The fleet is still very old in relation to historic fleet age. That also drives aftermarket. The technology content in each machine we deliver is increasing constantly, which both means you need more service and parts, different types of parts as well, sensors and so on. It also increases our aftermarket capture rate because the more advanced the machine is, the more difficult that is for a third party or local service workshop to do the service. So, all of these things are combining into the dynamic that we are seeing this healthy growth in the aftermarket business. Max Yates: Okay. And maybe just a follow-up. Obviously, if you kind of go back a few years, there were a lot of discussions around -- well, at least from the, sort of, investment community about, sort of, potentially a separation of Sandvik into the machining business and the mining business. We're continuing to see kind of businesses simplify across industrials. I guess your share price and multiple would kind of indicate your decision for not doing that at Sandvik, given it's clearly been a great run for the share price. I guess my question is, to what extent do you still discuss this internally? And is there any consideration on this debate as to it matters where machining is in its cycle and if we get to a more, sort of, mid-cycle level in demand and margins, then that decision comes more back on the table? Or given where the multiple is versus the peers, which looks very healthy and looks like there's no major discount versus the peers, is that decision -- is that discussion really internally, kind of, off the table for now? Just -- so the latest thinking around that would be helpful. Stefan Widing: I mean, our approach to this has always been that you have to have a very long-term perspective. We have obviously explained before how we believe we can be value accretive to our shareholders based on the strategy and execution that we have had or have. And we are, of course, very happy that we feel we have gotten a recognition for that in the past, yes, 12 months or so. And if the discussion would be there in any way, it would never be around tactics around share price or cycles or anything like that because if you do it, you do it once and for eternity, so to say. So it has to be driven by other fundamental reasons. And we believe, as we have said, that Sandvik is a great group. We have 23 market-leading divisions. And based on the strategy and the operational performance, we should be able to create value, and we have created value now in the current group structure. Louise Tjeder: Okay. So we have a few minutes left, and three in line, so I ask you to keep your Q&As short. Operator: The next question comes from James Moore from Rothschild & Co. James Moore: I'll try and make it shorter. If cutting tools were high single, machining overall 15%, it would suggest 80% for powder and software. Could I assume triple-digit powder in 2030 software? And I'll give all three together at the same time. And on whatever the tungsten and tariff price impact is to the whole of machining in orders in the fourth quarter, is that the peak? Or would you expect that impact as a percentage of contribution to growth to increase going forward? And finally, on the mining aftermarket side, you said high single, I think? Did you say the number? Did you say if it was 7 or 8? And how are Rock Tools and Ground Support doing? Are they flat or down? And what's happening there? Stefan Widing: Okay. Louise Tjeder: That was record long, is that okay? Stefan Widing: If we start with the growth in machining, I mean, as we said, software is growing double digits. Now, it's not in the 20% to 30% range. And if you wait a little bit, you will soon get the broken out Intelligent Manufacturing restated figures, as you know, since we will start to report it separately. So then you will get even more or you will get the exact figures. But it's not in the -- it's not -- it's below 20%, let's say that. I'll jump to your third question on... Cecilia Felton: Rock Tools and Ground Support. Stefan Widing: Rock Tools and Ground Support, yes. Yes. So, I mean if parts and services are growing double and aftermarket is high single, you can see that they are a little bit dilutive. That is, I would say, normal. They -- all the dynamics I mentioned around the growth dynamic, around service and parts, all of them are, of course, not relevant for Rock Tools and Ground Support. They are more purely production-driven. So you have a little bit of a lower overall market growth there. On tungsten, I'm not sure if we can say about that. Cecilia Felton: I think, well, it was a question on tungsten and the tariff and this is reaching the peak now in terms of the PV impact. I think here, there are -- I mean, some dynamics is that we will start to have these effects also in our comps from the second quarter onwards. So that's, of course, limiting the impact when you look at the year-over-year development, but I think in terms of, are we at the peak or not, it's very hard to say, both how tungsten or ATP prices will develop, also with tariffs. There were some discussions, as you know, between U.S. and Europe, again, just a couple of weeks back around additional tariffs. So very hard to say, I think, how this will develop in '26. Stefan Widing: Yes. Louise Tjeder: All right. The time is out. The idea was good, but we can't manage now to take any more questions. But please reach out to Investor Relations, and we can help you further. And with this, we thank you for calling in, and as usual, for good questions. Thank you.
Louise Tjeder: A warm welcome to Sandvik's Presentation of the Fourth Quarter Results 2025. My name is Louise Tjeder, Head of Investor Relations. And beside me, I have our CEO, Stefan Widing; and CFO, Cecilia Felton. We will start off with the presentation. Stefan and Cecilia will take you through the highlights of the quarter and the remaining time we will spend on the Q&A session. So, let's start. The word is yours. Stefan Widing: Thank you. And also from my side, of course, a warm welcome to the fourth quarter report in 2025. If we summarize the quarter, we see a strong ending to the year with double-digit order intake and revenue growth. We see a strong demand in mining and infrastructure is continuing to improve. There's a mixed demand in cutting tools with strong demand in, for example, aerospace and defense, while automotive remains weak. We also see a strong demand in both software solutions and powder solutions. Total order intake grew by 4%, and the organic order intake growth was 15%. Revenue increased totally by 1% and organically by 12%. We also see a stable margin on the significant currency headwinds. Adjusted EBITA came in at just below SEK 6.4 billion, corresponding to a margin of 19.6%, which is a slight improvement versus last year, even though the figures round to the same number. On the rolling 12 months basis, the margin is 19.3%, up from 19.2% in the year before. The savings in the restructuring programs had a positive bridge effect of SEK 131 million in the quarter. And the adjusted profit for the period came in at SEK 4.2 billion, up from SEK 4.1 billion. We also had a strong free operating cash flow of SEK 6.7 billion, corresponding to a cash conversion in the quarter of 110%. A couple of strategic highlights, as always. We continue to see strong momentum for digital solutions in Mining. In the quarter, we booked two large automation orders, which were significant. We also see strong growth in our software offering in mine planning. And overall, Digital Mining Technologies booked good double-digit order intake in the quarter. And for the full year, the business also grew in the double digits. In Intelligent Manufacturing, our Metrologic business unit launched a new version of their software, where we now include our Copilot AI technology also in this software. They also launched a New Machining Module, which is important for us because it means that the Metrology software will, based on the measurement, recommend machining process updates to ensure that the component is more aligned with the intended design. So, we start to connect the loop between metrology and machining. Rock Processing launched a new Jaw Crusher platform with significant new automation features, also significant productivity gains and longer service life. And this platform also received Sandvik's Internal Innovation Prize Award in 2025, because of the significant improvements in the product. If we look at the market development, and we start with a geographical perspective, Europe was up 13%. And here, cutting tools was up in the mid-single digits. North America, up 9% with cutting tools up in the high single digits. Asia up 14% and China cutting tools up in the double digits. And then mining markets, Africa, Middle East, up 5%, Australia, up 43% and South America up 13%. So, solid growth across all geographies. If we then go to mining, as I said, we continue to see strong demand basically across the board. General engineering, here, underlying, it's stable, but we do see low double-digit growth, driven then by good double-digit growth in China. Europe up low single digits and North America up mid-single digits. In infrastructure, we see continued improvement in particularly driven by North America. But overall, on a global scale, we still characterize it as a fairly stable development. We also see some signs of improvement in Europe. Automotive is a bit weaker, overall, up in the low single digits. Europe is flat. North America up mid-single and China is down high single digit. Aerospace, strong, up in the double digits, and both Europe and North America is up in the double digits, while China was down in the double digits, primarily driven by timing of orders. In the other segments, we are up high single digits. Europe is up high single, driven then in particular by defense. North America is up mid-single, while China is flattish. Summarizing then the order intake and revenues. We booked orders in the quarter of SEK 32.7 billion, revenues SEK 32.5 billion, and this is a positive book-to-bill of 101%, which is fairly unusual in the fourth quarter where we typically have strong deliveries of equipment. But thanks to the strong order intake, we still maintain a positive book-to-bill also this quarter. Looking at this from another angle, we can see the order intake continues to be strong in the solid double-digit space. We also see revenues picking up also now in the double digits. And this is, of course, a consequence of that we are also now delivering and invoicing mining equipment at a higher level than before, showing that we have managed to ramp up production to meet demand in a good way. Adjusted EBITA improved by 1.4% in absolute terms, SEK 6.4 billion almost, up from almost SEK 6.3 billion last year. This corresponds to a margin of 19.6%. And here, we see solid leverage on the higher volumes. We also have good price execution and good savings, but then offset by the strong currency headwinds. The currency impact came in at almost SEK 1.2 billion negative, a dilution of 130 basis points. And as you know, this is a more adverse headwind than we had guided for when the quarter started. Of course, driven by a continued weakness of the U.S. dollar and a continued strengthening of the Swedish SEK. Rolling 12 months then a margin of 19.3%. Going first into the Mining business. We continue to see a strong momentum with strong demand both for our underground and our surface solutions. We see a double-digit organic growth across all our equipment divisions as well as Parts and Services and Digital Mining Technologies. Total order intake increased by 5%. The organic growth was 17% and the growth of equipment was up 39%. Excluding major orders, we were growing organically by 12%. The adjusted EBITA came in at just below SEK 3.4 billion -- sorry, SEK 3.8 billion, corresponding to a margin of 21.5%. We have good leverage on the higher volumes, but it is offset by the very negative currency. The operating leverage was 32%, which we are satisfied with in this business. The currency then was negative by over SEK 700 million year-on-year, corresponding to a dilution of 120 basis points. Rock Processing. Here, we saw order intake in the mining part of the business declining year-on-year on tough mining comps. The underlying market demand was robust. We saw solid demand in infrastructure, driven in particular by U.S. demolition and recycling as well as for the first time in a long time, I would say, an improvement in aggregates. And we also see positive signs in Europe. Total order intake declined by 9%, but organically, it was a black 0%. And excluding major orders, it was an organic growth of 2%. Adjusted EBITA came in at just below SEK 400 million. This corresponds to a margin of 14.5%, slightly down from 14.6%, but a strong operating leverage of 41% with good savings was offset then by a very negative currency impact, almost SEK 100 million negative impact corresponding to a dilution on the margin of 170 basis points. And then Machining and Intelligent Manufacturing. Of course, the last quarter, we will present this in this form. Going forward, you will see these two businesses being reported separately. We see a mixed demand for cutting tools between the regions and segments. Strong demand in aerospace and defense, as I've said, while demand in general engineering improved, but it was primarily then driven by a strong development in Asia and China, while automotive remained weak across more or less all the regions. Orders in cutting tools overall increased in the high single digits. It's partly due to low comps. Remember, for example, that Boeing was on strike in the fourth quarter of '24, but also positive contribution from price and tariff surcharges. We see a double-digit growth in intelligent manufacturing and also in powder solutions. And total order intake increased by 5% and the organic increase was 15%. If we look at the start of January, we continue to see a stable development compared to the fourth quarter if we look at the daily order intake and take normal seasonality into account. The adjusted EBITA came in at SEK 2.4 billion, corresponding to a margin of 19.7%, which is up from 19.4% in the prior period. We see good price execution, very good savings and also structure supporting margins, then partly offset by a negative currency. The savings had a positive effect in the quarter of SEK 103 million. Acquisitions had an accretive effect of 20 basis points, while currency then had a negative impact of SEK 330 million, corresponding to an 80 basis point dilution. With that, I'll hand over to you, Cecilia, to take us through the details. Cecilia Felton: Thank you, Stefan. Hi, everyone. All right. So, as usual then, let's start with the growth table on the right-hand side here. As Stefan mentioned, we had very strong organic growth. Orders grew by 15% and revenues by 12%. Structure was neutral on both orders and revenue, while currency had a significant negative impact, minus 12% on orders and minus 11% on revenues. All-in-all, though, total order growth of 4% and a revenue growth of 1%. Adjusted EBITA increased year-over-year to SEK 6.4 billion, corresponding to a resilient margin of 19.6%. Net financial items continued to trend downwards year-over-year. I will show you a few more details around that in a few minutes. The tax rate, excluding items affecting comparability and also on a normalized basis was 24.4%, so within our guided range. Net working capital also continued to gradually trend downwards. We ended the year on a 12 months rolling basis at 28.7%. So, an improvement of 1.2 percentage points compared to last year. As Stefan mentioned, strong cash flow in the quarter, SEK 6.7 billion, corresponding to a cash conversion of 110%. Returns improved year-over-year and adjusted EPS grew to SEK 3.38. If we then continue with the bridge. And as usual, starting with the organic column, you can see that revenues grew by SEK 3.9 billion, and that generated an EBITA of SEK 1.2 billion. So, solid leverage of 31%, which was accretive to the margin by 1.3 percentage points. Significant currency headwind, both in absolute numbers, as you can see here and a dilution to the margin of 1.3 percentage points, and structure was slightly accretive. But all-in-all, resilient margin and good development considering the currency headwind. If we then continue down the P&L, looking at the finance net, it came down year-over-year, and this is mainly driven by the lower interest net. You can see it on the first row here. And that's the result of both lower yield cost but also lower borrowed volumes. Reported tax rate came in at 24.5%. Items affecting comparability had a small impact in the quarter. So, excluding items affecting comparability and also on a normalized basis, the tax rate was 24.4%, so within the guided range. As I said, working capital continued to trend downwards, an improvement of 1.2 percentage points on a 12-month rolling basis. So, a good achievement this year, but also a continued focus area for us across the group. And on the right, you can see that the net working capital improvement was driven by Mining and Rock Processing. In the bars, you can see that it was a strong cash flow quarter, as we said, 110% cash conversion. In the trend line, you can also see that for the full year, we had a cash conversion of 95%. If we then look at the year-over-year development, earnings adjusted for non-cash was higher. CapEx was a little bit lower and a positive impact from net working capital was also a little bit lower compared to last year. But all-in-all then, an increase in free operating cash flow to SEK 6.7 billion. The positive cash flow also resulted in a reduction in financial net debt, which came in at SEK 27 billion. And in relation to 12 months rolling EBITDA, we're now at 0.9. Capitalized leases and the pension liability came down a little bit sequentially, which resulted in a net debt of SEK 34 billion. Looking then at outcome versus guidance. Currency, as Stefan mentioned, came in at SEK 1.2 billion, a bit higher than our guidance of SEK 1 billion that was based on the rates at the end of September. CapEx for the full year, a bit lower than guidance. This is partly driven by currency, but also timing of some projects and initiatives. The interest net and the normalized tax rate came in, in line with guidance. And looking ahead then at the first quarter and the full year. If we start with currency. Here, we expect the significant currency headwind to continue into the first quarter, both on top line and also on EBITDA. And as you know, from a seasonality point of view, Q1 is also typically a low invoicing quarter. Nevertheless, unexpected negative currency impact of minus SEK 1.4 billion, and this is now based on the currency rates as of the 23rd of January. Then if we look at full year, we estimate CapEx to come in at between SEK 4 billion and SEK 4.5 billion. We expect the interest net to continue to trend downwards with a guidance of SEK 0.6 billion. And for the tax rate, we have left the guidance unchanged. And with that, I will hand back over to you, Stefan. Stefan Widing: Thank you. So, if we go into the conclusion, we see a strong financial performance, both in the fourth quarter and in 2025 overall. In the fourth quarter, we have double-digit organic growth in orders and revenue and improved margin and strong cash conversion. For the full year, the organic order intake and revenues increased by 11% and 5%, respectively. And the margin came in for the full year at 19.3% despite tariffs and significant currency headwinds. We also continue to make good progress in our strategic priority areas. We have a continued good innovation pace, and we welcomed several new companies into the group. We see strong progress in our digital offerings. Strong growth in both Intelligent Manufacturing and Digital Mining Technologies. And in my view, this has been the strongest year we have had when it comes to the development of our digital businesses, both in terms of financial performance and the strategic progress we have made. We also continue to make successful traction in the surface mining business, and we see strong growth in important regions in Machining such as India, and the local premium segment in China. And for us, this is not only the last quarter of the year. It's also the last quarter of our 5-year strategy period, the shift to growth strategy period. And if we summarize this period, we see a strong and good financial performance throughout the period with strategic progress despite the significant macro and geopolitical challenges that we have managed throughout the period. We have strengthened our offerings. We have gained traction in important growth areas and also introduced many leading solutions. So overall, we go now into the new strategic period, Advancing to 2030 as a stronger group. Thank you. And let's go to Q&A. Louise Tjeder: Thank you, Stefan, and Cecilia. Yes, it's time to move on to the Q&A session. So operator, please, we can take the first question. Operator: [Operator Instructions] The first question comes from Gustaf Schwerin from Handelsbanken. Gustaf Schwerin: Yes. I have a question on the cutting tool growth. The positive trend you're calling out for general engineering in Asia, is that mainly an effect of pre-buys in China on the tungsten prices? And secondly, given the spike now in price, do you have any evidence at all that customers and other markets have been building inventory as well? Stefan Widing: On China cutting tools, it's a combination. We see an underlying growth in the demand picture. But we also see an effect from pre-buying, not because we are raising prices, sort of, here and now. But because of the increased tungsten prices some customers are buying or they're increasing their inventory levels basically to, because you anticipate some level of price increase. We are not seeing it anywhere else. It's a dynamic we have seen in China specifically. Operator: The next question comes from Chitrita Sinha from JPMorgan. Chitrita Sinha: I have three, please. My first question is just on mining demand. So 17% order organic growth is obviously a very strong result. But could you provide more color on the demand by commodity and whether you're seeing anything incrementally different given where gold and copper prices have got to the start of this year? Stefan Widing: I wouldn't say, we have seen any specific change throughout, sort of, the past quarters. Of course, gold and copper are key drivers. They remain above 60% of our total exposure. But of course, we are also seeing many other commodities, silver, palladium, et cetera, that are strong. So yes, maybe led by gold and copper, but a strong demand across the board. Chitrita Sinha: Very helpful. And then, my second question is just on the margin in mining. So, operating leverage was obviously very strong this quarter. But how should we think about the margin heading into 2026, especially if we expect equipment deliveries to pick up? Cecilia Felton: For mining, we have a margin corridor of 20% to 22%. And we also have a normal leverage of around 30%. So that gives a rough framework of where -- what we are aiming for in terms of the margin. When it comes to higher equipment growth, there, you need to look at the incremental leverage of those additional equipment sales. So, even if you look at the full margin of equipment versus aftermarket, of course, equipment has a lower margin, but the incremental margin that we get on additional equipment sales should not be dilutive. Stefan Widing: And just to add to that, I mean, this is something we have been talking about for a few years based mainly on comments from other in the industry. If you want proof that what we just say is correct, and just look at Q4, we had significant increase in equipment deliveries and we see a solid operating leverage. So, no negative mix impact. Chitrita Sinha: Perfect. Very helpful. And then my final question is just on Machining and Intelligent Manufacturing. So, comps were slightly easier in Q4 than Q3, especially in software and aero, as mentioned. Can you please explain the moving parts heading into Q1? And is there any easy or tough comps to be aware of? Stefan Widing: I think the main thing that impacted, sort of, from a comps point of view was that we had a dip in aerospace in Q4 in '24. As I said, there were strikes in the U.S. in particular. And then there were maybe a few other segments that were on the weaker side. The fall of '24 was a little bit weaker. It jumped up a little bit in Q1. So sequentially, so to say, on a dailies perspective. But that's the only thing I would call out. Operator: The next question comes from Edward Hussey from UBS. Edward Hussey: Maybe just a couple, if I may. So just firstly, on the organic drop-through in Machining and Intelligent Manufacturing of 28%. I mean, clearly, a strong drop-through. However, my understanding was that when volumes returned in metal cutting, we could be looking at drop-through closer to 40% or 50%. Could you maybe just talk through the delta between the two? I mean, is 40% or 50% organic drop-through an unrealistic expectation? Or has tungsten been a headwind to achieving that level? Cecilia Felton: No. We still stick with the assumption that around 40% is a realistic leverage for the machining business long term. Now in this quarter, a lot of the growth was driven by price to offset inflation, we have tariffs surcharges and so on. And when you have a very high component of the growth driven by price, then to mitigate these type of effects, then we are protecting our margin. We're not expecting an incremental margin of that -- on that type of growth. So, that's why it's a little bit lower in the quarter. Edward Hussey: Yes. That's very helpful. And then just maybe -- I mean, you might not be able to answer this, but I mean, do you have any concerns around the tungsten price? I mean, do you see any risk that it might pull back this year? I mean, for example, if new supplies brought online, if the pre-buying, sort of, stops or if China relaxed export restrictions. I mean, what's your kind of base case at the moment into 2026? Stefan Widing: I can start with that. No, but I mean, there are several dynamics driving this. One, as you say, is sort of some type of constraint of supply from China. That is, of course, possible that it's being reversed quickly and then that can have an impact on the prices. There are other dynamics as well, such as the growth in defense industry, which is also driving demand for tungsten. And then, you have tariffs and so on, that comes into the picture as well. So it is a complex picture. Tungsten, historically, has been volatile. So we are prepared for all, sort of, eventualities and scenarios. But yes, currently, the momentum is positive, at least. I don't know if you want to add. Cecilia Felton: No, I think you summarized it well. Operator: The next question comes from Alex Jones from Bank of America. Alexander Jones: Two, if I can. The first, just on the capacity ramp-up in mining as you, sort of, start to deliver more equipment, clearly, strong revenue growth this quarter. Could you just give us an update on that capacity ramp-up and whether you've encountered any bottlenecks or it's all going smoothly so far? Stefan Widing: Yes, I think it's going well and very happy with the strong deliveries in the quarter, which I think is a testament that -- I mean, when we invoice, it means we have produced them maybe 3, 4, 5 months earlier, and then it takes a while to get them to customers and do local adaptations and so on. So this shows that a while back, mid-year production levels were starting to ramp up and reach higher levels, and then it has now taken a while to get it out to customers. And of course, now we have a continuous feed of new equipment on its way to customers. We are continuing to do adjustments to the production plans and so on as we speak. But I think the step change has been managed. And we can also see it on the lead times that we are managing to keep the lead times under control despite the high order intake, which I've said has been a high priority for us, because we have seen in prior upturns that if the lead times becomes too long, you start to lose business on lead time, and we have really wanted to minimize the risk of that. Then of course, as Cecilia mentioned, we have a bit of seasonality in the business, as you know, with Q1 being typically a little bit lower invoicing, simply because you have the southern hemisphere with countries being on holiday in the beginning of the quarter. But yes, I'm happy with the ramp-up, and I cannot say we -- there are anything I would like us to have done differently or more. Alexander Jones: Great. Okay. And then, one just on capital allocation. Could you give us any color or update on, sort of, the pipeline for bolt-on opportunities in the various areas you outlined as strategic priorities at the Capital Markets Day last year? Stefan Widing: Yes. I mean, if we start with -- I mean, as we have seen here, the cash flow is strong and the net debt-to-EBITDA is coming down. We've always said we want to be maybe slightly below 1, and that's where we are now. It also means that we have given green light since a while back to most of our divisions to pursue M&A in the strategic areas. It takes a while once you have taken a little bit of a pause to get back and, sort of, make the pipeline active again. But I would say across the areas we did identify, we have ongoing conversations. And then it's always a matter of right price, right timing. But we have an active pipeline, and I would expect more M&A to come in this year than in '24 and '25. Operator: The next question comes from Klas Bergelind from Citi. Klas Bergelind: My first question is on the growth in cutting tools of 8%. How much was pure pricing out of the 8% growth, so not tariff surcharge of 1.4%, but the pure price component. And when you look at this running quarter, the first quarter, Stefan, I would assume that you will push prices further. You are -- I think, correct me if I'm wrong, but I think that you are 15% to 20% self-sufficient on tungsten. So obviously, the cost headwind should grow. So I would assume that the pure price component should move up even more into the first quarter. Interested in the dynamics there. Stefan Widing: Do you want to take the price first? Cecilia Felton: Yes. When it comes to pricing for the cutting tools, we don't give a detailed breakdown in terms of the specifics. We had slight volume growth. And then, surcharges related to tariff and the rest is price, but we cannot, unfortunately, be more specific than that. Stefan Widing: Then it was a little bit difficult to hear you, but were you talking about the pricing dynamics coming into 2026? Klas Bergelind: Yes. On the back of that, obviously, you have your own mind, Stefan, but you're not that self-sufficient, right? Stefan Widing: Yes. I mean -- okay. So I mean, tungsten prices, of course, continue -- have continued to go up, scrap as well, which means there will be a continued price dynamic here. On the powder itself, we are adjusting prices on a regular basis, basically on a monthly basis, depending on the latest APT notation. And then, when it comes to our other products, cutting tools or drill bits and so on, then of course, we adjust prices when needed to compensate for the increased raw material costs. But I cannot give more specifics. Other than that, we are -- if tungsten prices continue up, we will, of course, have to continue to do price adjustments for that. Klas Bergelind: Yes. My second one, and I hope you can hear me, is on the demand in Europe. So if you look at construction, you're saying that there are positive signs, but you didn't move the arrow upwards on infrastructure in Europe. And then, on -- if you can comment, Stefan, on general industrial demand in Europe through the quarter, it seems like there is a little bit of, sort of, green shoots, but I'm interested to hear across what products and countries that you see this development? Stefan Widing: Yes. No, you're right on the infrastructure. We say there are positive signs, but it hasn't really translated into order intake increasing to a level where we put our arrow up, but we are positive. We are seeing a little bit more activity, quoting, stock levels coming down and so on. So, it is a positive trend, but not yet visible in our order intake in Q4. Of course, Q1 will be important. As you know, it's the order where you typically get the orders for the summer season, construction season. So, we will have to see in Q1 if we can continue with this trend. For general engineering, yes, we say it's in Europe, it's stable. You are right. I would also say that there is a little bit of also positive sentiment in some areas, in particular, certain countries where maybe we have seen a little bit more positive development, some of the larger continental European countries. But also here, not something we can really claim is visible in the numbers, and PMI is hovering around the 50. There is still uncertainty. So, I would say the jury is still out on, sort of, more broad-based recovery. Operator: The next question comes from John Kim from Deutsche Bank. John-B Kim: A couple of questions, if I may. Staying on the topic of visibility and demand. What are you seeing, if anything, from stimulus programs, particularly in Europe? Or any early signs there? Stefan Widing: No, I wouldn't say -- I mean, some of this infrastructure, sort of, positive sentiment is, of course, also coming in Germany where there is a big package. And even if it hasn't, sort of, come through yet, it means that some dealers or customers are maybe preparing for higher demand picture. So in that sense, indirectly, it might impact. But otherwise, I cannot point to any specific, sort of, stimulus outcomes. Unless you count -- sorry, unless you count defense into the stimulus package, of course, but that's -- I put that in a different category. In defense, we indeed see, of course, significantly increased demand. John-B Kim: Okay. And if we -- zero in on the SRP division, the comments indicated that you saw some good activity in demolition. I'm wondering if you could give us some color here, whether that's more infrastructure or construction related. Stefan Widing: So demolition and recycling for us, that's our attachment tools, and they go into things like civil construction projects, also infrastructure projects. So it's a mix. We also say we see an improvement in aggregates, which is more, kind of, infrastructure, road building and so on. So I would say, if you look at the U.S., we are positive in infrastructure more generically right now. We did get -- for a couple of years, we haven't really seen, sort of, dealer orders coming in, in anticipation of the summer season. But in Q4, we started to get some dealer orders for that, which is a good sign. We'll see if it continues into Q1. John-B Kim: Okay. Great. Last question, if I may. Any color on the CapEx focus for this year? Cecilia Felton: On CapEx focus, well, we gave the guidance. Typically for us, the larger share of our CapEx is maintenance or replacement CapEx. But then, of course, we also have expansionary CapEx built in there, and that's mainly for the mining business. Operator: The next question comes from Rory Smith from Oxcap. Rory Smith: It's Rory from Oxcap. Hopefully, you can hear me okay. My first question is just on the breakdown of order intake in mining between brownfield, greenfield replacement, or cutting it a different way, between surface and underground, is that something that you could comment on? Stefan Widing: Yes. If we start with the first one. It was pretty similar to prior quarter and also the, sort of the, full year picture, meaning brownfield is the majority, slightly over 50%, replacement is about 1/3, and then the remaining being greenfield. And that's been fairly consistent besides certain quarters when we have received a large greenfield orders such as the second quarter. But that's a general trend, I would say that's been there for a couple of years. Which actually means, if you look at the growth that it is a broad-based growth because that, of course, means that everything is growing since the ratio is the same. On underground versus surface, I would say and as I mentioned earlier, we see solid double-digit growth in all equipment divisions, meaning both surface and underground. If you take more specifically, for example, the rotary business, I would say we see growth that is higher than the average for our business. But in general, surface and underground are equally strong. Rory Smith: That's great. And then my second question, and apologies, this is quite short term in nature, but just looking at 1Q '26, is there any reason to believe that, that operating leverage in machining is going to be any different to the sort of 28%, 30% level seen in Q4? Cecilia Felton: I mean, we cannot say too much, but I think the main driver for it being higher than around 20%, 30% now, it would be if we would have a volume recovery. And that is, of course, something we do not give guidance on. We said Q1 started at a stable level compared to Q4. Rory Smith: I understand. That's helpful. And then just finally from me, maybe I misunderstood this, but I was -- given the tungsten price action last year and the Wolfram mine that you own, maybe I misunderstood this, but I was sort of expecting to see slightly better margins in Rock Processing. So I was just wondering if there was, A, have I misunderstood that? Or if there's any, sort of, comment you could give around the breakdown of the margin outcome in Rock Processing? Cecilia Felton: Yes. The tungsten, the prices don't really impact the Rock Processing business. When we look at the margin development for this year, it's driven by a positive price versus inflation last year with a weak comparable. We had some price pressure in wear parts last year. Then we have good leverage on the higher volumes. We have the positive impact from savings, but then a significant currency headwind of 1.7 percentage points. So those are the main components for the margin development within Rock Processing. Stefan Widing: The tungsten dynamics will be in the machining business. That's where we have it. Operator: The next question comes from Vlad Sergievskii from Barclays. Vladimir Sergievskiy: Thanks very much for taking my three questions. I'll ask them one by one. First one, could you give us an idea on what was the share of growth projects in the new equipment mining orders specifically? I suspect the share of total orders that you provide also includes aftermarket, which is, of course, the reflection of historical installed base. What would be interesting is to see the proportion of new mining demand coming from [ coal ] customers specifically. Stefan Widing: Yes. I mean we will -- you will get an updated figure with the annual report, but I don't think we give quarterly breakdown for commodity. I'll look at you, Louise. Louise Tjeder: No, I think we can wait. Stefan Widing: Yes. What I can say is that, of course, copper and gold are -- have been a bit stronger than the average that you would see in 2024. But as I also said, it is a broad-based demand picture. I mean, we have a good business within silver, palladium and so on as well. So slightly higher than the historic average, but yes, not materially higher. Louise Tjeder: I think it's a fair reflection that the quarter looks quite similar as the -- on a full year basis. Vladimir Sergievskiy: Understood. That's very helpful. Also, is there a reason why orders from mining customers in the Rock Processing were down? Is it a function of commodity mix over there compared to your main mining business or something else? Stefan Widing: No, actually, the main reason this quarter was high comps. They had some larger orders and a strong demand in Q4 of '24. The underlying demand, as we see it, is unchanged. Then of course, if you compare to our mining business area, they don't have the same dynamics in the sense that their largest commodity exposure is to iron ore, where you have a lot of crushing and screening. And iron ore, of course, is at decent levels, but it's not at the gold, copper, silver type dynamics there. And then finally, downstream' mining have a different -- slightly different cycle than upstream' mining. It tends to be a little bit more late cycle. You need to first ramp up production enough to hit your thresholds for the processing plant capacity before you do additional investments there. So, it is a little bit of different dynamic. But overall, the mining demand in Q4 also for Rock Processing was robust. Vladimir Sergievskiy: Excellent. My final one would be on cutting tools. You mentioned some pre-buying effects in China because of the tungsten price. Why do you think you are not seeing those pre-buying effects outside of China? I assume your customers can see what's happening to tungsten price and can anticipate what will happen to cutting tools price later on. Stefan Widing: I can start, and you can see if you want to add something. Yes. Of course, it's -- we don't have a straight answer to why we see a different dynamic. But one reason is that the pricing dynamics in China is different. In China, the pricing for cutting tools are also more directly linked to the tungsten price. While in the rest of the world, it is, sort of, embedded into a normal list price. So I think it's, the visibility is much higher. And also, I think the way they operate is a little bit different as well, but it's difficult to say, but that would be my speculation. Cecilia Felton: And maybe also another factor that could have an impact is we haven't had price increases in China for a very long time. So this is a little bit of a new phenomenon. I think in the rest of the world, Europe, U.S., we have had continuous price increases for a long time now. So, I think that could also feature into the dynamic. Stefan Widing: I think it's a very good comment. I mean, we have had many years in China where price increases has been off the table completely. Now also our local competitors, which have been operating at very low margins are -- have to raise prices in line with the tungsten increase, which maybe creates a broader market dynamic anticipating this phenomena, so to say. Operator: The next question comes from Daniela Costa from Goldman Sachs. Daniela Costa: I have two. One is a follow-up on this tungsten debate. When we think about the technologies it gets used on, is there any potential substitution? Have you seen that in the past when tungsten prices went up a lot? Or is it just simply not possible and customers are just going to have to eventually weather the full price increase? That's my first question. I'll ask the second once you answer this. Stefan Widing: There is, to my knowledge, no substitute, unless you go to even more advanced materials such as diamond-based materials and so on, which is even more expensive. Daniela Costa: Got it. And then one other thing, I guess, that we have, sort of, started to hear about is more and more, sort of, memory chip shortages, I guess, throughout your portfolio, be it in metrology or in some of the automation that you have on mining, I'm not sure. Can you talk through like how significant a user you are of this and whether you see any tightness? Or how are you prepared for potential tightness there? Stefan Widing: We see no impact from that. And I mean, overall, we have, of course, it's high mix, low-volume products that we have in this area. So our volumes are -- we tend to not feel this kind of dynamics since we can always, worst case, find things on the spot market since our volumes are so low. Operator: The next question comes from Sebastian Kuenne from RBC. Sebastian Kuenne: Thank you for taking my two remaining questions. One again on tungsten. You got your own mine, as mentioned. Can you confirm that it has about 1,000 tons of tungsten output per year? And then I would like to know if your priority is to maintain the margin in the tooling business or to kind of take a little bit of market share, because you can be less aggressive on the full price increases? Or if you go with the same price increases as your competitors and therefore take a bit more profit? I would just like to understand a little bit more your thinking here. Stefan Widing: I think the last question, I think we got it last time as well, and my answer is the same. I mean this is, let's call it, the business tactics or business secret. We will not give that away to the audience. So we will manage that tactically as we feel gives the most value to the business. Sebastian Kuenne: I think you mentioned earlier something like flat margin if volumes are not increasing, when it's were to increase, you get some operating leverage in the tooling business. Cecilia Felton: Yes, that will come with a -- yes, just because we would have better cost absorption with higher volumes, that is what will drive a higher -- a more normal leverage around 40% as opposed to the 20%, 30% we're seeing at the moment. Stefan Widing: And on the mine output, I don't have a ton for you. But what we can say is that for -- in terms of the overall production of powder, the mine is roughly or just over 10% of our supply. And then 55% roughly is recycled material from buyback programs, and the rest is sourced from other sources to make sure we have a diverse supply base. Sebastian Kuenne: Understood, okay. And then, my second question is on mining OE. You mentioned that you plan to increase capacity this year for obvious reasons. And in what areas do you see bottlenecks specifically on the supply chain at the moment? Stefan Widing: I mean, historically, we have typically seen bottlenecks with major components such as engines or certain drivetrain components. We worked fairly diligently about a year ago to get ahead of that this time. So at the moment, I mean, we can produce as we have planned to produce. No specific bottlenecks. We have, of course, been helped, A, by the fact that we were early out here. And secondly, that we don't -- I mean, in general, we don't see this type of, let's say, increase in production in adjacent industries. So, we have -- we can get what we want, so to say, for the moment. When it comes to assembly and these kind of things, we can scale fairly straightforward with partners, our own people and also the fact that we have said before that we have also new sites coming online in Asia, both in India and Malaysia. So it's -- we can produce what we have or want to produce right now. Operator: Next question comes from Max Yates from Morgan Stanley. Max Yates: Just two quick questions from me. Just the first one is on the aftermarket side of mining. I guess, we're kind of used to these businesses growing mid- to high single digits and some people would make the case that given the commodity price backdrop, there's a huge amount of incentivization to get stuff out of the mines by the customers. But that's also been happening already. So, I guess my question is simply kind of from those, sort of, 8% growth rates that we're seeing now, is it actually possible for the business to grow much faster than that given volume production rates, what the customers are doing already? Or would we think that is a very good growth rate historically and therefore, kind of any acceleration or meaningful kind of next step-up has to come from the brownfield and greenfield? Stefan Widing: I mean, we stick to what we have said in terms of long-term growth rate should be high single digits. Now in this quarter and some quarters in '25, we have been in the double digits. And that is maybe a bit of an acceleration driven by the commodity prices and the fact that customers want to push even harder. But I think the long-term trend, we believe it should be high single digits. And it's driven by a number of factors. Our fleet size continues to grow. That obviously drives aftermarket growth. The fleet is still very old in relation to historic fleet age. That also drives aftermarket. The technology content in each machine we deliver is increasing constantly, which both means you need more service and parts, different types of parts as well, sensors and so on. It also increases our aftermarket capture rate because the more advanced the machine is, the more difficult that is for a third party or local service workshop to do the service. So, all of these things are combining into the dynamic that we are seeing this healthy growth in the aftermarket business. Max Yates: Okay. And maybe just a follow-up. Obviously, if you kind of go back a few years, there were a lot of discussions around -- well, at least from the, sort of, investment community about, sort of, potentially a separation of Sandvik into the machining business and the mining business. We're continuing to see kind of businesses simplify across industrials. I guess your share price and multiple would kind of indicate your decision for not doing that at Sandvik, given it's clearly been a great run for the share price. I guess my question is, to what extent do you still discuss this internally? And is there any consideration on this debate as to it matters where machining is in its cycle and if we get to a more, sort of, mid-cycle level in demand and margins, then that decision comes more back on the table? Or given where the multiple is versus the peers, which looks very healthy and looks like there's no major discount versus the peers, is that decision -- is that discussion really internally, kind of, off the table for now? Just -- so the latest thinking around that would be helpful. Stefan Widing: I mean, our approach to this has always been that you have to have a very long-term perspective. We have obviously explained before how we believe we can be value accretive to our shareholders based on the strategy and execution that we have had or have. And we are, of course, very happy that we feel we have gotten a recognition for that in the past, yes, 12 months or so. And if the discussion would be there in any way, it would never be around tactics around share price or cycles or anything like that because if you do it, you do it once and for eternity, so to say. So it has to be driven by other fundamental reasons. And we believe, as we have said, that Sandvik is a great group. We have 23 market-leading divisions. And based on the strategy and the operational performance, we should be able to create value, and we have created value now in the current group structure. Louise Tjeder: Okay. So we have a few minutes left, and three in line, so I ask you to keep your Q&As short. Operator: The next question comes from James Moore from Rothschild & Co. James Moore: I'll try and make it shorter. If cutting tools were high single, machining overall 15%, it would suggest 80% for powder and software. Could I assume triple-digit powder in 2030 software? And I'll give all three together at the same time. And on whatever the tungsten and tariff price impact is to the whole of machining in orders in the fourth quarter, is that the peak? Or would you expect that impact as a percentage of contribution to growth to increase going forward? And finally, on the mining aftermarket side, you said high single, I think? Did you say the number? Did you say if it was 7 or 8? And how are Rock Tools and Ground Support doing? Are they flat or down? And what's happening there? Stefan Widing: Okay. Louise Tjeder: That was record long, is that okay? Stefan Widing: If we start with the growth in machining, I mean, as we said, software is growing double digits. Now, it's not in the 20% to 30% range. And if you wait a little bit, you will soon get the broken out Intelligent Manufacturing restated figures, as you know, since we will start to report it separately. So then you will get even more or you will get the exact figures. But it's not in the -- it's not -- it's below 20%, let's say that. I'll jump to your third question on... Cecilia Felton: Rock Tools and Ground Support. Stefan Widing: Rock Tools and Ground Support, yes. Yes. So, I mean if parts and services are growing double and aftermarket is high single, you can see that they are a little bit dilutive. That is, I would say, normal. They -- all the dynamics I mentioned around the growth dynamic, around service and parts, all of them are, of course, not relevant for Rock Tools and Ground Support. They are more purely production-driven. So you have a little bit of a lower overall market growth there. On tungsten, I'm not sure if we can say about that. Cecilia Felton: I think, well, it was a question on tungsten and the tariff and this is reaching the peak now in terms of the PV impact. I think here, there are -- I mean, some dynamics is that we will start to have these effects also in our comps from the second quarter onwards. So that's, of course, limiting the impact when you look at the year-over-year development, but I think in terms of, are we at the peak or not, it's very hard to say, both how tungsten or ATP prices will develop, also with tariffs. There were some discussions, as you know, between U.S. and Europe, again, just a couple of weeks back around additional tariffs. So very hard to say, I think, how this will develop in '26. Stefan Widing: Yes. Louise Tjeder: All right. The time is out. The idea was good, but we can't manage now to take any more questions. But please reach out to Investor Relations, and we can help you further. And with this, we thank you for calling in, and as usual, for good questions. Thank you.
Operator: Good morning. The Roper Technologies conference call will now begin. Today's call is being recorded. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing 0. I would now like to turn the call over to Zack Moxcey, Vice President of Investor Relations. Please go ahead. Zack Moxcey: Good morning, and thank you all for joining us as we discuss the fourth quarter and full year 2025 financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer, Jason Conley, Executive Vice President and Chief Financial Officer, Brandon Cross, Vice President and Principal Accounting Officer, and Shannon O'Callaghan, Senior Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and are also available on our website. And now if you please turn to page two. We begin with our safe harbor statement. During the course of today's call, we will make forward-looking statements, which are subject to risks and uncertainties as described on this page in our press release and in our SEC filings. You should listen to today's call in the context of that information. And now please turn to page three. Today, we will discuss our results primarily on an adjusted non-GAAP and continuing operations basis. For the fourth quarter, the difference between our GAAP results and adjusted results consists of the following: amortization of acquisition-related intangible assets, and financial impacts associated with our minority investment in Indicor. Reconciliations can be found in our press release and in the appendix of this presentation on our website. And now if you please turn to page four, I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil? Neil Hunn: Thank you, Zack, and thanks to everyone for joining our call. As we turn to page four, you'll see the topics we plan to cover today. Start by highlighting our Q4 and full year performance, then Jason will walk through our enterprise financials, our Q4 segment performance, our balance sheet and capital limit capacity. Next, we'll discuss our segment highlights and introduce our 2026 guidance and then we'll close with a few summary thoughts before opening the call for questions. So let's go ahead and get started. Next slide, please. As we turn to page five, I want to highlight three takeaways for today's call. First, we delivered solid execution in 2025. Revenue was up 12%, EBITDA was up 11%, and free cash flow was up 8%. Importantly, enterprise software bookings grew in the low double-digit range for the year providing strength as we head into 2026. Second, we continue to invest for our long-term and sustainable growth. That said, organic growth this past year was below our expectations for 2025, and we own that. Our organizational focus and resolve are even stronger coming into this year. We've upscaled talent, sharpened strategy, improved execution across the portfolio and that work is showing up for the enterprise. To this end, our application software business, save for Deltek, improved organic growth in the 70 basis point area demonstrating broad-based growth improvements occurring within the segment. Importantly, we're not starting the year assuming organic growth will inflect in 2026 despite the traction we believe we're starting to achieve. We're going to execute and will reflect any improvement in organic growth in our guidance as it materializes throughout the year. We'll have much more to say on this later in the call. On AI specifically, we continue to be excited about the AI product opportunity because our businesses sit directly inside mission-critical, high-frequency workflows where we already have deep domain knowledge, proprietary data, and trusted distribution. The way AI can move from productivity to on-stack embedded automation improves outcomes for our customers and is highly monetizable. Importantly, our decentralized model lets each business deploy AI with the appropriate domain specificity across their various end markets. To further accelerate our pace of AI product development, we hired Shane Luke and Eddie Raphael to lead the Roper AI accelerator team. They'll coach and partner directly with our businesses, build a small AI development strike team, and leverage reusable elements and best practices across the portfolio so we can deploy AI with increasing speed and market-specific precision while scaling what works. Exciting stuff for sure. Zack Moxcey: And our third key takeaway centers on capital allocation. Neil Hunn: During 2025, we materially advanced our portfolio and foundation through capital deployment, deploying $3.3 billion towards high-quality vertical software acquisitions during the year, highlighted by Central Reach, SubSplash, and several tuck-in acquisitions. Also and importantly, we leaned into opportunistic repurchases buying back 1.1 million shares for $500 million in Q4. As we look to 2026, we have north of $6 billion of capacity for potential M&A and share repurchases. We're very encouraged by the size and quality of our acquisition pipeline and we expect to remain active while staying highly disciplined on price and business quality, and in parallel, we'll continue to use buybacks opportunistically when they represent the most attractive risk-adjusted path to durable cash flow per share compounding. So with that, Jason, let me turn the call over to you so you can walk through our quarterly and full-year results. Jason? Jason Conley: Thanks, Neil, and good morning, everyone. We'll start off here with the fourth quarter results. To summarize, we finished ahead of expectations on DEPS, driven by very strong margin performance. Revenue of $2.06 billion was up 10% over the prior year, with acquisitions contributing 5% and organic growth of 4%, which was below our expectations. I'll expand on this shortly. EBITDA of $818 million was also up 10% over the prior year. Notably, our core EBITDA margin expanded 60 basis points in the quarter, representing 54% incremental margin. DEPS of $5.21 was above our guidance range of $5.11 to $5.16, and up $0.40 over the prior year. Shares were reduced by 1.1 million in the quarter for repurchases, which you see partially showing up here in our diluted share count on a year-over-year basis. However, the repurchase did not impact DEPS in the quarter versus our guidance, given the partial quarter share count benefit and higher interest expense. Now if you turn it with me to Slide seven, I'll walk through the Q4 segment performance. Application software revenue grew 10% with organic growth of 4% and margins were solid, expanding 70 basis points to 42.2%. It's important to outline some details on organic revenue. Recurring revenue grew 6% in the quarter, however, nonrecurring revenue was down 8% in the quarter and was the primary driver to the lower end of our mid-single-digit outlook. In our last call, we talked about Deltek being the big swing factor in the quarter. With the prolonged government shutdown, large GovCon commercial activity and perpetual license revenue, was meaningfully impacted, leading to Deltek being up at the lower end of mid-single digits for the year as compared to the solid mid-single-digit plus grower it's been over the decade that we've owned the business. That said, we are cautiously optimistic about a 2026 improvement for Deltek given both the 2025 disruptions caused by Doge, and the shutdown, and the forward benefit of the O triple B appropriations coming into the market. As improvements occur, we will reflect this in our outlook. For network software, revenue grew 14% with organic growth of 5%. Margins were lower at 52.8% due to the recent bolt-ons for DAT that are currently scaling into profitability. On organic revenue, recurring growth here was also 6%. The recurring performance was consistent with patterns over the last two quarters with mid-single-digit growth at DAT despite a muted market backdrop and steady improvement at Foundry. However, nonrecurring revenue was down 3% on lower services revenue and some customers electing to move from perpetual to SaaS, which negatively impacts the quarter but benefits long-term growth and customer lifetime value. For our test segment, revenue grew 6% or 5% organically, while margins held flat to the prior year at 34.8%. NDI outperformed in the quarter given strong demand for solutions in the cardiac ablation space, while Neptune was down slightly as expected. As we comped against a stronger prior fourth quarter and worked through the final surcharge negotiations. Now let's turn to slide eight, where I'll summarize our 2025 full-year results. 2025 was a solid year in terms of cash flow and DEPS performance, despite lower than expected organic revenue. Revenue posted at $7.9 billion or up 12% over the prior year. Acquisitions contributed nearly 7% growth. Of note, we acquired two great platform businesses in Central Reach and Subsplash that will be accretive to 2026 second-half organic growth. We also made three strategic bolt-ons for DAT that significantly automate workflow in the spot freight market and will gain adoption in the years to come, which will ultimately inflect the growth rate for DAT. Organic growth was nearly 5.5% which Neil will discuss in the segment detail. EBITDA reached $3.1 billion or 39.8% margin and was up 11% over the prior year. Of note, core margin improved 30 basis points and represented 47% incremental margin, which is in line with our long-term growth algorithm. DEPS of $20 was up 9% over the prior year and reflects the top end of our 2025 guidance range provided in January, despite lower organic revenue and in-year dilution from recent acquisitions. Free cash flow of nearly $2.5 billion was up 8% and represented 31% of revenue, which is in line with our initial free cash flow margin framing for the year. This represents an 18% CAGR since 2022, or excluding the impact from section 174 in both periods, it was at 14%. As we look forward to 2026, we expect higher growth than in 2025 through benefits from working capital, and cash tax improvements. This will put us safely over 30% of revenue next year issued in the 2025. However, Q1 will be a bit lower given the timing of coupon payments for new bonds. This, of course, does not contemplate future capital deployment towards either M&A or share repurchases. Neil Hunn: Which brings us to our balance sheet discussion on Slide nine. We're entering 2026 in a strong financial position with a net leverage ratio of 2.9 times and ample near-term liquidity with about $300 million of cash nearly $2.7 billion available on our revolver. With this position and strong forward cash generation, we have over $6 billion capacity for capital deployment this year. Regarding M&A opportunities, we've been proactive and successful in executing high-quality acquisitions for the last couple of years despite a weak M&A market. Most anticipate the market to pick up in 2026, which we view as a net positive given Roper is a home of choice for many acquisition targets' CEOs. Additionally, we have the attractive optionality of a share repurchase program, which was authorized and commenced in the fourth quarter. As Neil mentioned, we deployed $500 million to acquire 1.1 million shares in the quarter at an average price of just under $446. This leaves us $2.5 billion remaining on our current $3 billion authorization. We will remain agile in deploying capital to the best return for shareholders. Given the current valuation dislocation, we are now very pleased to have the buyback option available. With that, I'll turn it back over to Neil to discuss the segment performance and outlook. Neil Hunn: Thanks, Jason. As we turn to page 11, let's review our Application Software segment. Revenue for the year grew by 16% in total, organic revenue grew by 5%. EBITDA margins were 42.5% and core margins improved 80 basis points in the year. For the segment, we saw recurring and recurring revenue grow on an organic basis 7% for the year and total organic revenue improved about 70 basis points save for the Deltek related market weakness. Both of which provide evidence of underlying strength for the businesses in this group. Aderant continues to execute from a position of strength. FY 2025 revenue grew in the mid-teens area with strong bookings throughout the year. Importantly, they're leaning into the right long-term work, accelerating SaaS and AI-led innovation while modernizing their tech platform and data lake. Deltek was the primary weaker part of the story for this segment and has been straightforward all year, with GovCon remaining a challenging market throughout most of 2025. That said, we view the passage of the O triple B as a positive development for the market. It should drive upside over time, but we've not included any benefit in our 2026 guidance, and we'll monitor customer activity as the year progresses. Vertafore has another solid year with growth driven by strong recurring revenue performance and continued execution on product and customer outcomes. Looking ahead, the team is leaning into a focused set of priorities. Scaling automation, particularly AI-enabled workflow improvements, while continuing to deliver steady innovation to the agency and carrier ecosystem. PowerPlan delivered another strong year with healthy recurring growth and steady progress on product modernization and cloud migration. They continue to invest in product innovation, customer experience, and internal operating capabilities improving their long-term organic growth profile. Shout out to Raffi for carrying the leadership mantle forward at PowerPlan and great job managing the transition from Joe. Illumia, formerly known as Seaboard and Transact, continues to execute well and is progressing in its integration and platform roadmap while maintaining solid commercial momentum. And we're excited to welcome Greg Brown, our new CEO at Illumia, brings a long and successful history of leading scaled software businesses. Congrats and thanks to Laura, Rachel, Taran, and Rob for executing the VCP driving the business combination and achieving the year one target. We look at the broader portfolio of businesses we've acquired over the last couple of years: Centellus, Transact, SubSplash, Central Reach, and ProCare, feel very good about the quality and long-term growth potential of this group. However, ProCare did not perform to our expectations in 2025, although we do feel good about the business building that occurred last year. Specifically, we improved payments execution, upgraded the entire leadership team, and continued to win competitively in the market where ProCare remains a category leader. The biggest constraint was implementation timing across both software and payments which delayed customer time to value and weighed on payments volumes. Improving implementation speed and delighting the customer base are the top priorities. ProCare's leader Joe Gomes has executed this playbook before at PowerPlan. Central Reach is off to an outstanding start and ahead of our deal model. The business is scaling well with strong recurring software momentum and expanding profitability, they're building a broader growth engine through cross-sell and steady cadence of new product releases, including AI-enabled offerings. Now turning to our outlook for 2026. We expect organic growth to be in the higher end of the mid-singles range. We also expect a modest back-half weighting as Central Reach turns organic and non-recurring comparables ease in the second half. As mentioned previously, maintaining a conservative posture in GovCon at Deltek until we've seen sustained improvement in commercial activity. So overall, application software remains a durable growth engine, supported by recurring revenue momentum and continued product execution across this portfolio. Please turn with us to page 12. Total revenue growth in our Network segment was 8%, organic revenue grew 4% for 2025. EBITDA margins came in at 54.1%. DAT continues to execute well on what they can control. Broker integrations, value capture, and trust in network, leading to ARPU expansion. Although the freight recession persisted throughout 2025, DAT is continuing its evolution from a traditional load board into a more automated market where brokers and carriers can match loads with greater trust efficiency and increasingly transact with the platform. And as this happens, DAT's TAM and monetization opportunities grow. To this end, DAT is advancing its AI-first operating model with concrete use cases across carrier onboarding, fraud detection, freight matching automation. This is a pattern we like, AI then improves customer outcomes, lowers transaction friction, expands our TAM, where you have a very high rate to win. ConstructConnect had another strong year of recurring revenue growth and the team made material technical advances with their AI-based takeoff solution Boost. Foundry is making steady progress with year-over-year growth in ARR as the market continues to recover. We continue to be excited about the AI product development at Foundry because it fits naturally in the creative workflows small improvements can materially improve artist throughput. Importantly, these are high-frequency, high-value tasks that Foundry already sits inside. AI is being delivered as embedded features that customers should adopt quickly given the clear and integrated efficiency gains offered. MHA, SoftWriter's SHP continued to execute well supported by stable end market demand and strong reoccurring revenue models. Each team is advancing its roadmap with targeted investments in functionality, workflow efficiency, and service levels to deepen customer value and retention. SunSplash is off to a great start in the portfolio with strong execution and solid momentum across the business. We're encouraged by the durability of the revenue model and the opportunity to continue expanding value delivered to customers over time. As we turn to the outlook for the year, we expect network software organic growth to be in the higher end of the mid-singles range, representing a modest improvement versus 2025. We expect a stronger Q4 driven by Subsplash turning organic in the quarter. Of note, remain conservative on DAT by assuming no meaningful improvement in the freight market. Now please turn to page 13 and let's review our TEP segment's full-year results. Revenue here grew 7% on a total and 6% on an organic basis. EBITDA margins remained strong at 35.7%. We'll start with NDI whose growth is being driven primarily by sustained momentum in its electromagnetic tracking solutions supported by strong OEM demand and program ramps. Importantly, OEM order activity has remained strong and the business is converting that demand into higher revenue scale and operating leverage. Great job by Dave and the entire team at NDI. Verathon continues to perform very well with solid growth across its GlideScope and BFlex franchises. Importantly, Verathon is the US market share leader in single-use bronchoscopes, reflects several years of consistent execution and reinforces the durability of a model as the business continues to take share in an attractive procedural workflow area. Looking to 2026, we're optimistic about several new product launches planned throughout the year. For the full year, Neptune grew modestly notwithstanding the year-long backlog normalization supported by demand for its static ultrasonic meters and its cloud-based software solutions. Although the second-half commercial challenges tied to our tariff surge program eased late in the year, we remain cautious and are not underwriting a recovery in our 2026 guidance. Finally, the balance of the businesses in this segment, Civco, FMI, Innovonix, IPA, and RF Ideas, performed really strong throughout 2025 and are meaningful contributors to the segment's results. For the full year, we expect segment organic growth in the mid-single-digit range with the first half being more in the low singles area as Neptune's backlog continues to normalize. Given the more limited visibility at Neptune, we're taking a cautious approach as we monitor underlying demand over the next couple of quarters. With that, please turn us to Page 15. So now let's turn to our Q1 and full-year 2026 guidance. Based on what we previously discussed in our segment overviews, we're initiating our 2026 financial guidance to grow full-year revenue in the 8% area, organic revenue growth between 5-6%, and adjusted DEPS of $21.3 to $21.55. Our guide assumes a full-year effective tax rate in the 21% area and more in the 22% area for Q1. To reiterate from earlier, our full-year guidance does not bake in improvement at Deltek's GovCon business or in DAT's freight market and assumes modest top-line weakness at Neptune versus 2025. As discussed, we expect stronger second-half organic growth driven largely by Central Reach and SubSplash turning organic and easing non-recurring comparables. Our guidance does not assume a meaningful revenue uplift from our AI development work either. We view AI as incremental upside as we scale commercialization across the portfolio. Finally, we remain positioned to be active and opportunistic on capital deployment. We continue to have a robust M&A funnel, a meaningful remaining share repurchase authorization, and substantial financial flexibility, and we'll remain disciplined and unbiased between M&A and buybacks based on what drives the highest and most durable cash flow per share compounding. For the first quarter, we expect adjusted DEPS to be in the range of $4.95 to $5 reflecting the dynamics previously discussed. Now please turn us to page 16 and let's open up for your questions. We'll conclude with the same three takeaways with which we started. First, in 2025, we delivered both double-digit revenue and EBITDA growth and solid free cash flow. Enterprise software bookings grew in the low double-digit range, which positions us well entering 2026. Second, we're investing for long-term sustainable growth improvements while staying disciplined in our expectations. Throughout 2025, we upskilled talent, sharpened strategy, and improved execution across the portfolio and we are accelerating AI product development. We're not baking in an organic inflection in 2026 and our guidance will reflect improvement as it materializes. Third, we materially advanced our portfolio through capital deployment. We deployed $3.3 billion into high-quality vertical software acquisitions, executed opportunistic repurchases, and maintained more than $6 billion of forward capacity. As we look ahead, Roper remains an advantage and preferred buyer for both management teams and private equity sellers and believe the M&A backdrop remains constructive as private equity firms face increasing pressure to generate liquidity for limited partners. Our pipeline is robust and our team is deeply engaged. We will remain disciplined and unbiased on valuation, and business quality. In parallel, we'll continue to balance acquisitions with opportunistic buybacks, allocating capital to whichever path drives the best risk-adjusted and long-term cash flow per share compounding. As we turn to your questions, please flip to the final slide strategic compounding flywheel. What we do at Roper is simple. We compound cash flow over a long arc of time with a disciplined strategy anchored on three things. First, we own market-leading vertical-focused businesses: application-specific, deeply embedded, and mission-critical. These are durable franchises with highly recurring revenue and organic cash flow growth that can improve over time. Second, we're running a decentralized operating model so our teams stay exceptionally close to customers and their workflows, so we can consistently compete and win. That customer intimacy is a core competitive advantage. It's also how we win in AI. In our markets, AI isn't a generic overlay. It has to be grounded in a real workflow context, tuned to domain-specific use cases, and deployed through trusted embedded relationships. So our AI delivers measurable value and better customer results. Third, we pair that with disciplined, centrally-led capital deployment. Focused on high-quality M&A and opportunistic share repurchases. Allocating capital objectively to maximize durable cash flow per share compounding. Niche leading businesses, decentralized operations close to customers, and disciplined capital deployment. That's our long-term compounding flywheel. We're excited to compete and win and continue delivering long-term and improving cash flow compounding per share. So with that, thank you for your continued interest and support. Let's open it up to your questions. Operator: We will now go to our question and answer portion of the call. We request that our callers limit their questions to one main question and one follow-up. If you would like to ask a question, you may do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then the digit two again. We request that callers limit their questions to one main question and one follow-up. Your first question comes from Brent Thill with Jefferies. Your line is now open. Brent Thill: Good morning, Neil. Regarding Deltek, I'm curious if you could just give everyone a sense of what you're baking into the 26 guide and how you're protecting against another potential government shutdown. Yeah. Go ahead, Jason. Jason Conley: Yeah. So good morning, Brent. Yeah. I think we are not assuming an improvement this year. You know, the fourth quarter was depressed by the perpetual license revenue. As I talked about, most of the Con Enterprise still buys perpetual licenses. So that's what drove our lower organic NAS in the fourth quarter. So we don't think that's gonna repeat next year. So we do have a comp benefit, but otherwise, we're not really assuming improvement in that market until we see it. Brent Thill: Okay. And, on ProCare, Neil, what do you think needs to happen to get that back meeting expectations? Neil Hunn: I think it's just to go through a little bit of what we talked about in the prepared remarks and then add a little bit more to it. So, hey, the business is the leader in the marketplace. It is the clear leader. We've done a lot of good things there. We sort of cleaned up and fixed the payments cost infrastructure and processing capability. We've fixed and improved the go-to-market. So, we're competing and winning in the marketplace. We're winning a majority of the jump balls versus the primary competitor. And so the problem now is just pushed to the right. So now we're winning these opportunities, and we're slow to the software, which means we're slow to implement the payments. And that's the next sort of objective in front of the team there. So once we get that done, we feel much better about that. It's a completely fixable problem. It's one of the problems that you don't like to have problems generally, but when you do have one that is imminently fixable, which this one is, the larger problem would be if we had a competitive situation, something like that, which we do not have. Brent Thill: Great. Thanks. Neil Hunn: Yep. You bet. Operator: Your next question comes from Clark Jeffries with Piper Sandler. Your line is now open. Clark Jeffries: Hello. Thank you for taking the question. I wondered if specifically on the GovCon business, you could maybe give a rank order of kind of appropriation bills. What would have the most impact? Or within Deltek's exposure? What segments of the government getting those appropriation bills passed would be most significant? Neil Hunn: Yeah. So I'll just draw back to the O triple B. And this is as you know, we're not Deltek doesn't have direct exposure to the government. It's our customers that are the federal contractors that have the direct exposure to the government, just to remind everybody. The O triple B is heavy on defense, Department of War, Department of Defense, and DHS funding and spending, that tends those categories tend to have a larger percentage of contractor spend. It could be north of 50% of the whole category. It can be contractor spend, so that's definitely a tailwind. The civilian programs tend to have a lower percentage, so it's not necessarily a bad thing for Deltek's customers. But it's certainly better on the current appropriations, the O triple B. Clark Jeffries: Perfect. And then the last two years hovered around $3 billion deployed towards acquisitions. Wondering if you could talk about expectations for how much you might deploy in 2026? What scenario might push you towards a number closer to $4 billion or a number closer to $2 billion? What are you factoring into the deployment outlook for '26? Thank you. Neil Hunn: As we mentioned, there's about $6 billion sort of is what the forward capacity is over the next twelve months. We have the two levers available to us on the capital, the M&A and the buyback. On the M&A side, you know, the thing for us I mean, I've been here fifteen years, Jason's been here twenty. You know, when you're building a business that has an M&A lever, we never view the amount of capital in the next twelve months as the budget or we gotta spend it because we're building a business that's gonna own businesses in perpetuity. So you have to buy very high-quality businesses at an appropriate price. And so that discipline guides us. So it's hard to set an expectation that says we're gonna get x dollars deployed against the $6 billion, excuse me, in M&A or buyback. But we like having both levers available to us, and we're gonna do what's best objectively to compound cash flow per share at the best rate we can. Jason Conley: I will say that we think this coming into this year, you know, I think the market is right for more assets to become available. I mean, we've been very proactive the last couple of years with a in a very muted market. So as I mentioned, I think it's a net positive for us, but, you know, we'll just stay disciplined and focused. Neil Hunn: Yeah. Don't mistake anything I'm saying. Like, was just saying, as Jason said, the opportunity the number of deals, the number of the amount of LP pressure on the GPs and private equity just continues to mount. There's gonna be there's an aging portfolio of very high-quality assets. A number of those assets that we have relationships with and are meeting with management teams and becoming the preferred owner. All that is very, very ripe for opportunity. But we're gonna remain, as we always do, disciplined. Finally, on that, over the last really, two and a half or three years, we've really leaned in and built capacity for tuck-ins and bolt-ons. That's a more predictable pace. I think we did seven or eight maybe eight small tuck-in acquisitions last year. That'd be more sort of predictable because it's a lower dollar per transaction but more of them. Clark Jeffries: Perfect. Thank you very much. Operator: Your next question comes from Joseph Vruwink with Baird. Your line is now open. Joseph Vruwink: Great. Thank you for taking my questions. On AI, when would you expect to get to the point of quantifying what AI means for Roper at maybe a more precise level? I think it's evident in certain areas already. The utterance callouts, you know, if they're mid-teens growth. They're 10 points above the segment. I would imagine customers want the cloud as part of their AI initiatives, and so there's an inherent uplift and positive correlation between Roper and AI for the legal space. Can you do that more holistically and attribute some of the organic improvement ex Deltek you're already seeing and say that's directly or indirectly related to AI investments? Neil Hunn: Yep. So appreciate the question. We spent a fair amount of time talking about that internally. A couple of guiding principles that we have internally is, one, we're not gonna AI wash or allocate revenue. Like other companies, have done or are doing. We're not gonna say x dollars, R&D's, therefore, y dollars of revenue is AI-related. So we're not gonna AI wash our revenue stream. That said, we do aspire to be able to report a number, yeah, that's Nick. AI revenue SKU related is x or y. Unfortunately, if we do that, I mean, we're gonna monetize AI in more ways than just AI SKUs. It's going to be cloud uplift. It's going to be in packaging. It's going to be lots of ways that we monetize this. So this is actually you know, it says simple. It does pretty hard from how we're gonna be able to sort of report this where it's credible. At the end of the day, Joe, you highlight the most important thing, which is we believe this is a TAM meaningful TAM expander for us, which means it should be a growth driver for us you'll see it show up initially in bookings and eventually into the recurring or reoccurring base. We see that at Central Reach. We'd expect to see it across several of our businesses starting this year. More broadly, as we sort of write the chapters on Roper, 25 the chapter on AI would be how we learned to develop the initial set of products across our software business. Essentially, every one of our software businesses either has or is right on the precipice of having AI-related product to deliver to our customers. 26, I think the chapter is gonna be how we commercialize. How do you sell, deploy, drive implementation? And ultimately sort of monetize all of the product. And so that's gonna be the journey of learning for us across the portfolio organization. We'll look forward to providing updates on that as we get through the year. Joseph Vruwink: Great. That's helpful. On your approach to guidance this year, I think it's very clear that you're gonna let the upside come to you and, you know, future changes are gonna happen as you see it. Can you maybe put some guardrails in magnitude of what that could ultimately mean? I'm thinking in the past, you've talked about how your current portfolio could be capable of sub and, in a best-case scenario, eight to nine. That's more of a long-term framework within FY '26. If things go right and you get some redirection and where the pressure is within the portfolio have been what sort of upside possibility could there be? Neil Hunn: So I would say the long-term to first point, the destination for the longer term certainly not a '26 comment. The longer-term entitled growth in a portfolio, we still have conviction is north of 8%. You know, we go company by company. About what their entitled realistically achievable growth can be so that number, sort of the target destination has not changed. We are definitely, as you've heard from our commentary, taking a much more appropriate and balanced view for the initial guide here. No improvement at Deltek on the government contracting side. No DAT market recovery, actually underwriting a slight decline at Neptune. And so you know, if you sort of thumb each one of those, I don't wanna get into the order of magnitude of what it could look like, but would say it definitely tilts more, conservative than, than in this past year, for instance. Joseph Vruwink: Thank you. Operator: Your next question comes from Dylan Baker with William Blair. Dylan Baker: Hey, gentlemen. I appreciate it. Maybe kind of following up on one of Joe's questions too. I think the Deltek perpetual piece makes sense, but you also called out some softness on nonrecurring due to some of those cloud migrations, and maybe that's just kind of rev rec of upfront for ratable. I guess, as you think about kind of AI's opportunity to accelerate this modernization and cloud journey given kind of the heavy maintenance space you still have there. How do you think about kind of that trade-off in those long-term economics? It seems favorable. I think it's kind of evident in the subscription bookings in that low double-digit framework. But maybe kind of walk through some of the nuance between those as well too. If you can. Thank you. Jason Conley: Yeah. Certainly appreciate the question. I think, you know, we've seen some of this just in our AS segment over the last years, you know, nonrecurring revenue has been sort of flattish, up a little bit, you know, here and there because you know, some of our businesses have moved more to the cloud, be it Aderant or in recent years PowerPlan. We see that at Deltek is gonna be a significant opportunity. So that's a part of our thinking in '26. Deltek's really put a lot of AI functionality into their cloud product. And so some of these large government contract customers are contemplating going to the cloud, and they have a big push for that. So you're right. That will obviously increase customer lifetime value. But it'll have a more muted impact in the year. So we thought through a little bit of those dynamics this year. And I think that's probably the biggest area where we will see that because a lot of the rest of our businesses are sort of on their cloud journey. But they will continue, to your point, to include, only AI features in the cloud, and so, that'll just increase adoption as we go forward. Neil Hunn: Yeah. And just to add to what Jason said, you know, we don't expect a pronounced j curve because we have a very large install base that's on-premise. That's gonna lift that is lifting and shifting at two to three x recurring. So the j curve is less pronounced than if because you're converting an existing recurring base at a higher level. And as you sort of, if you will, can a trip or convert net new perpetual to recurring. So they offset one another, and we think we have that harnessed in our guidance. Dylan Baker: Okay. Great. Thank you. And then maybe, Neil, for you too, on the kind of topic between platform and bolt-on M&A, I guess, you kind of give us a sense if you see any opportunity maybe as a part of AI, maybe not, but given kind of the current backdrop to accelerate some of the initiatives in one effort. I know we've built out kind of the bolt-on team. There's a little bit more visibility into those. Platform acquisitions, maybe have come down to a particular level as well. But just kind of think about kind of the mix between capital deployments between bolt-on and platform if you can. Thank you. Neil Hunn: Always hard to predict mix. I can tell you that if there is a genetic generally speaking, if there's a rank order, bolt-ons or tuck-ins are gonna be first order because they are advancing sort of the organic growth as direction of one of our platform businesses. At the same time, you always have a little bit of back-office G&A synergy, enables to sort of buy down the initial purchase price pretty quickly, and then you get to a growth-oriented. So that continues and will always be a focus of ours. What we see, by the way, on that front is it takes a little bit of time as we added the resources. They get to know the company. They build a relationship with our company. They build a relationship with sponsors and targets and founders. I think something like 60% of our pipeline for bolt-ons is either proprietary or founder-driven. That's a completely new motion for us. That would not have been the case three years ago. I think it bodes well, but these things do take time to matriculate through and mature to where they can become actionable. On the platform side, the number of opportunities and the high quality of assets is very interesting. The question on the table is gonna be what happens relative to valuation. We've never been a short-term, you know, next twelve-month multiple arbitragers. We're not gonna do that. But we definitely have to sort of we have to look at buybacks versus bolt-ons versus platforms on what is the best long-term compounding. In terms of value creation opportunities for us. Dylan Baker: Great. Thank you, guys. Operator: Your next question comes from Brad Reback with Stifel. Your line is now open. Brad Reback: Great. Thanks very much. I know you guys gave the software bookings for the entire year. Can you give us what it was in 4Q? Jason Conley: Yeah. It was up high single digits. And that is with Deltek being down in the low double-digit area. Actually, Deltek's SaaS was strong, but, like I mentioned, perpetual was down meaningfully. The rest of the portfolio performed pretty well. Vertafore had a strong quarter off of a really tough comp last year, so they're continuing to just have success in 2025, and that should be good for them for twenty-six. And then as I mentioned last quarter, healthcare has been really strong for us, and that was the same in the fourth quarter. Brad Reback: Great. Thanks. Neil, this is the second quarter in a row you've missed expectations. And you're guiding to a back-half acceleration in '26. So maybe take a moment and help us understand where the incremental conservatism is in the '26 guide versus the last couple of quarters? Thanks. Neil Hunn: Sure. So we did say and we're certainly disappointed with the last couple of quarters, but we did say this time last quarter we had a wider range of outcome, fan of outcome. Especially because of the uncertainty at Deltek. And so while disappointing, we try to be sort of very straightforward in that regard. I think for this year, I said it before, I'll say it again, when you look at where we're exiting this year, look at 25 compared to 26. And you just go and let me back up. When you look at 25, the initial guide versus where we ended up, it really reconciles to three things we talked about. It's Deltek because of GovCon. It's Neptune because of the dynamics we talked about, and it's ProCare. That almost fully reconciles the difference between the initial guide and where we ended up. You then have that in mind. You take it. You carry it forward. We're assuming in 2026, there's no improvement in Deltek. There is no acceleration at DAT. There's actually or right underwriting a modest decline at Neptune versus '25. And the only thing that sort of then you get the accretion to organic growth from SubSplash and Central Reach that turn organic this year. Then we have this easing second half not sort of nonrecurring. So optically, it looks like an acceleration through the year, but when you look at the pieces, it's actually pretty steady, save for the things that we just said. Jason Conley: Yeah. And just to remind you, all the Central Reach and SubSplash becomes organic second half. So it's gotta create some of that ramp. And I would just call out too, just again, just a small comp, a couple of call comp issues. Foundry gets a little bit better this year, and I know it's small dollars, but in network, it matters. And then, we had the '25 a pretty depressed network number because we were comping against a bigger number in '24. So that comp goes away. So there's some math too. Know, just going from '25 to 26. Brad Reback: Great. Thank you. Operator: Your next question comes from Terry Tillman with Truist Securities. Your line is now open. Terry Tillman: Yes. Hey, Neal, Jason, and Zack. Thanks for taking my questions. The first one is going to be on Deltek, the second one the follow-up is going to be on DAT. But on DELTECH and I know these months or these part of the quarters are probably less seasonally strong. But did you actually see any improvement in order volumes for perpetual in December or January? And also with Deltek, are the effects of Doge kind of lessening, or is that still in POC? And then I had a follow-up. Jason Conley: Yeah. So, Terry, I'll this is Jason. I think the, you know, December's always stronger than the other months, and that's just the natural kind of inertia. Of how orders flow in Deltek. I will say we had two large, contractor government contractor deals that slipped. So it was, like, right at the end. And so we think they'll both land in the first half of next year. But we've also sort of hedged that, just in case. But the so usually, we get some big deals, and they were right at the finish line, and they didn't close. But they're still in the queue, and we still think we're gonna close the rest of this year. Neil Hunn: Yeah. Exactly. This year. And just to pick up on that, Terry, as well, just to add. While the signature is on paper are slower because of the shutdown, the commercial activity, the pipeline build has actually been encouraging. It's been encouraging throughout. It's because, you know, all the this is an environment, unfortunately, that our customers live in. They sort of they're subject to the vagaries of what's happening in the government, but they have a business to run. And they have contracts that are likely gonna get awarded, and they have to sort of manage sort of our software in that regard. And so there's no competitive issue here at all. The has been asked, but zero competitive issue here. It's just deals that are building that are to the right a little bit given the uncertainty. Doge, I would say, is, to your question, is lingering impact, but it's not the topic that anybody's talking about the way it was in the first third the first half of the year of last year. Terry Tillman: Got it. I appreciate that. And just a follow-up is on DAT. Do you see ARPU lift continuing to play out through the year? And are you on track for that autonomous kind of load matching technology innovation to play out in '27? Thanks. Neil Hunn: Yeah. So we do expect ARPU to continue improving and growing in 2026. There's a couple of reasons for that. One is you just have like-for-like pricing that'll sort of get cascaded in during the year as it normally does. But for the second reason is we have more value to sort of sell to both sides of the network. And so you're gonna get, you know, in the past, it was just load board. So it's load board in pricing. Now it's load board in automation. It's load board in data. Load board in a number of things on both the carrier and the broker sides. In terms of the automated matching, it's early days. But we're encouraged by the progress. The tech unambiguously, the technology does the job. Let's just be clear. It is the ability for a broker to tender to the DAT one platform and automatically match a load and have a carrier pick it up, complete the commerce with payment sort of overlay across all that. Works, and it's working every day in the marketplace. The number one focus of that business is to build both sides of the network. That starts on the broker side by getting native integrations with their TMS systems. And you have seen and will continue to see during 2026 a cascade of announcements about the various TMS's that we're integrating with. That allows the brokering or the tendering to our platform to be native and the workflow of the brokers. And then we continue to build the carrier side of the network, gotta be a high trust, no fraud environment. That's part of the core technology that we have and we're integrating. So early days, but we like the tendering percentage. We like the completion percentages. We like the factoring percentages, and we wanna see that business scale as Jason and Shannon and the and Satish, the team at DAT look at this on a monthly basis. Terry Tillman: Thank you. Operator: Your next question comes from Ken Wong with Oppenheimer. Your line is now open. Ken Wong: Fantastic. Thanks for taking my questions. You guys are guiding to 5% to 6% organic for '26. You know, as we think about 1Q first half, with a lot of faster growth businesses coming in second half 4Q and no Deltek tailwinds, like, is there the possibility that you could be below that 5% low end? Any context there so we could properly level set our numbers? Jason Conley: Yeah. No. I don't think so. We're kind of thinking for AS, we'll be, you know, sort of in the mid-single-digit range with nonrecurring being flat and the recurring reoccurring being, like, mid-single-digit plus. Which is consistent with Q4 levels. I mean, you central reach turning organic. Not we're not gonna have the same nonrecurring, decline, like we did in the fourth quarter. And then as you mentioned, the second half gets better on the We've got this the nonrecurring, as I just mentioned, we get a better comp in the fourth quarter. So not a lot of I would just say not a lot of go get in that second half number. And then, on, on NS, you know, I think sort of the, you know, recurring revenue will be just sort of continue to be mid-single-digit plus out of the gate, and then as we go throughout the year, sub slash actually comes in in the fourth quarter, so that'll be that'll be helpful. And so think that's sort of how it sets up. Nothing nothing outside of that. To call out. Ken Wong: Got it. Really appreciate the color there. And then perhaps just any additional context you provide in terms of what the new business activity pipeline conversion looks like versus maybe the renewal business, you know, term expansion, contraction? And any details would be helpful. Neil Hunn: Ken, is that a broad portfolio question or specific to a business? Ken Wong: Broad, broad question? Yeah. Yeah. Just like a yeah. Correct. It's more of a broad kind of software selling you know, kind of trends that you guys are noticing across Yeah. Across the group? Neil Hunn: Understand the question. Yeah. I would say we're broadly encouraged by what we saw in the finishing the year. It was it was the bookings and retention statistics were quite good. You know, as you know, our enterprise, our gross retention in the mid-nineties for our enterprise businesses. That's steady to tick up a little bit during 2025. And then in terms of the bookings activity, hey. You know, while there's a little bit we expect there to be volatility quarter to quarter, low double-digit bookings growth in the year. And being pretty broad-based with sort of weakness at Deltek, I think is all you need to see. You know, we and so it's been it's been pretty good. Ken Wong: Okay. Fantastic. Thanks a lot, guys. Operator: Your next question comes from George Kurosawa with Citi. Your line is now open. George Kurosawa: Great. Thanks for taking the questions. You guys brought in some new AI leadership Shane and Edward, Would love to hear a little bit about the team they're building out, what you have them focused on, and if there's any kind of low-hanging fruit that you know, learnings they can apply across the portfolio. Neil Hunn: Yeah. So we're excited to have Shane and Eddie join and the team. They're starting to build out. So you know, three things they're generally focused on. First is, all in pursuit of accelerating the top-line goals, accelerating sort of our pace of AI product development and ultimately, you know, shipping, selling monetization. That's where the focus is. So three subcomponents to that. It's coaching and teaching. Right? Our businesses did a meaningfully above average, above expectation job in 2025, late twenty-four or '25 learning, making mistakes, learning, making mistakes, learning, around AI, AI AI development, what works, what doesn't, and getting product into the hands of customers. That was great to see. But some of these a lot of these AI tasks are quite complicated, complex from a technical point of view. And also, unlike regular way, software development, there's some art in this, in this AI development. And so Shane and Eddie and the team, they're bringing really bring just a history. These are people that studied machine learning and AI in university quite a while ago and spent their entire careers. They've seen a lot of pattern recognition. So they're gonna coach and teach our leadership teams, our technical leaders, our product teams on all things AI, ML related. That's one. Number two, they are gonna build an AI sort of development strike team or accelerator team to where when there are you know, a company might have more than it can do from its internal resources, and we'll supplement those teams to accelerate in some pockets. And then third, there is in their first quarter with the business and they met with most of our software businesses, there is clear opportunity for some reuse inside the portfolio, certain AI-based sort of capabilities we can sort of produce and sort of have if you will, Roper open source model where we can reuse some components and componentry. And so we're gonna focus there and early days, it's been just really great. They understand our culture. Our teams have really engaged them. And they're just looking forward to scaling the team. And getting to the work. George Kurosawa: Okay. Great. Did also wanna touch on the margin side. Core gross margins were up over one point in the quarter. Maybe talk through the tailwinds there. How do you how should we think about any sustainability to improvements? Jason Conley: Yeah. I mean, think we've always said in our long-term incremental margins at the EBITDA lines around 45%, did a little bit better this year. I think as we go into next year, you know, I think AS might be up a little bit. Network's gonna be down just because we've got the full year of convoy and our algo, rolling through. And so that'll accrete up over time, but a little bit of a drag in '26. And then you know, I think our dinner test segment will be for the full year sort of. We've got more consumables rolling through next year. Than normal, which has a little bit lower margin. And that's really more pronounced in the first half. So maybe down a little bit in TAP in the first half, and then it'll improve throughout the year. Operator: Your next question comes from Josh Tilton with Wolfe Research. Your line is now open. Josh Tilton: Hey, guys. Thanks for sneaking me in here. Neil Hunn: You bet. Josh Tilton: Maybe just first kind of appreciate all the color that you gave. A simple high-level one on the guide for next year. I On Deltek and DAT and Neptune. But if you were to take those three businesses aside and treat the rest of the organic business as one, like, what would be the one-line color on the rest of the organic business? Does the guidance assume that everything ex DAT, Neptune, and Deltek gets better? Stays the same, gets worse. Like, how would you characterize what the rest of the business has to do that's baked into the guidance? That make sense? Jason Conley: It does. Yeah. So, I mean, I would say broadly, you know, it gets a little bit better, but not a lot. Not meaningful enough. To draw inflection. That's baked in. I mean, when you think about we finished around 5.4%, the deals are a tailwind. This nonrecurring, in 10 basis points or so to the enterprise. And then, really, the swing factors, I talked about the confidence in Q1 twenty-five that didn't repeat. Then you just talk about like, the swing factors. It's all within Neptune. And that's what our low single-digit to mid-single-digit guidance has for TEP. And that's what kind of bridges you to the from the low to the high end. Josh Tilton: And then maybe just a quick follow-up. I understand that some businesses go organic in the second half. Is there any conservatism is the right word, but is there any conservatism? Is there any learnings that you saw following like, kind of the little hiccups that you saw in Procore that you're kind of applying or embedding or assuming will happen as some of these inorganic businesses convert to organic in the second half of next year? Neil Hunn: Yes, Josh, it's Neil. I'll take that one. So sure answer is heck yes. There's a lot of learning from our ProCare governance what worked, what didn't work, and how we're governing both SubSplash and Central Reach. And we can spend more time talking about offline. But in essence, when we see a small variance in a monthly reporting package, relative to one of the key levers in the value creation plan. In ProCare, we observed that variance for a longer time we decided to take action to correct it. Now we immediately jump to a corrective action, a countermeasure and, we don't let small variances turn into large variances. And as a result, you know, Central Reach is ahead of the underwrite model and SubSplash is on the underwrite model. For the outlooks for those businesses. Just that we can get in much more detail when we have more time offline, but that's the essence of it. Jason Conley: And I would just say that for know, for Central Reach and SubSplash, know, feel good about the contribution in the second half, you know, the path that we're on. Bookings momentum, the recurring, the gross retention, just the path to get to that accretion in the second half. We feel very good about that. Josh Tilton: Super helpful. Thanks, guys. Operator: Your next question comes from Deane Dray with RBC Capital Markets. Your line is now open. Deane Dray: Thank you. Good morning, everyone. Neil Hunn: Good morning, Dean. Deane Dray: Hey, this has come up several times today about the M&A bias and looking for a durable cash flow compounding. I'd be interested in hearing your thoughts about how do you rank looking at absolute dislocations in some assets prices today versus what you perceive as where there might be a wider moat against AI in these assets. So how are you weighing those? Neil Hunn: I wanna reframe, Dean, the question to make sure that we answer the right question. If not, if you correct us. And so the question is, you know, looking at both private and public companies that have evaluation dislocation, are we looking at that? And then how does the AI moat influence our thinking? Can you just reframe it? I wanna make sure we answer the right question. Deane Dray: Yes. So, yeah, I wasn't specifically talking about public valuations, but that would be great to hear that as well because you've done those in the past. Versus thinking more, strategically about where there might be wider moats? Neil Hunn: Yeah. So I would say so at the again, feel free. We won't ding you on one of your questions if I get I answer it incorrectly the wrong question. We're always for the long history of Roper, we're always investing in these vertical market application-specific businesses with deep deep moats. Right? And so that does not change. We believe in the AI world, you know, these the modes where you're intimate with the customer, you have unique and proprietary data. You're embedded in high-frequency workflows. Where on-stack AI is easier to implement, easier to monetize, and ultimately translates to the automation of tasks, which is this TAM expansion. We really like and are leaning in it. We're seeing it playing across our 21 software businesses. Days. So continue to lean in that thesis from a capital deployment point of view. Deane Dray: That's really helpful. That's what I was looking for there. And just a quick one on Neptune. You know, we've talked about the order delays. Is there how much of an impact is the spike in copper played? Is there a sticker shock? Is that does that need to be, kind of ripple through the market to reprice? It's just, you know, what's the impact there? Neil Hunn: I would say that, what we talked about last quarter, largely in the bucket of tariffs, but it's tariffs, it's copper pricing, this the generally the shock to the cost structure of a water meter when we started in really July pushing a surcharge to accommodate for that increase in cost of goods. It was definitely a shock in the system in Q3, and it really evaded during Q4. So I think our base case assumption is that is really in the rearview mirror and set to the side. And moving forward, it's just about the normalization of volumes in the market sort of on the very tail end of the COVID spike in volumes, and now we're on the backside of that spike into more normalizing range of volumes in the market. Deane Dray: Thank you. Neil Hunn: You bet. Operator: Your next question comes from Joe Giordano with TD Cowen. Your line is now open. Joe Giordano: Hey, guys. Good morning. How are you doing? Neil Hunn: Hey, Jeff. Good morning. Joe Giordano: Hey, I'm just curious how you're now weighing like, in terms of capital deployment, like, different, like, timing horizons here. Like, Right? Like, you have stock today is, I don't know, 15% below the average price of the buyback in the fourth quarter. You're trading at like almost a high single-digit free cash flow yield now. And it's a portfolio that you're intimately like, close to relative to something that you might buy that drives top line that is something that inherently has more risk because you don't know it as well? Like, how are you weighing you know, something that like, the certainty of what you know versus, like, the risk-reward of something you don't know at the price that you're paying? Neil Hunn: So I'll take the first half of that. I'm sure Jason will have some color he may wanna add. So, again, just to we've said it. It's on repeat. We'll say it again. The objective of M&A versus buybacks, sort of the levers available to us is what's the best risk-adjusted path to long-term cash flow per share compounding, period. Full stop. We're totally objective in dispassionate about the allocation of the two. There's $6 billion available so a big sort of large amount of capacity. On the buyback, we just the valuation dislocation is just is silly. And so we leaned into it in Q4 and we find it obviously you know, more attractive today. And it's a great opportunity to drive long-term cash flow content that way. On top of that, we're very excited and confident about our future. Right? And we get the growth, the AI, the leadership, the strategy, the execution, prowess, I mean, all of it feels very, very good to us and what we see internally. At the same time, you know, M&A is a real lever. I mean, there's not to somewhat to my surprise, you know, we introduced the buyback last quarter. There is commentary about oh my gosh, is the M&A thesis, you know, not intact? As one of those absurd things I've heard in my fifteen years at Roper. We are a preferred buyer of vertical market software leaders. We're absolutely preferred from a management point of view or preferred from a seller point of view. The pipeline's enormous. The, you know, the LP pressure is legit. Number of assets in private equity portfolio have to get liquidity are at levels we've not seen. So that thesis just needs to be eliminated from the talk track because it's not real. And so, for us, it's balancing those two. You know, buybacks are great in the short run. M&A generally is gonna beat in the long run, and we like having to balance between the two options in front of us. Jason Conley: Yeah. I would just add that, they're around the confidence, and we've had just these unusual things happen with three of our businesses. Like, the underlying quality is getting better. So there's that. And I would just say the AI or, you know, we have 21 different businesses working through AI right now. That are annual operating plan reviews and came out with an increased level of conviction that we're gonna win. Relative to AI. We're just we're so our customer intimacy is really proven to be a competitive advantage, and we've got the tools and resources to get after the AI just as fast as anyone else. So we feel really good about that. And so buying ourselves in that scenario where there's this dislocation makes all the sense in the world. But also gonna be an incredibly active year on M&A, so we're just really got an abundance of opportunity in front of us this year. Joe Giordano: And what now that you brought in this AI talent, on the accelerator team, were there any instances where like, negative instances where these guys coming in as experts of kind of identified that maybe parts of your business where you thought you had more of an opportunity is gonna be harder to drive or mean, I'm sure they're identifying places that you have opportunities, but was there any on, like, the negative side where something was like, well, maybe this isn't as attractive as I thought in a particular part of the company. Neil Hunn: Yeah. So I would say, on balance, their reviews and early takes are quite positive about the opportunity market-wise, technical-wise, the prowess of the teams that we have in place. But we also and we had them sort of do a short readout to our board last week. And then there was a few bullet points of things that were on the constructive ledger. None of it was market opportunity lack of market opportunity or lack of opportunity to win. Again, these are more technical resources. I'm saying might not have, like, the best acumen in, like, these vertical market spaces to judge that anyway. It was like, hey. As you'd expect, maybe there's we definitely need to improve the quantity of AI talent in the businesses. I mean, that's a little bit of why we're adding the central team to sort of spark some acceleration. It's just gonna take some time because we gotta build these people. You know? It's not something that we're gonna be able to hire en masse. We gotta build these people and did a good job last year. We'll continue to scale that. And compound the learning on that this year. Jason Conley: Yeah. Think the ideas have been well received by Shane and Eddie. I mean, they understand the specificity of what we're trying to solve at the individual sort of vertical level, and that's they view that as very unique, right, coming from a horizontal player. So I think they see the opportunity just like our businesses do. Joe Giordano: Thanks, guys. Operator: This concludes our question and answer session. We will now return back to Zack Moxcey for any closing remarks. Zack Moxcey: Thanks, everyone, for joining us today. We look forward to speaking with you during our next earnings call. Operator: The conference has now concluded. Thank you for attending today. You may now disconnect.
Operator: Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, a member of our team will be happy to help you. Your meeting is about to begin. Good morning, and welcome to the Synchrony Financial Fourth Quarter 2025 Earnings Conference Call. Please refer to the company's Investor Relations website for access to the earnings materials. Please be advised that today's conference is being recorded. Currently, all callers have been placed in a listen-only mode. The call will be opened up for your questions following the conclusion of management's prepared remarks. I will now turn the call over to Kathryn Miller, Senior Vice President of Investor Relations. Thank you. You may begin. Kathryn Miller: Thank you, and good morning, everyone. Welcome to our quarterly earnings conference call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules, and presentation are available on our website, Synchronyfinancial.com. This information can be accessed by going to the Investor Relations section of the website. Before we get started, I wanted to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. On the call this morning are Brian Doubles, Synchrony's President and Chief Executive Officer, and Brian Wenzel, Executive Vice President and Chief Financial Officer. I will now turn the call over to Brian Doubles. Brian Doubles: Thanks, Kathryn, and good morning, everyone. Synchrony ended the year with a strong fourth quarter performance, highlighted by net earnings of $751 million or $2.40 per diluted share, which included a $0.14 restructuring charge related to a voluntary employee early retirement program. A return on average assets of 2.5% and a return on tangible common equity of 21.8%. During the quarter, we connected nearly 70 million customers to our partners and generated more than $49 billion of purchase volume, a fourth-quarter record and a year-over-year increase of 3%. As average active account and spend trends continue to sequentially strengthen across almost all of our platforms. Purchase volume across our digital platform increased 6%, driven by higher spend per account, strong customer response to enhanced product offerings, and refreshed value propositions. Diversified and value purchase volume grew 4%, primarily reflecting the impact of partner expansion this year. Purchase volume in Health and Wellness also grew 4%, reflecting growth in Pet and Audiology, partially offset by lower spend in cosmetic. In addition, higher spend per account exceeded the impact of lower average active accounts. Purchase volume in our Lifestyle platform increased 3%, reflecting higher broad-based spend per account, partially offset by lower average active accounts. And purchase volume in Home and Auto was down 2%, generally reflecting selective spend in Home improvement, lower average active accounts, partially offset by strong growth in spend per account. Synchrony's dual and co-branded cards accounted for 50% of our total purchase volume in the fourth quarter and increased 16% versus last year. Driven by product upgrades, higher broad-based spend, and expanded utility across these card programs. We also continue to see year-over-year improvement in the mix of discretionary spend within our out-of-partner purchase volume with strength coming from categories like electronics, entertainment, and travel. In addition, both average transaction values and average transaction frequency continue to grow across the portfolio. Average transaction values rose about 30 basis points compared to last year, reflecting growth from non-prime and super-prime customers. Average transaction frequency increased across all credit cohorts, up about 3.7% versus last year. Collectively, these strengthening core trends across our portfolio are a reflection of Synchrony's focus and disciplined execution throughout the year. We delivered strong credit results while also advancing our key strategic priorities to enhance the value utility of our financing solutions, broaden our reach, and deliver more powerful experiences for our customers and partners alike. And as a result, Synchrony added more than 20 million new accounts, drove engagement with nearly 70 million existing customers, and generated more than $182 billion of sales for our partners, merchants, and providers in 2025. This is the kind of proven success that has established Synchrony as a trusted partner. In the fourth quarter, we added or renewed more than 25 partners, including Bob's Discount Furniture, RH, and Polaris. We're excited to announce our exclusive multiyear agreement with Bob's Discount Furniture to offer short and long-term promotional financing options to customers at more than 200 Bob's locations. This partnership is expected to launch midyear and strengthen Synchrony's leadership in the home furnishings industry partnerships across more than half of Furniture Today's top 100 retailers. In addition, our renewed partnership with Polaris, a leading manufacturer of off-road vehicles, builds on a nearly two-decade-long relationship of collaboration, to provide financing for vehicles, parts, accessories, gear, as well as vehicle service and protection products customized promotional financing and loan options. Throughout the past year, Synchrony expanded our portfolio across both national and local businesses, bringing our total added or renewed partners to more than 75, including two of our top five partners and seven of our top 20. Approximately 97% of our total interest and fees from our top 25 partners are renewed through 2028, our top five partners are renewed through 2030 and beyond. Reflecting the deep trust our partners have in Synchrony, and our ability to deliver for their businesses. Synchrony also continued to diversify our programs, products, and markets over the past year. Providing greater flexibility, and broader access for our customers and partners as their needs evolve and priorities shift. We entered into more than 10 merchant and practice management platform partnerships including Weave, one of the largest patient relationship management software providers in the health and wellness space, that supports over 35,000 small and medium-sized practices across dental, cosmetic, vision, and vet. Together, we're focused on eliminating the friction between patient communication and payment experiences and empowering customers with access and financial flexibility so we're excited to develop a best-in-class patient engagement and payment solution that will seamlessly integrate CareCredit across critical moments that matter in the patient journey. From appointment scheduling and reminders to bill pay. Synchrony now partners with over 50 merchant and practice management platforms like Weave, both in the health and wellness, and home and auto markets so that we can enable seamless access to our financing solution suite while converting more sales for hundreds of thousands of small and mid-sized businesses that utilize these technology platforms to operate their businesses. Similarly, our acquisition of Versatile is expected to accelerate our multi-source financing strategy, reaching and empowering more customers with smarter financing options across online, in-store, and mobile points of sale. Driving seamless integrations, higher approval rates, and detailed reporting to drive sales across home, auto, and elective medical merchants and providers. And our continued launch of new products across our portfolio is delivering enhanced utility and value for our customers while driving loyalty and sales for our partners. For example, Synchrony Pay Later is now offered to more than 6,200 merchants, and thus far, our data shows that when we offer a pay later and revolving products together, we experience an at least 10% average increase in sales. Pointing to the expansive purchase power Synchrony can deliver through our multiproduct strategy. In today's world, where purchases are often decided and financing approved before checkout, Synchrony is increasingly wherever our customer is, on the product page, in search results, in digital shopping carts, and even in their inbox providing effortless access to flexible financing options. The investments we've been making are driving these and other innovations at Synchrony, as we seek to expand and deepen the role we play across the consumer finance and payments ecosystem. Over the last year, we have enriched the experiences we deliver while empowering our customers with more dynamic access and choice through the combination of Synchrony's marketplace, features our AI search capability called Joy Hunt, and Synchrony's website and native app. Together, the enhancements we made across these channels contributed to an 18% increase in total visits and 17% more in sales in 2025. Our digital wallet strategy also continued to accelerate, having more than doubled the number of unique provisioned accounts and digital wallet sales compared to last year. This growth also supported a 400 basis point gain in our dual and co-branded cards wallet penetration rate. Which should enhance the stickiness of these products and provide natural tailwinds to Synchrony's mobile wallet share as we continue to invest in this strategy and aim to ensure that our products are anywhere our customers want them to be. So no matter how our customers come to Synchrony, the hundreds of thousands of partners, providers, and small and midsized businesses we serve, our digital ecosystem is designed to connect them with the compelling value propositions, broad utility, and flexible payment structures that best align with their needs in that moment. By almost any account, we believe the ways in which Synchrony is executed throughout 2025 have positioned us well for the future. We have invested in our products and digital capabilities to drive greater reach, deeper penetration, and broader utility. And we have built enduring relationships with a diverse range of partners who are primed to deliver strong risk-adjusted growth as conditions allow. And with that, I'll turn the call over to Brian to discuss our financial performance in greater detail. Brian Wenzel: Thanks, Brian, and good morning, everyone. Synchrony's fourth quarter and full-year financial performance delivered strong risk-adjusted returns amidst evolving market conditions. The combination of our underwriting discipline and the efficacy of our prior credit actions enabled the return of our full-year net charge-off rate within our long-term target range of 5.5% to 6%, we achieved strong new account and purchase line growth across the portfolio despite maintaining our net credit restrictive position. And despite the associated effects of an elevated payment rate ending loan receivables grew across three of our five platforms, and net interest income increased reflecting the building impact of our product pricing and policy changes or PPPC's the reduction of our funding liabilities costs. The combination of these trends drove enhanced program performance which was shared through our RSAs maintaining economic alignment with our partners enabling them to reinvest in our mutual customers and drive loyalty amidst a backdrop of more discerning spend behavior. To summarize Synchrony's fourth quarter results, we generated net earnings of $751 million or $2.40 per diluted share which included the impact of a $0.14 restructuring charge related to a voluntary employee early retirement program. A return on average assets of 2.5% a return on tangible common equity of 21.8% and a 9% increase in tangible book value per share. And for the full year, Synchrony delivered net earnings of $3.6 billion or $9.28 per diluted share. A return on average assets of 3% and a return on tangible common equity of 25.8%. We look forward to building on this momentum across our business in both the short and medium term. Focusing on our fourth quarter results in more detail, we generated $49 billion of purchase volume a fourth quarter record and a 3% year-over-year increase despite the ongoing effects of net credit restrictive actions we took between mid-2023 and early 2024 and continued selectivity in customer spend behavior Ending loan receivables decreased 1% to $104 billion in the fourth quarter reflecting the combination of higher payment rates, lower average active accounts, and the effects of lower purchase volume in the first half of this year. The payment rate increased by approximately 45 basis points versus last year to 16.3% and was approximately 155 basis points above the pre-pandemic fourth-quarter average. Net revenue of $3.8 billion was flat versus last year, as higher net interest income was offset by higher RSAs driven by program performance. Net interest income increased 4% to $4.8 billion primarily driven by higher loan receivables yield and the impact of our PPPCs and lower interest-bearing liabilities costs associated with lower benchmark rates, partially offset by lower liquidity portfolio yield. Our fourth-quarter net interest margin increased 82 basis points versus last year to 15.83%, reflecting three key drivers. One, a 53 basis point increase in our loan receivables yield contributed approximately 44 basis points to our net interest margin. This increase was primarily driven by the impact of our PPPC's partially offset by lower benchmark rates and lower assessed late fees. Two, a 51 basis point decline in our total interest-bearing liabilities cost versus last year. Contributed approximately 41 basis points to our net interest margin. And three, a 46 basis point increase in the mix of loan receivables as a percent of interest-earning assets which increased our net interest margin by approximately eight basis points. These improvements were partially offset by a 73 basis point reduction in our liquidity portfolio yield which reduced our net interest margin by 11 basis points. The decline generally reflected the impact of lower benchmark rates. Moving on. RSAs of $1.1 billion or 4.3% of average loan receivables in the fourth quarter and increased $175 million versus the prior year. Primarily reflecting program performance, which included lower net charge-offs and the impact of our PPPC's. Provision for credit losses decreased $118 million to $1.4 billion driven by a $294 million decrease in net charge-offs, and partially offset by a reserve build of $76 million versus a $100 million release in the prior year. Other expense increased 10% to $1.4 billion generally reflecting higher employee costs and technology investments. Employee cost increase primarily due to a $67 million restructuring charge associated with the voluntary employee early retirement program as well as a shift in headcount mix. The fourth-quarter efficiency ratio was 36.9%, approximately 360 basis points higher than last year. This resulted from higher overall expenses and the impact of higher RSA on net revenue as program performance improved. Excluding the impacts of the restructuring charge, the fourth-quarter efficiency ratio would have been approximately 180 basis points lower. Shifting focus to our key credit trends on Slide nine. Which shows that our thirty plus ninety plus delinquency rates as well as our net charge-off rate are all below our historical average for the 2017 to 2019. At quarter end, our 30 plus delinquency rate was 4.49%, decrease of 21 basis points from 4.7% the prior year. Our 90 plus delinquency rate was 2.17%, a decrease of 23 basis points from 2.4% in the prior year. And our net charge-off rate was 5.37% in the fourth quarter, a decrease of 108 basis points from 6.45% in the prior year. When evaluating our credit performance, our portfolio delinquency and net charge-off trends reflect both the efficacy of our credit actions and the power of our disciplined underwriting and credit management strategies. These trends reinforce our confidence in our portfolio's credit positioning as we move forward provides a strong foundation for us to execute our business strategy. Finally, our allowance for credit losses as a percent of loan receivables was 10.06% which decreased approximately 29 basis points from 10.35% in the third quarter and declined 38 basis points from the 10.44% in 2024. Turning to Slide 10. Synchrony's funding, capital, and liquidity continue to provide a strong foundation for our business as we exited 2025. Six ks grew our direct deposits by $2.9 billion versus last year. As we reduced broker deposits by $3.8 billion Also during the fourth quarter, we issued a $750 million three-year secured public bond from the Synchrony Card Issuance Trust with the tightest benchmark adjusted spread we've had in the past seven years and a final coupon of 4.06%. At December 31, deposits represented 84% of our total funding with secured debt representing 9% and unsecured debt representing 7%. Total liquid assets decreased 3% to $16.6 billion and represented 13.9% of total assets 45 basis points lower than last year. Moving to our capital ratios. Synchrony ended the quarter with a CET1 ratio of 12.6%, a Tier one capital ratio of 13.8% a total capital ratio of 15.8%. Each declined approximately 70 basis points versus prior year. In our Tier one capital, plus reserves ratio decreased to 23.7% compared to 24.3% last year. During the fourth quarter, Synchrony returned $1.1 billion to shareholders. Consisting of $952 million in share repurchases $106 million in common stock dividends. And for the full year, returned $3.3 billion including $2.9 billion in share repurchases and $427 million in common stock dividends. Synchrony remains well positioned to return capital to shareholders subject to our business performance, market conditions, regulatory restrictions or expectations, and our capital plan. Turning to our outlook for 2026 on Slide 11. We increased high-level execution throughout the past year, coupled with our ongoing investments has positioned us well to grow our portfolio in a prudent risk-adjusted manner should conditions allow. Our baseline assumptions include no regulatory or legislative changes, a stable macroeconomic environment, with no significant reduction in inflation rates, full-year GDP growth of 2% a year-end unemployment rate of 4.8%, a year-end fed funds rate of 3.25%, and full-year deposit base of approximately 65%. For 2026, we expect average active account and purchase volume growth to drive mid-single-digit ending receivables growth even while payment rates remain elevated. The rate of receivables growth should follow seasonality and accelerate as we move into the back half of the year as recently launched programs grow and the Lowe's commercial co-brand credit card program transfers to our portfolio in the second quarter. This growth outlook also assumes no additional broad-based credit refinements. We currently also expect our portfolio net charge-off rate to be in line with our long-term target of 5.5% to 6% We will continue to monitor our portfolio performance and the broader macroeconomic conditions closely. To the extent we see notable changes in the portfolio trends, or macroeconomic conditions, we will consider making further adjustments to our credit positioning. We expect net interest income to continue to grow in 2026 as the impact of PPPC's continue to build as we reduce our funding liabilities cost. These trends will be partially offset by lower late fee incidents and the yield dilutive effect of accelerating new account growth. RSAs are expected to increase reflecting stronger program performance, but remain within our target of 4% to 4.5% of average receivables. Other expenses excluding the impact of the $98 million of notable items in 2025, should grow in line with loan receivables, reflecting continued investment in our growth and innovation as we look to drive our momentum forward. We remain focused on delivering operating leverage in our business balancing the opportunities we see to power leading-edge experiences and portfolio expansion. Altogether, these financial drivers are expected to deliver net earnings per diluted share between $9.10 and $9.50 for the full year 2026. This range includes the impact of growth-related initiatives like Walmart One Pay, Lowe's commercial co-brand, and Versatile Credit as well as investments in other key technology initiatives. These combined investments will impact loan receivables yield, provision for credit losses other income, and other expenses to varying degrees. Synchrony's model is designed to generate double-digit earnings per share growth on average over time and through cycles. This reflects our disciplined approach to underwriting credit management as well as our expense base, economic alignment we achieved through our RSAs. We look to 2026 and beyond, these core drivers have set the stage as conditions allow Synchrony to drive strong earnings and continued progress towards our long-term financial targets while generating incremental excess capital. With that, I'll turn the call back to Brian. Brian Doubles: Thanks, Brian. Before I turn the call over to Q&A, I'd like to leave you with three key takeaways from today's discussion. First, Synchrony is executing on our key strategic priorities to grow and win new partners, diversify our programs, products, and markets, and deliver best-in-class experiences for all those we serve. We are doing this while also earning the honor of being ranked second among the top best companies to work for in The U.S. By Fortune Magazine and Great Place to Work in 2025. I am incredibly proud of the great work we are doing together and the great strides we are making as we seek to solidify Synchrony at the heart of American commerce. Second, Synchrony's past, present, and future are grounded in our ability to drive sustainable growth at appropriate risk-adjusted returns through cycles and the evolving consumer landscape. Our expertise, discipline, and consistent innovation have made this possible. Allowing us to deliver products and experiences with enduring appeal and compelling value for both our customers and partners alike, Since exiting the pandemic in 2021, Synchrony has added or renewed more than 300 partners including 16 of our top 20, while also growing ending receivables at an average rate of approximately 7% and delivering an average return on assets of approximately 3% and an average return on tangible common equity of approximately 25%. And third, Synchrony's robust capital generation capacity, positions us well to continue to invest in our business and growth opportunities while also returning capital as conditions allow. As we look to 2026 and beyond, we are confident in the momentum we've built to drive considerable long-term value for our many stakeholders. And with that, I'll turn the call back to Kathryn to open the Q&A. Kathryn Miller: That concludes our prepared remarks. We will now begin the Q&A session. So that we can accommodate as many of you as possible, I'd like to ask the participants to please limit yourself to one primary and one follow-up question. If you have additional questions, the Investor Relations team will be available after the call. Operator, please start the Q&A session. Operator: Thank you. Our first question comes from Sanjay Sakhrani with KBW. Please go ahead. Your line is open. Sanjay Sakhrani: Good morning. Good job on 2025. I know you guys had a lot to deal with. Maybe just starting on the mid-single-digit growth guide for receivables growth, I think that's quite encouraging. Brian, can you just talk about sort of the building blocks for that? I saw the co-brand volume growth accelerated. Is that partly due to Walmart? Or how are the early views of Walmart looking? And then Brian Wenzel, you talked a little bit about not necessarily assuming any changes to sort of the underwriting stance for the year, but is that something you're considering inside the guide? Brian Doubles: Sanjay, why don't I start on that? So look, overall, we're pretty encouraged by what we're seeing in terms of the consumer. I think the consumer has been resilient all year, I think better than we expected. We're not really seeing any signs of weakness. We're actually seeing strength as we look at the spending patterns and credit continues to outperform our expectations, as you mentioned. So I think the macro environment is still pretty constructive. Bigger tax refunds could potentially help us a little bit here in the short term as well. But if you look at our business more specifically, I think purchase volume turned the corner, nice trajectory, up 3% versus last year. We've got four out of five platforms improving sequentially. We're seeing really nice growth in co-brand purchase volume up 16% versus prior year, as you mentioned. So we're kind of firing on all cylinders, and we feel pretty good about that mid-single loan guide. If you look at the components, Walmart's obviously a big part of that. We launched in September. It's the fastest-growing program we've ever launched, so we feel great about that. We're making continued investments in health and wellness. That's a platform that continues to outperform, and we expect it to continue to outperform next year. So Lowe's commercial program, there's just a lot of things as you tick down the list that we're really optimistic about as we look forward to 2026. I don't know, Brian, if you want to add to that. Brian Wenzel: Yes. Sanjay, so a couple of things I'd just add on to what Brian said. I mean, first, look at the trajectory as you step through 2025, we're minus four minus two and you get through the end part of 2025, you were plus 3% on purchase volume. If you take that and extrapolate that into the first several weeks of 2026, we have accelerated the purchase volume beyond that rate. Now again, we'll see what happens this weekend after the snowstorm and ice storm came through, but we were encouraged by that increased spending. Even when you look at the holiday inside of the fourth quarter, our holiday partners, which make up about two-thirds of our portfolio grew above a 4% rate. It's really the non-holiday parties, you get in with about a third was growing significantly less than that, which is how you got to the three. And even you see green shoots in the portfolio, one of the biggest things that you think about guide, Sanjay, is where is consumer confidence? You saw it tick up. Most certainly, trails a lot of times what we're starting to see in our portfolio. And if you look at like home specialty, here's something that was comping down every single quarter was kind of flattish in the fourth. So if you can get that bigger ticket to turn and consumer confidence to turn, I think that gives you momentum. I think if you pull up for a second, the growth rate as you think about it for moving forward, we were just slightly down 1% to mid-single digits is really put in three buckets, right? Number one, the core book, which we just talked about some of the momentum you highlighted co-brand. The other things we're seeing in some of the green shoots and the consumer confidence. Two goes into the credit aperture changes we made in 2025 that will contribute to the portfolio. We don't have incremental credit aperture changes in the guide here. That's something obviously at our discretion depending on how credit performs. And then third, it's really Walmart and Lowe's they kind of come into the portfolio. And again, the opportunity with Walmart is obviously significant given their customer base. So I think there's many different levers. And even when you look at the consumer behavior, both on a frequency and average transaction value basis, we're showing improvement in both of those as we exit out of 2025. So really, strong performance by the consumer in an uncertain environment. Sanjay Sakhrani: Thank you. Just my follow-up question is on the news on the 10% APR caps. I'm just curious if you guys obviously, views on it, but if you guys have any had chances to talk to some of your partners about sort of how they're thinking about it because it definitely affects both you and them as well. So just curious to hear your views. Your feedback. Brian Doubles: Yes. Sure, Sanjay. So look, I think the administration is focused on affordability, which we completely agree is important for consumers and the economy. And as you know, like we pride ourselves on offering credit to a very broad cross-section of The U.S. Consumer. We approve more customers at that low to mid-income level than many other issuers. And I think that availability of credit is critical to the economy. As you know, this is a highly competitive industry. Credit cards are one of the most competitive spaces in banking. Our products have to be competitively priced, and we also have to offer significant value to the consumer. So any price controls like an APR cap, would not make credit more affordable. It would eliminate credit for those that need it. A cap would require issuers to significantly reduce the amount of credit they're able to provide. And again, that disproportionately impacts the consumers at the lower income level. And then you mentioned our partners. I mean this is very bad for merchants that depend on those credit programs. We support 400,000 small- to medium-sized businesses who depend on those credit programs. In some cases, we can be over 40% of their sales. So this would be a huge hit for them. So when you look at, like, the severe impact on both the consumers and businesses, there's no question this would be very bad for the economy. And we're out there talking to our partners every day, the big partners, small to medium-sized businesses, and they're very concerned. When they think about what this would do to their businesses. Sanjay Sakhrani: Thank you. Operator: Thank you. Our next question comes from Ryan Nash with Goldman Sachs. Please go ahead. Your line is open. Ryan Nash: Good morning, guys. Good morning, Ryan. Hey, Ryan. Maybe just start on credit. The guide, I think, would imply losses increasing slightly at the midpoint despite strong delinquency performance. And if I'm doing the math correct, if I use the 2017 to 2019 seasonality, that would put losses on the low end, although I guess losses were rising in 'seventeen, so that overstates the seasonality. So maybe can you unpack the credit guide a bit? Do you expect to be at the low end of that or potentially lower? And maybe just talk about any benefit that is baked in from the elevated tax refund. Thank you. Brian Wenzel: Yes. Let me unpack that a little bit, Ryan. Thanks for the question. First, we have started on the performance, right, and where delinquency is as we enter into 2026. I mean, obviously, when you look at net charge-offs of $537 million for the fourth quarter and how that kind of steps out and the favorability that you have versus the historical loss rate in 2017 to 2019 to 12 basis points better. Obviously, 30 plus being 13 basis points better than that historical period and a little bit narrower on 90 plus at two seventeen, but seven basis points better. So the formation as we enter into 2026 is strong, right, number one. The full year, obviously, for this year was May. The way to think about it, Ryan, a little bit is you got a strong foundation bringing you into the year, but you're also bringing into a new portfolio. We talked quite a bit about Walmart kind of coming in, you have early losses associated with that. So there's an upward bias, right, relative to the One Pay Walmart program. You also have a little bit of upper bias, relative to I'd say, the credit aperture changes that we made during the middle part of the fourth quarter of this year, they begin to bleed in the back half of the year. So they do factor into losses. To some degree as you kind of come through here. So there are some moving pieces here. We don't really kind of give you a point within the guide. Obviously, the biggest thing is going to be, has the macro developed? And there are our models and the software reserves, we have unemployment rising a little bit in the back half of the year from a model standpoint that obviously produces higher net charge-offs. So the extent that unemployment remains in a check position, it plays out I think you're going to have some favorability as it comes to that. So we're going to see how as we step through the year again. I think we're really proud of what we've done. It sets us up nicely for the year. Ryan Nash: Got you. Maybe as my follow-up, Brian, can you maybe just talk about what kind of net interest margin is embedded within the guidance? Should we assume continued improvement given the PPP fees and the benefits from lower rates? Or are there other headwinds that we should be considering? Thank you. Brian Wenzel: Yes. Obviously, refer on outlook page, you should see NII increase, right? And obviously, there's probably a greater bias for the margin to increase. I think when you look at the pieces Ryan, there's probably different gives and takes, right? So number one, when you think about the interest in interest and fee line, clearly, that's going to continue to benefit, albeit at a slower pace as you kind of move through 2026 from the PPPC's. They continue to build both on the APR piece and then as delinquent pricing piece kind of comes in. So that's actually favorable. If you kind of think about that line again, you're going to have part of the interest rate environment kind coming down. So you're going to have prime rate going down. Against that. As you step through. Depending upon how where you come out on losses, you obviously have a late fee impact that's going to either be neutral, high or lower depending upon where you sit that charge-offs in your model. I think then when you kind of continue on, and think about the different pieces, the interest rates obviously will be favorable. Year over year again. That should be offset, I would say, by both prime rate, number one, investment portfolio yield, number two, and the MDR number three. So that should probably be a little bit more neutral you kind of step through it. So as you kind of look at it, the biggest thing is going to be obviously payment rate, and we have payment rate to remain elevated here, which is a combination of the credit mix of the portfolio being one of its best periods of time, number one. And then number two, having a lower percentage of promotional financing assets, which carry a lower payment rate. The extent that we get some of that big ticket that I talked about and some of the bigger items. credit mix can slow down the payment rate to give you That will effectively slow down the payment rate as well as the give you an upward bias. So I think when you put the piece together, again, NII should go up, NIM should go up. But again, it's how you factor those different moving parts together. Brian Doubles: Thanks, Brian. Thanks, Ryan. Have a good day. Operator: Thank you. Our next question comes from Terry Ma with Barclays. Please go ahead. Your line is open. Terry Ma: Hey, thank you. Good morning. Maybe just a follow-up on the triple BCs. Can you maybe just talk about how those are kind of tracking relative to your expectations? I think you had indicated about 75% should be kind of priced in by June. And then kind of going forward, like how much more lift can we expect from them kind of after 2026? Brian Wenzel: Yes. Good morning, Terry. Thanks for the question. I think when you take a step back to the and look at the BPPCs, I think is what we've said is we're slightly ahead of the burn-in of the APR changes to date because of the fact that the payment rate has been elevated. So the protected balance has paid down a little bit quicker. So again, you're probably a little bit ahead of that pace towards the 75% in the middle part of this year. Again, the back end of that curve it's not as steep, right? So the growth can will continue to bleed through. So I think that's developed other than paying other than coming a little bit quicker, developed as we thought, right, relative to the various assumptions on attrition rates, etcetera. So we feel good about the PPP on the APR line. When you think about on the paper statement fee line, I think that has settled in. And to some degree has been relatively flat And I think the combination of that is even as you see the average actives pick up in the fourth quarter, it's the really growth in our e-bill percentage of people who are electing digitally, which I think is a better thing for us as a company, not only for them to avoid the fee, but engage with us digitally. So we're seeing the benefit that's going to come through the expense line there. So when I look at that in combination, most certainly, I think we're pleased the way the PPBCs have performed and it's generally in line with our expectations. Terry Ma: Got it. Helpful. And then as my follow-up on the expense growth guide that's in line with receivables. Maybe just talk about what sort of investment related to growth you're making? And then after 2026, should we kind of expect kind of more positive operating leverage going forward? Thank you. Brian Wenzel: Yes. So let me pull up and maybe address one broader point here, which is really the significant investments in growth we kind of highlighted here, which affect all the lines really in the P and L. The largest line when we talk about significant investments is going to be on the reserve line, right, really for the asset growth as you think about growing not only the Walmart portfolio, but obviously Lowe's that comes in, in the first half. But also the new programs when you think about BOBS and RH etcetera, kind of coming in. But the biggest piece is reserves. I think when you think about the expense component of that, right, there's a couple of things that happen, right? You have launch costs associated with new programs. You invest in some of the early month on books and marketing programs associated with kind of getting a lot of new accounts up and running and engaged as you think about that. So there's the launch cost, there's the conversion cost for certain portfolios. Then you have most certainly the investment in marketing. Also from an expense standpoint, you really want to make sure you're investing and we have to add the staffing and head up. This is more of a nonexempt standpoint. To take the calls that come with it. All in all, those are really positive investments for growth and we'll certainly will pay back and we'll get that operating leverage The one thing I'd say is we have increased our capital spend a bit And that's really around, I'd say, three key areas. Number one, it's around increased investment in AI and driving AI in various areas of business, not only that drive productivity, but also drive growth for us. Which is our focus and we can most certainly chat about that more The second area is around our cloud journey and accelerating expenditures related to getting that done a little bit faster so we can the productivity and efficiency benefits that it comes through that And then third, Brian's talked quite a bit about our desire to continue to grow health and wellness at a faster pace. So investments in that health and wellness business. Those are the big pieces. But again, if I go back to where I started on the significant investments, the biggest piece is reserves. Again, as you think about all the lines in the P and they're going to be impacted by growth. You're going to have as you think about the J curve, you're going have assets in there at a lower yielding as they go to maturity and seasoning. You're going to see it on the other income line when it comes into loyalty, maybe in advance of again, some of the income coming off the assets and then expense line. When I think about the various pieces on the individual lines, they're less than 10 basis points, but they're on each of the lines. So that's why we kind of try to call it out as you guys model it Again, are all investments that we believe across the business really set us up for the longer term to be a much better company. Brian Doubles: Great. Thanks, Terry. Operator: Our next question comes from Moshe Orenbuch with TD Cowen. Please go ahead. Your line is open. Moshe Orenbuch: Great. Thanks. Going back to kind of loan growth and opportunities, You mentioned adding the pay later gives you a lift Can you talk a little bit about are there other areas, whether they're verticals or partners and how much of the portfolio kind of could that impact over the course of 2026? Brian Doubles: Yes. I think Moshe, I'll start just by talking a little bit about the multi-product strategy because I think this has been very successful, I think, over the last couple of years. And pay later is an important part of that. It's resonating with our partners. We now have it at some of our largest partners, Lowe's, Amazon, Pennies, Belk, Sleep Number. And the accounts that we're seeing come through on that product are incremental. And I think that's great news. Right? So we still have kind of the same flow of new customers coming into private label co-brand. And the pay later customers are incremental. Which means our partners are getting incremental sales. So they love that, obviously. So our partners are not looking at this as like an either-or. They're really now seeing the power of having these products kind of work in concert with one another. And given customers have different financing needs, sometimes we're evolving products the right the right product for them. Some may prefer fixed payments or installment product. And the strength of our franchises, we offer all of the above. So we really like how this is working. Like I said, it's resonating with our partners. It's helping us win new programs as well. And we can show them that kind of migration strategy. So we might be starting off a customer with a pay later account, getting comfortable with them and their payment behavior, and then upgrading them to a private label card, ultimately, a co-brand card with a larger line. So that's I said, really resonating with our partners, and we think that's the right strategy for the long term. Moshe Orenbuch: Great. And maybe give me Brian, you did just reference kind of new programs. Can you talk a little bit about state of play? I mean, are some startups that are in the space, but I think a lot of others have kind of pulled back. What are the areas you think that are most ripe kind of for new programs? And talk a little bit about what you're seeing in the market. Brian Doubles: Yes. Look, we've got a great pipeline across all of our platforms. We if you just look at last year, we added or renewed seventy-five partners. We renewed seven of our top 20. I think and it's broad. It's across every industry. Both existing programs, start-up programs, So we feel really good about our ability to compete. We're winning the deals that we want to win. And I think this is back to a little bit of what Brian talked about. The investments that we're making are helping us stay out of the competition. Every RFP that we go into, we're told that our tech is best in the industry, our ability to integrate, our the investments we've made in our proprietary underwriting model, Prism, those are all helping us win and compete in business. We are never going to be a low-cost provider. We're very clear on that upfront. We've made big investments in the business and the platform. And we need to earn a return commensurate with that. And we think that we're the best in the partner-based financing business. And we're proving that out every day with the deals that we're that we're renewing, the partner base that we have. And where we're adding new partnerships. Moshe Orenbuch: Thanks very much. Brian Doubles: Yes. Thanks, Moshe. Thanks, Moshe. Have a good day. Operator: Thank you. We will move next with Mihir Bhatia Bank of America. Please go ahead. Your line is open. Mihir Bhatia: Hi. Thank you for taking my question. Maybe just first, to start on the reserve rate. You're approaching day one CECL levels here. So just wondering, I mean, I know obviously you've tightened credit and it's gotten better, just how are you thinking about the reserve rate level from here? And any thoughts into 2026 on how that would trend? As you widen the credit aperture again? Brian Wenzel: Yeah. Thanks, Mihir. You know, honestly, as we look at the reserve rate clearly, it's come down and most certainly, it's come down relative to the loss rate we've experienced. As you think as you look out into 2026, most certainly, we've given you the guide where we see unemployment rate rising here towards the end of the year, which is really the Moody's forecast. Most certainly, we maintained the qualitative overlays where you have an unemployment rate consistent with past quarter. So we have not eased off of that. I think as you look forward, the question becomes, you believe the macro environment becomes stable, at what point can the qualitative reserves kind of come down, which would end up giving you a little bit of on a rate basis, a downward bias to the reserve rate. When that actually happens, it's a little bit unclear. I think we're the closest to we've been to day one, not that that's necessarily the greatest anchor, but it's most certainly the first mile marker you look at of where your rate should be. So I think we're encouraged around that, but obviously, lot's going to depend upon how our number one, how our delinquency formation develops. And then number two, the macro environment. So again, I would assume a little more downward bias on a rate basis. Obviously, as I talked about the significant investments you're going to see on a dollar basis, increase with the growth going back to the mid-single digits. Mihir Bhatia: And then maybe just going back to the pay later conversation, that you're just having. Can you just comment like on how the has been? I think you've made you gave an impressive start about 10% increase where it's offered side by side. Is that across all your platforms? And just, you know, maybe just comment if you would on Lowe's, Amazon, some of the big ones, any learnings from those rollouts? That you can share and where you are with that process currently? Brian Doubles: Yes. I think look, generally, we're very pleased with the performance so far across all of the partners where we've launched it. I think going back to the multiproduct strategy, we believe that, that's the right one. We're anchored in that strategy. The one question for us, as we started to roll this down, I think the question for our partners, was would there be any cannibalization of the private label card and the dual card and co-brand cards that we offer? And the good news is, there hasn't been. So we try that very closely across all of our partners where we have the multiproduct strategy in place. And we can clearly see that the volume flowing through private label and co-brand is very consistent and that the pay later accounts that we're getting are net new. And I think that's great news. That allows us to attract a new customer base that ultimately we want to offer other products to. And so that was as we embarked on this a number of years ago, that was kind of the question that we were getting from our partners. We were pretty confident that this was going to attract a new customer base. That's been the case so far. So we're very pleased across the board. Mihir Bhatia: Thank you. Brian Doubles: Thanks, Mihir. Thanks, Mihir. Have a good day. Operator: Thank you. Our next question comes from Erika Najarian with UBS. Please go ahead. Your line is open. Erika Najarian: Hi, good morning. Just wanted to clarify your response to Mihir's questions. Within the 09:10 to 09:50, we should assume that the ALLL ratio is going to come down due to qualitative reserves coming down, and that offsets perhaps the higher reserves from Walmart growth? Brian Wenzel: Yes. Good morning, Erica. So again, I was more giving the trajectory of the reserve. We haven't given guidance or what you actually should think about relative to or anything, to be honest with you, to the nine ten to nine fifty. It's over time that you have a downward bias to it. Again, on a dollar basis, most certainly, we would hope that the rate comes down to offset some of the growth, but we'll have to see how that plays out. But again, again, we have a very stable outlook here. Which I think as you think about the reserve, I was just more talking about the trajectory over time. If you believe that the environment gets better which again we haven't on the assumptions we put on our outlook side haven't getting better. They're staying the same, Erica. Erika Najarian: Got it. And just as a follow-up you've talked about the tax refund as a potential tailwind for purchase volume. I'm wondering as we think about the inflection point in growth and your assumption that payment rates stay high, one of your peers have talked about the tax refund in context more of better credit rather than better spend. And I'm wondering how have you sort of thought about the different scenarios in terms of how the tax refund dynamic could impact the payment rate. Brian Wenzel: Yeah. It's a great question. It's gonna be interesting to see how it plays out. Most certainly, I think this tax refund season will be the one of the largest, if not the largest that we've seen that that's really a factor of the retroactive nature of some of the benefits two, that were passed in legislation in the middle of last year, number one. And number they withholding rates, which were not adjusted for 2025 will produce Some people say between $500,000 refunds off of an average refund of call it, between 3,000 and $4,000 So a significant amount of cash that flows in That cash generally flows in if you look at historical refunds 50% to 60% comes by mid-March, 80% to 90% come by May. You're going to see a large influx of cash into the economy. I think when you take a step back, Erica, and you look at where the benefits associated with the tax law changes, who do they affect when you think about whether it's a soft deduction, the childcare deduction, things like that? They're going to affect a certain part of the population that probably income skews a little bit higher. So when you think about it a little bit higher, the higher generally will sit back and say, okay. Let me either save that or pay down debt. When you think about a more moderate income consumer, that consumer probably is either going to spend that money as it kind of comes through or not. So our impact on the payment really kind of goes back to our view on the consumer and what they're going to do. We're going to obviously tracking very closely. There's going to be a large influx of cash again in that end part of the first quarter into the second quarter that we'll look to see what it's doing. And I think the good news, look, both of those are positive outcomes for us. You go back to a few years, the stimulus payments, some consumers spent, and we saw an increase in purchase fines, some paid down debt, and we saw record low losses. So any kind of boost like that is a good result for us and will drive a little tailwind as we get into next year. Erika Najarian: Thank you. Brian Wenzel: Thanks, Erica. Good day. Operator: Thank you. We will move next with Rick Shane with JPMorgan. Please go ahead. Your line is open. Rick Shane: Hey, guys. Thanks for taking my questions this morning. Look, you're calling for mid-single-digit loan growth and some degree of NII growth in 2026. Midpoint of EPS is flat despite the expectations of continued buybacks. And again, we're this is sort of revisiting Terry's question. RSA is up pretty significantly. Basically takes you back to pre-pandemic levels, which is consistent with pre-pandemic, credit expectations. Implication is obviously that the efficiency ratio was higher in 2026. I'm trying to understand, I think, part is the RSA of function of sort of a pull forward, pay it forward on the new programs? And should we revert start to revert to normalized efficiency ratios in 2027 as that sort of pull forward anniversaries? How do we look at this going forward? Brian Wenzel: Yes. Thanks for the question, Rick, and good morning. I think as you look at the model, as you try to put the pieces together, this is why we kind of called out some of the significant investments because what you are seeing is some of the early growth in some of the programs where you have the heavy reserve rate when you have assets that are not yielding as much because they're just in the early stage of the J curve. It's just the nature of the businesses when you think about these vintages. And when you go from a flat growth rate to an accelerating growth rate, you see that, that vintage slowdown on some of the lines. The RSA moving to a large degree, we have newer programs. They're not necessarily an RSA perspective, right, because of the early J curve dynamics. So I think that ultimately normalizes. I think as you step out and what we expect as we go beyond 2026, obviously, would be moving closer back to the long-term framework on all the lines we hope. And most certainly, our goal is to grow business at a double-digit EPS. I think the investments this year in moving from a flattish to down 1% to a mid-single digits gives you an EPS profile this year that's a little bit different. But again, we think that sets us up nicely for the medium to long term, and that's what our focus is on creating that value. Rick Shane: Got it. Brian, that's helpful. And so I think what you're steering me to understand is, yes, it's a little bit RSA, but it's really the timing differential associated in part with the CECL reserving of the loan growth. Is that the best way to distill it? Brian Wenzel: Yes. I mean, yeah. Yeah, Eureka, don't want to get into my tirade around my views on CECL and whether or that's good accounting or bad I think we'll take up another hour, but most certainly, when you have to book those losses upfront, before you get any earnings off the asset to me is not necessarily the right way to look at the business per se. That's why we kind of look at things without reserves first and then with reserves, obviously, because it's a GAAP basis. So but yes, CECL does dwarf the true reality a little bit. Brian Doubles: Brian, it could be a short tirade. You'd be preaching to the choir on that one. Rick Shane: Thank you. Brian Wenzel: Rick. Have a good day. Thanks, Rick. Operator: Thank you. We will move next with Rob Wildhack with Autonomous Research. Please go ahead. Your line is open. Rob Wildhack: Good morning, guys. One more on the pay later discussion. You sound quite positive on the uptake and conversion there. But I guess what I'm wondering is, is the translation from the top of the funnel and pay later to loan growth any way different than the more legacy Synchrony product? I'm thinking that maybe pay later might be more of a onetime purchase versus a larger open to buy amount, maybe a smaller ticket on a per transaction basis. Any early indications you could share there? Brian Doubles: Look, I would say that it does tend to be a little bit more onetime, although we're seeing good repeat usage in pay later across the partners where we have it, which is which is encouraging. Ultimately, our goal and kind of where our partners want to be is to get them into that revolving product because I think that allows you to do life cycle marketing push promotions, push offers, But we like look, the customers that are take out a pay later loan, we're going to be front and center with them offering another pay later loan. To buy whatever it is they're buying next. So it's not that you can't do the life cycle marketing. It's just a little bit more natural in terms of how our partners think about it in the PLCC and co-brand space. But we like all three products. They're working really well in concert together. That was the thesis we were trying to prove out. And so far, we've proven it. Brian Wenzel: Yes. The one thing, Rob, let me just add a little bit of financial dimension to it, right? If you look at our entire portfolio, our entire portfolio turns just under two, right? One plus billion of receivables on the purchase volume. I think when you tear that apart into pieces, obviously, the dual card and co-branded turn faster private label turns a little bit slower. When you think about the pay later that we originate, we generally originate majority in the six to twelve months. You go really is probably the biggest part. You then see eighteen to twenty-four months. So the turn is a little bit more consistent when I think private label. We do not do a lot of volume and don't really push anything below six months. We just it's hard to make money. It's really to make money most certainly in the pay it for and stuff like that. But think about it, it's going to be the bulk is going to be in the six to twelve month variety of installments. Rob Wildhack: Okay. Very interesting. Thank you. Brian Doubles: Thanks. Thanks, Rob. Have a good day. Operator: Thank you. Our next question comes from Jeff Adelson with Morgan Stanley. Please go ahead. Your line is open. Jeff Adelson: Hey, good morning. Thanks for taking my questions. Maybe just a follow-up on the credit actions or refinements Can you maybe just update us on your current posture at this point? Are you kind of continuing to lift off the prior tightening actions as you go along? Has that trend accelerated or maybe slowed it off from where you were earlier last year? And then, Brian Wenzel, you mentioned the guide doesn't really include the additional broad-based credit refinements and that this would really depend on credit performance as it comes through. I guess, my question is, what maybe holds you back from opening up a bit more given that you're already with within that historical charge-off range you range you target? You're perhaps getting a little bit of a positive bias and short order with with tax refunds. Is this maybe just, you know, conservatism you prefer to see the delinquency improvement to continue to come through? Before you maybe make it more definitive commitment there on the credit actions? Brian Wenzel: Yes. Thanks for the question, Jeff. Let me unpack that a little bit. First, let me remind you, the credit actions that we took in 2023 and 2024 were around very specific types of items. So you think about student loans, think about personal loans, things like that, that we thought about ability to pay. So some of the actions that we've taken in 2025 in the third and fourth quarter, we're not necessarily lifting of those because we think those are good strategies to have in place, but there are other strategies that have had the effect of adding sales or expanding your credit aperture. So I wouldn't necessarily refer to it we're just unwinding those because I think those do stay. The reason why we haven't done incremental, think, and just to be clear in our guide, actions that we took in the end part of 2025 are in the guide. No incremental broad-based changes are assumed for 2026 as we enter the year. The reason why, if you're asking me why aren't we taking more and more because we have five sixty-five loss rate delinquency looks good. I think when you look across the credit cohorts, the one thing that you'd see across all issuers, this is in the Synchrony issue, probability of default across credit grades is higher than historical norms. So we benefit a little bit more because of our line structures. And our ability to maintain a lower line structure and control that exposure at default. But most certainly, we're continuing to watch that probability of fall again across all the crack rates. It's not into one part. So it's how it normalizes And most certainly, there's a focus we've been tighter at the bottom end, which you've seen our shift a little bit less into non-prime is in that kind of right at the prime level. So that kind of advantage six fifty million to 700 and see what that customer who is feeling the effects of affordability for a number of years. So we're watching that probability to fall across not only us but across the industry. Jeff Adelson: Okay, great. And as my follow-up, it's nice to hear of the success you're having in pay later and I think you mentioned that 6,200 merchants, So I guess maybe a different way of asking some of the other questions that have been asked. Is there a way to think about how you're you know, how material that pay later offering can be for your forward loan growth either the mid-single-digit growth you're looking for in the near term or the 7% to 10% long term you talk about? Is that something that could be 100 basis points or more of a pickup And and maybe just, you know, we've gotten some questions on progress of the pay later offering at Amazon you launched earlier last year. I think we did notice that it's not available the checkout anymore. Is there maybe just an update on how that program is going? Thanks. Brian Doubles: Yeah. Sure, Josh. Look, we can't get specific on any of our individual programs. But I would again just say we're very happy with the results on the product so far across all of our partners, We're seeing really strong growth in new accounts. Obviously, that's included in the loan guide. Again, it's a little bit about what pay later can deliver, but it's also that vehicle to bring in new customers and then migrate them over time. So it's obviously a big part of the strategy. It's included in the mid-single digits. And I don't know, Brian, if you want to give a little more color. Brian Wenzel: Yes. I think the one thing, Jeff, to understand about that product in and of itself is the average ticket size and what that product is meant to do. And where Brian highlights the multiproduct strategy, the product fits a certain purchase type and a certain thing. You do not see as much a large ticket going into that six and twelve month with installment on a closed end. You generally see a smaller ticket size So when you see a smaller ticket size, the relative contribution when I think about the a company that's got over $100 billion receivable it's not going to be as a meaningful driver to move the company's overall growth rate, but an important part for us to continue to expand penetration at our partners. So it's important to have that. Today, we have a bigger ticket offering, right, relative to equal pay installments. It just sits inside our revolving account, which is what you see primarily in our home and auto business, little bit our lifestyle business and health and wellness. So again, from a growth rate standpoint, again, the denominator I'd sit back and say the smaller ticket move the growth rate as fast right now. Again, it's important to have it as part of a holistic offering to our partners. Jeff Adelson: Great. Thank you. Brian Wenzel: Thanks, Jeff. Thanks, Jeff. Operator: Thank you. Our next question comes from Brian Foran with Truist. Please go ahead. Your line is open. Brian Foran: Hi. You've kind of touched on this throughout your comments, but just the decision on the guide to move from kind of the and and I know there's no standard the way you've done it, but generally over time you've given line items and now you're giving an EPS range. With a little bit less line item detail. Is the conclusion you're happy with where consensus is on an EPS basis, but you're flagging some of the line items might need to change as people think through these investments for growth? Or I don't want to leave the witness, maybe you could just say, why switch to an EPS range this year? Brian Wenzel: Yes. Thanks for you. Good morning, Brian, and thanks for the question. This is an interesting it's an interesting question on how we try to help analysts know, understand the results of our company. And I think to a large degree, Brian, to be honest with you, with a large number of analysts, there's quite a diversity in even though we provided line item guidance, the outcomes on line items. Relative to the guidance, how people built their models. So effectively, we said, listen, the best way for you to understand and value our company, ultimately, at the end of the day was to provide as I sometimes call it the cheat code on the test, which is what we think the EPS amount will be on the different line items. So it was more a factor of how do we try to get people to the the best way to think about the performance of the company for 2020 and trying to get five line items right? Brian Foran: That's helpful. And I think you mentioned the mid-single-digit loan growth is going to be a little bit more evident in the back half of the year. If that's right, what would you say are the one or two key markers we should watch for in the front half of the year that would show whether you're on track above or below tracking above or below, that kind of trajectory. Brian Wenzel: Yes. It's a great question, Brian. I think the first thing you have to look at is what's purchase volume and what's that flow of volume that's coming into the system, number one. I think number two, you got to watch your average actives and whether or you see average active growth. And you think about sequential whether it's purchase volume for average active, etcetera. So you can kind of step through and say, does the growth make sense, right? Again, we're optimistic about what we saw here in the first three weeks of January, but those are the kind of two big mile markers I'd be looking at. As you kind of come through. I mean, the payment rate will manifest itself all its way in the turn of the portfolio. And the receivables. But that's really you won't really see that until the end of period. Again, each of the monthly delinquency reporting, Craig, you'll get a snapshot of what average loans do. And then most certainly what end of period is. Brian Foran: If I could sneak in one last one, just on the tax refund thing. So is the conclusion that your best guess of the impacts is included in the guide? Or to the extent there are benefits to your business from elevated tax refunds that would be incremental to the guide? Brian Wenzel: Brian, I'm going let you deal with with Kathryn for going up beyond one extra question, but it is included in the guide. Brian Foran: Okay. Thank you so much. Brian Wenzel: Have a good day, Brian. Operator: Thank you. And we have time for one more question. That question comes from Don Fandetti with Wells Fargo. Please go ahead. Your line is open. Don Fandetti: Hi. Can you maybe just dig in a little bit on the Walmart partnership? I mean, obviously, that's going very well. Like, is this going to be just a steady ramp up in loan growth? Any milestones or can you just maybe talk about how the rollout is going? Brian Doubles: Yes. Look, Don, it's going incredibly well. The program is fully launched in market, really strong early results. I mentioned fastest growth that we've ever seen in the de novo program There's a couple of things that I would highlight as you think about it. First, it is a leading-edge program from a tech perspective. So we're fully leveraging the One Pay app. Which is a great app. We're leveraging our API stack. So we're completely embedded with a digital experience. The entire experience is inside the application all the way through when you apply for credit, all the way through servicing. The second thing I'd highlight is it's got a very strong valprop on the car. So Walmart plus members get unlimited 5% cash back at Walmart, 1.5% cash back everywhere else. That's a big improvement and a big lift compared to how we're running the program when we last had it. And we're seeing it convert a lot of Walmart Plus members, which is really great. We've got really good digital in-store placements. You'll see that if you're on walmart.com. You'll see it if you're in the stores. And overall, I'd say we just have really good alignment. Alignment for the deal structure, we're both incented to grow the program. So we couldn't be off to a better start, and we're really encouraged about what this is going to do for growth, not just in 2026, but in the future. Don Fandetti: Okay. Thanks. I'm all set. Brian Doubles: Thanks, Don. Have a good day. Operator: Thank you. And this concludes our Q&A session. As well as Synchrony's earnings conference call. You may disconnect your line at this time. Have a wonderful day.
Operator: Good morning, and welcome to the UnitedHealth Group Fourth Quarter and Full Year 2025 Earnings Conference Call. A question and answer session will follow UnitedHealth Group's prepared remarks. As a reminder, this call is being recorded. Here are some important introductory information. This call contains forward-looking statements under US federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings. This call will also reference a non-GAAP amount. Reconciliation of the non-GAAP to GAAP amounts is available on the financial and earnings report section of the company's Investor Relations page at www.unitedhealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-Ks dated January 27, 2026, which may be accessed from the Investor Relations page of the company's website. I will now turn the conference over to the Chairman and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley. Stephen Hemsley: Thank you, and good morning. You for joining us today. This morning, I'll provide updates on the product our organization has made over the last six months in the momentum that is building in 2026. Tim Noel and Patrick Conway will dive more deeply into how UnitedHealthcare and Optum finished 2025, and our conviction for improved performance in 2026. Wayne DeVeydt will walk through the details of our full year 2025 financial performance and 2026 outlook before we turn to Q&A. We continue to progress and strengthen as we enter 2026. Taken a critical look across all our products and our U.S. market positions, focusing on what is working, what needs more attention, and what no longer makes sense for us. We are driving greater operational disciplines in all our business practices, leveraging the use of technology and artificial intelligence broadly, and renewing our commitment to innovation, agility, and accountability. We have removed assets that are not aligned with our focus on serving the U.S. health system. We continue to strengthen our management team, leveraging both our internal depth and bringing fresh ideas and talent from outside the organization. These actions and others are intended to improve the value we offer to all those we serve and drive sustainable growth for many years to come. Our people are rising to the challenge before them. We finished 2025 with adjusted earnings per share of $16.35, which was slightly ahead of our expectations. Full year 2025 results exclude a $1.6 billion net of tax and largely non-cash charge very consistent with what we discussed on our third quarter earnings call. Addressing the elements of this charge was important in setting the solid foundation for returning to the historical earnings quality and growth you've come to expect from us. Wayne will provide further details on both these results and the charge. Looking to 2026, we expect adjusted earnings per share of greater than $17.75 for growth of at least 8.6%. Our initial outlook reflects measured growth across all four of our reporting business segments, with double-digit improvements at UnitedHealthcare and low to high single-digit adjusted growth across our Optum segments. These overall results are tempered by the third year of Medicare funding reductions, ongoing funding shortfalls within our Medicaid state Medicaid programs, and our historical respect for rising medical cost trends. As expected, improvements will be more evident within UnitedHealthcare 2026, while at an earlier stage Optum will take more operational effort and investment and time. At UnitedHealthcare, we successfully repriced the insurance businesses intentionally rightsizing them to refocus on membership we can best serve on a sustainable basis. In Optum, new leaders are driving operational improvements that translate to more consistent results and better performance visibility. We've taken a critical look at our services and geographies remaining in markets that are best aligned with our core integrated value-based care purpose. This analysis also led us now to align Optum Financial Services with OptumInsight where our energies and talents for health care technology and financial technology innovation can be brought together to better address the opportunities and potential within these markets. We are clearly embarking on a new age of technology already transforming the way the world operates and health care must participate carefully and fully. We plan to be a leader in that movement. We expect 2026 to be a year of focus and execution. An important one in the history of our company. Have emerged strongly from challenging periods in our past and are committed to that course today. Our team is showing great resilience and energy and we believe strongly this we're taking will pay off. With that, I'll turn it over to Tim. Timothy Noel: Thanks, Steve. UnitedHealthcare finished 2025, having made progress to more effectively serve our members and network partners. Another important element in building sustainable growth. We closed the year with medical care patterns in each business in line with our updated outlook and ultimately supportive of our pricing decisions for 2026. With that, I will briefly walk through each business. Starting with Medicare, the 2025 medical cost trend was in line with our expectation of approximately 7.5% and supports our 2026 trend expectation of 10%. This reflects consistently elevated utilization in addition to increases in physician fee schedules, and the continuation of higher service intensity per care encounter. As part of our efforts to address elevated trends and funding cuts, we plan for some Medicare Advantage membership contraction in 2026. We now expect UHC Medicare Advantage contraction will be in the range of 1.3 million to 1.4 million members for the full year including group, individual, and dual special needs plans. These are greater losses than originally anticipated as competitive market dynamics drove higher than expected planned shopping during the intensely competitive annual enrollment period. Our 2026 approach favored margin recovery and these membership trends are a result of these actions. We similarly positioned our Medicare Supplement and standalone Part D segments and as a result of the totality of actions taken across UHC Medicare, we expect an improvement in Medicare margins of approximately 50 basis points from 2025. Looking briefly to 2027, the advance notice published yesterday simply doesn't reflect the reality of medical utilization and cost trends. We will continue to work with CMS to ensure an appropriate final growth rate calculation to avoid a profoundly negative impact on seniors' benefits and access to care. That would be a deeply unfortunate result for a program that already under funding pressure from the previous administration despite its track record of success serving seniors and taxpayers. Turning to Medicaid. We can continue to expect this business to see incremental pressure in 2026 largely driven by state funding shortfalls. We have received some rate relief but still anticipate the mismatch between rate and acuity to pressure performance in 2026. While we hope for further improvement in 2027. We expect Medicaid membership contraction of approximately 565,000 to 715,000 people which includes DSNP members. Due to reduced Medicaid eligibility combined with the exit from one state. We took important steps in our commercial pricing and cost management efforts during the second half of this year Nearly all of our employer group and fully insured pricing align with continued increases in care activity for 2026. In the individual ACA market, we re-priced nearly all states in response to higher medical trends, and the elevated needs of ACA beneficiaries in 2025. These actions were necessary to ensure a sustainable foundation in these plans. And enable us to maintain our participation in all the states we served in 2025. We are working with CMS on solutions to address the consumer affordability challenge given the unfolding dynamics in the ACA marketplace. As we announced last week, we have voluntarily pledged to rebate ACA market profits back to our ACA customers this year as policymakers work to determine how to improve affordability in this marketplace. We expect both fully insured group and individual enrollment to contract and be partially offset by continued momentum in our group self-funded offerings. 2026 overall, our strategic focus on margin recovery through product repositioning and repricing efforts enables us to estimate approximately 13% adjusted operating earnings growth across all of UHC. Principally from the improvement in serving commercial, and Medicare market needs. These actions should expand operating earnings margins for United by 40 basis points and are expected to result in membership contraction of 2.3 million to 2.8 million. The expected contraction in commercial membership is in line with our plans. While this will drive margin expansion in 2026, we still anticipate operating operating just slightly below our historical margin range until 2027. Our UHC recovery effort is being supported by steady efficiency gains as we advance AI and machine learning capabilities across our businesses. We anticipate operating cost reductions of nearly $1 billion in 2026 many AI enabled and importantly, in higher customer experience and satisfaction at a lower cost. Over 80% of calls from members leverage AI tools to help answer members' questions faster and more accurately. This enables our advocates to focus more time on a better service experience for individuals. Now I'll turn it over to Patrick Conway CEO of Optum. Patrick Conway: Thanks, Tim. And good morning, everyone. As we start 2026, Optum will be anchored around relentless focus on improved and consistent execution. In OptumHealth and OptumInsight. That will enable future margin expansion and top line growth. OptumRx will remain focused on maintaining its market position and providing a more comprehensive suite of pharmacy benefits and services. And continuing to pursue success in winning new customers for 2027 and 2028. All in highly competitive markets. Our 2026 performance outlook reflects adjusted earnings growth in all three segments of our business, ranging from low to high single digit year over year performance and margin expansion ranging from 20 to 90 basis points across the portfolio. Growth rates will remain somewhat tempered in 2026, but strategic refocus and investment in modern next generation services should lead to growing momentum in the back half of the year that will carry into 2027 and beyond. Some details on each of our segments, starting with OptumRx. At OptumRx, we expect operating earnings growth from expanding margins by 20 basis points. On an adjusted basis. This growth is driven by a strong external selling season, that will impact 2026 and 2027 as we implement and expand over 800 new customer relationships. While new customer wins were offset by membership contraction at UnitedHealthcare, we are capitalizing on significant AI automation enabled operating to support our expanded margin outlook. In 2026. Entering 2026, we have implemented new pricing models that will deliver greater transparency to customers and cost based reimbursement. To pharmacies. We have removed reauthorization requirements for 180 drugs benefiting millions of people and we will continue to expand these efforts. And we continue to advance our commitment to pass through 100% of drug rebates we receive to our customers. Over 95% of our customers have elected to receive full rebate pass through in 2026. With all remaining customers expected to transition by the 2027. Our customers recognize pharmacy benefits are an essential tool helping employers, governments, and patients afford and access medications. OptumRx members save over $2,200 in annual prescription costs due to our efforts in moderating manufacturer drug price increases. Turning to OptumInsight. We expect earning growth of greater than 4% while expanding margins by approximately 90 basis points. This growth is driven by new sales, commercialization of new products, stringent cost management, and increased volumes within existing core businesses. Investments and execution on 2026 priorities will set the stage for more growth into 2027. And beyond. Principally through broad based AI first new product innovation, strengthening Optum's care provider market offerings. An important change starting in 2026 involves aligning OptiMinsight and Optum Financial Services. These businesses have a much greater synergy today. For example, integrating OptumReal's AI driven revenue cycle solutions with Optum Financial Services payment and financing capabilities, has the potential to transform health care transactions moving the industry from post service reconciliation to real time point of care approval and monetization. Creating a more modern, closed loop approach that is better for the health system. The impact is significant. It reduces areas of long standing processing friction. While enhancing OptumInsight's growth and margin potential. By expanding beyond transaction processing into higher value services. Focused on a more certain simpler, faster experience for patients and providers we serve. Unlocking faster settlement, improved liquidity for providers, creating new value pools for payers. Turning to OptumHealth. As you see in our results this morning, we made substantial changes through 2025. Enabling our team to enter 2026 with a stronger foundation more aligned to the intent of our integrated value based care approach. We expect operating earnings growth of approximately 9% while expanding margins by approximately 30 basis points. This growth is driven by a back to the basics focus. On integrated value based care and execution. I'll touch on a few core areas in which we have taken action. First, we are focusing on markets where we have strong presence and the complementary wraparound services to succeed in our integrated value based care approach. We provide these services under an aligned incentive structure that improves outcomes reduces cost, and improves patient satisfaction. Practices operating in this environment are driving down total cost care by up to 30%. With patient satisfaction NPS near ninety. Second, we are making sure our integrated value based care network is appropriate and optimized. We've narrowed our affiliated network by nearly 20% since this time last year. With the goal of having a more optimal alignment of positions and services in place to best serve our patients. We have strengthened our value based care network and management disciplines, and will continue to reshape the network to ensure it is aligned with our strategy for higher quality, and greater affordability. Third, we have streamlined our risk membership by approximately 15%. This reflects dropping unaligned PPO contracts repositioning certain markets, and payer de delegation. In instances where we were not able to reach viable sponsor contract. Importantly, we have made strides in getting back to the original intent of our integrated BBC vision. Removing ancillary services risk and focusing back on core medical care. The majority of this work was done for 2026 with a smaller amount still to address in 2027. Finally, have improved basic operational disciplines. We have exceptional care teams and proven approaches. In 2024 and 2025, inconsistencies in market to market execution hurt us. We are intensely focused on driving consistency, accountability, and performance. For example, we now have nearly a 100% of our employee provider groups on one of three strategic electronic medical records. This is down from 18 EMRs in the past few years. This will enable us to more swiftly adopt enhanced workflow tools and AI. As well as have more timely and consistent data to guide our patient care efforts. OptumHealth has made significant progress in bringing the integrated value based care approach back to original purpose. You should expect further progress from us throughout 2026 as we continue our journey back to strong, transparent, consistent results while driving higher quality of care for patients, and lowering overall cost in the health system. Before I turn it over to Wayne, I want to take a brief moment to thank all the people of Optum. Who continue to work every day to ensure our customers, and our patients get the best experience and care we can offer. Wayne? Wayne DeVeydt: Thanks, Patrick, and good morning, everyone. I'll start by diving right into our twenty twenty five results. Today, we reported adjusted earnings per share of 16.35 which was slightly ahead of our expectations. These results reflect continued solid execution across the enterprise that will carry into 2026. As Steve noted, the quarter included a $1.6 billion net of tax charge or $1.78 per share. Which was largely non cash and primarily related to actions within Optum. This net charge has three primary components. First, a true up for all remaining cyber attack related activities. Including approximately $800 million for net collection expectations associated with provider loans and other customer balances. Second, a net gain. Of about $440 million related to portfolio optimization activities associated with assets we are exiting or plan to exit. And third, a $2.5 billion related charge principally to broad restructuring and other actions including contract reassessments, real estate rationalization, and workforce reductions. Of note, approximately $625 million of this charge relates to a lost contract reserve for third party contractual relationships within the Optum portfolio that are structurally unprofitable and that we could not exit for 2026. These actions are aligned with our broader efforts to improve focus and execution to drive more sustainable long term earnings performance. Some additional details for the full year 2025. We delivered revenues of nearly $448 billion reflecting 12% growth from 2024. Driven by domestic membership growth of over 415,000 people. Our medical care ratio of 89.1% came in slightly better than our expectations. This includes approximately 20 basis points of negative charge related impacts primarily associated with the lost contract reserve. I just discussed. Our operating cost ratio of 13.3% demonstrates strong management discipline while balancing key investments in people and capabilities that support long term performance improvements. Operating cost ratio was slightly higher than anticipated due to approximately 40 basis points of charge related impacts. Higher than originally contemplated because of approximately $800 million in broad based employee and incentives and funding to the UnitedHealth Foundation. Investing in our workforce and the communities we serve both are critically important to this enterprise. Finally, earnings were supported by strong cash flows of $19.7 billion or approximately 1.5 times net income. Turning to our 2026 outlook, We expect revenues of approximately $440 billion net earnings of at least $17.10 per share, and adjusted net earnings of greater than $17.75 per share. This reflects anticipated operational improvements and margin stabilization as we continue executing against our long term strategy. We expect slightly under two thirds of full year earnings to be generated in the first half of the year, This seasonal progression is largely consistent with 2025, and reflects the impact of Part D benefit changes under the Inflation Reduction Act as well as overall business mix. Turning to cash flow. We expect to generate at least $18 billion from operations in 2026, or about 1.1 times net income. Our medical care ratio is expected to be 88.8% plus or minus 50 basis points reflecting our view that medical care activity will likely remain at current trend levels through 2026. Consistent with prior years, we expect the first half medical care ratio to be notably below the midpoint with the second half notably above. The operating cost ratio is expected to be 12.8% plus or minus 50 basis points. This reflects disciplined cost management, ongoing productivity initiatives, and the early benefits of our investments in artificial intelligence. While also incorporating required investments in people, and technology. Our 2026 outlook reflects the realignment of Optum Financial Services from OptumHealth into OptumInsight. We believe this better optimizes the Optum portfolio aligns with how we expect to engage the marketplace and grow through the Optum AI network. Finally, on capital and liquidity, For 2026, we expect our dividend to remain well supported by earnings and cash flow. As we look ahead, we expect leverage to continue improving through the year supported by strong cash generation and a more stable operating environment. And to reach our long term debt to capital target of approximately 40% before year end. And as this progress continues, we expect to return to our historical capital deployment practices in the second half of the year. Before closing, I wanna echo what Steve Tim, and Patrick have said about the people of UnitedHealth Group. 2025 was a year of challenges on multiple fronts. Our team stepped up, embraced those challenges, and remained focused on delivering for the people we serve. Now I'll turn it back to Steve for some closing remarks. Stephen Hemsley: Thanks Wayne. I hope everyone is getting the sense from today's comments that we're returning to the operating and executional focus and the quality financial disciplines that have served us well. Details matter in these businesses. These approaches are essential to enable us to better serve customers and consumers, and the expectation of shareholders. That commitment to serve is embodied in our mission to help people live healthier lives and help make the health system work better for everyone And it's supported by a deliberate culture To that end, I would call out three overarching themes we're pursuing. The first is to refocus back to that mission and culture. We are reenergizing and retooling that sense of mission and culture throughout the company. Which is already the core reason so many of our colleagues joined this enterprise. The second is the urgent thoughtful application of modern intelligent technologies. These efforts can help address long standing needs in healthcare for simplicity, speed, certainty, insight, consumer empowerment, and con and convenience. expect at least We're hoping to invest nearly $1.5 billion in 2026 and as much to follow in 2027. This work is making a difference within our organization today and we it will serve as the foundation for external versions that can benefit the broad health system through OptumInsight. Lastly, we are methodically taking steps to advance greater trust and transparency wherever we serve the public health care interests. This began with the independent reviews of business practices and risk assessment in pharmacy services, and in care management. Those first independent reports were published in December and the remediation recommendations will be completed and reported no later than March. Further independent oversight reviews and reports were in process today and will continue. And in addition, in 2026, we will begin to publish our results in areas of interest such as prior authorizations, and claim approval rates, certain performance statistics, data and trends, rebate practices and prices for products and services, key business and core management practices and policies. For methods such as these and more, as they evolve, we will become even more publicly accountable for our performance and strive every day to improve it. We thank you for your time this morning. We'll now open it up for your questions. Operator, please. Operator: The floor is now open for questions. At this time, if you have a question or comment, please press 2 on your touch tone phone. We ask that you limit yourself to one question. If you ask multiple questions, we will only be answering the first question so we can respond to everyone in the queue this morning. Our first question comes from Josh Raskin with Nephron Research. Joshua Raskin: Hi, thanks. Good morning. Appreciate all the details. So you're guiding to a decline in 2026 in traditional MA lives of you know, even more than that. So almost mid teens and the proposed rates for 2027 as Tim mentioned, might indicate the need to further refine benefits think we're at the bottom of the MA cycle now? Should we expect MA margins to improve not just what you mentioned in '26, but in 2027? And then if you could help frame how important that core MA book is to the other segments of the enterprise, especially OptumHealth. Thanks. Stephen Hemsley: Yeah. So Josh, maybe I'll maybe respond to the second half of your question, and then Tim Noel can kinda respond to the first. But our interest has always been to serve all the markets in health care. All the segments, and also the national health system as a whole. And MA is certainly important in that sense. And it's important to OptiHealth and OptumRx just as you suggest. But I also might turn it around another way because the Optum businesses are extremely complementary to UnitedHealth and its benefits, and to many other payers. And that's why we believe and that we are bringing more broadly to the health care market very broad value really across the board. And that is why you really you have to strike the right balance when you're thinking about this. In terms of growth and membership really across the whole of the UnitedHealth Group platform. Tim? Timothy Noel: Good morning, Josh, and thanks for the question. So let me start the conversation with with 2026. And as I hit on in the opening remarks, our our strategy in '26 did focus on more so on margin than it did on any specific membership target. And that is all really playing out as expected when you think about some of the core and key pricing assumptions that we made as we close out '25 those look to be good assumptions that we made and they're really holding firm. We feel good about our margin recovery efforts of about 50 basis points across Medicare Advantage. The membership losses, while, they're a little north of, what we were talking about, earlier, really kinda sit within our internal planning range. So I can I think about that all as a real solid foundation that we're setting for 2026 as we then head into 2027? So moving into 2027, the news that we received last night in the advance notice was disappointing. And it was because it's a further for a program that is experienced $130 billion in funding reductions over the last three years under the prior administration. Which is particularly concerning for a program that provides excellent choice access, and affordability for America's seniors. And does so with satisfaction rates north of 95%. While saving money for taxpayers. the rates are finalized. So we're going to, of course, work with CMS from now until But as this all sits today, as I talked about, it will mean very meaningful benefit reductions and will once again need to take a hard look at our geographic footprint, our product footprint. Across the country. And, you know, has the likelihood to play out not dissimilar to how 2026 did in terms of modifications to plan footprint and benefits. We don't see this to be something that's going to be broadly disproportionate payer by payer. Therefore seniors kind of across the sector are going to experience this implications of reduced choice, reduced access, and affordability challenges. Given all of this and kind of where we sit, too early to talk point estimates around margin or membership for 2027. But I will say this that over the long term, given the actions that we have taken in 2026, and our integrated business model that as Steve alluded to, really focuses on value based care Those things having a strong foundation focusing on value based models, are going to be even more important in this environment that we're being asked to operate. Thanks for the question, Josh. Next question, please. Operator: Our next question comes from Justin Lake with Wolfe Research. Justin Lake: Thanks. Good morning. I wanted to ask about the fourth quarter OptumHealth performance. You guided to just under $3 billion of OI. With the third quarter results. And if I'm doing the adjusted math correctly, came in closer to $2.3 billion. So underperformed by $607.1 billion dollars of OI in the fourth quarter. It's fairly surprising to still see this kind of volatility in the business that leads in the year. Was hoping you could lay out the drivers there and talk to what gives you guys confidence in more stable performance in 2026. Given that fourth quarter volatility coming out of the year? Thanks. Stephen Hemsley: Good question, Justin. And you know, very much focused on making sure that we really took a hard look at that whole the whole of the OptumHealth business. So, Krista, do you wanna respond? Krista Nelson: Yeah. Absolutely. Thanks for the question, Justin. So your results in the fourth quarter and for the full year were, you know, slightly disappointing to our expectations. But really reflective of the restructuring actions that we took in the fourth quarter as well as some onetime items that are now right behind us. In addition, in the fourth quarter, medical remained elevated, but consistent with our expectations. So, you know, excluding restructuring and the move of Optum Financial, our adjusted earnings are now approximately $1.5 billion which is our new baseline that we will continue to build off of in the future. Maybe I'll just take a quick step back and answer the second part of your question, which is you know, what gives us confidence? We have reoriented OptumHealth back towards our original purpose. And we have a full integrated value based care delivery system where we employ and deeply partner with providers across multiple service lines including primary and specialty care imaging, surgery, home health, behavioral health, and additional wraparound services to support our patients. It's a system that's anchored by primary care, and an aligned payment model which incentivizes improved outcomes. Offering preventive and holistic care, compared to a system that rewards volume of services. We've established this strategic clarity in the business and paired it with a very comprehensive evaluation of our assets and capabilities which as a result, you know, we took meaningful actions in the fourth quarter to strengthen our foundation. And in addition to that, I'm pleased with progress that we've made in reshaping our risk portfolio, refining our network, and bolstering operations. I would say we're significantly stronger today than we were just six months ago. Thanks for the question. So a really solid shakeout a totally different management and leadership team and a much more rigorous approach a lot of potential there. Next question, please. Operator: And we'll move to our next question from Kevin Fischbeck with Bank of America. Kevin Fischbeck: Great. Thanks. Wanted to go back to the, the 27 mA rate update. Basically, it sounds like you're saying that trend is the biggest part you want to go back to. The government with. But I wanted to focus, I guess, on the the two kinda coding components that if you take out normalization, you know, 1.8 for call it, the risk model and another 1.5 for charts, So it's like a 3.3% headwind. I think that with v 28, you guys talked about an impact that was more than what the industry was seeing. Would you expect a similar dynamic with with these two coding components that you know, as a company who's probably better than average at coding, you'd see more than this kinda 3.3% headwind, that we're calculating. And, you know, do you still feel good about if that's true, do you still feel good about getting to a 5% margin in in value based care OptumHealth? Thanks. Stephen Hemsley: Sure. Tim, do wanna address that? Timothy Noel: Yeah. Kevin, thanks for the question. So, no, we don't expect the impact to be different for us. Versus the rest of the industry. On those two elements that you, outlined. Are our modeling shows, you know, consistency between what we're seeing and also what the estimates are of industry averages on those two elements. And then I'll look So, Kevin, was there a second part to your question? Kevin Fischbeck: Yeah. The second part was OptumHealth margins with this rate cut, because we took it to 5%. Krista Nelson: Yeah. Yeah. Thanks for that question. I would just say, you know, it's early. We have opportunities to improve performance in the business, you know, just outside of MA rates. You know, let me just give you a couple of examples that really give me confidence in why, there's you know, why we're really confident in getting back to our long term target margins. You know, I've gotten to spend time with our care teams And after we've done that complete, you know, thoughtful evaluation of our performance in our businesses, we do have many high performing markets today that really deliver strong outcomes for our patients. One example worth highlighting is, yeah, large market in Texas. Where we serve over 750,000 patients across over 50 clinics offering that holistic care I described, you know, primary care, labs, imaging, specialty care, home health, surgery, care coordination. We're really proud of our results. You know, for example, here, we've got a four and a half star health plan. We have total cost of care that is approximately 30% better than our competitors. A patient satisfaction of 90 really strong provider retention, and margins already performing in our long term target margin range. Another example that just gives me confidence here is we've got about 30% of our mature value based care patients that are already again inside that target margin range or above. And so those two examples combined with the work I described previously that we're doing to improve the consistency of of our performance just give me a lot of confidence in the runway ahead for OptumHealth. So really more about execution really than any other single factor, really is focused on execution. Yep, thanks for the question. Next please. Operator: We'll go next to Steven Baxter with Wells Fargo. Steven Baxter: Yes. Hi, thanks. In the Medicaid business, I think you made reference to getting a little bit of rate relief. So was hoping you could speak to oneone rates that you're seeing and maybe contrast that to the rates you were seeing in 2025? And in general, if the rates are coming in a bit better seems like there's not gonna be any material impact from early starts to work requirements if you kinda revisited your margin assumption for the Medicaid business at all in 2026? Thanks. Wayne DeVeydt: Thanks, Stephen, for the question. I'll give you kind of an overview on where we are in rates. For 2026, our view remains unchanged. In terms of overall performance. Our Medicaid business for Medicaid we do expect some margin contraction. Due to the ongoing dislocation of rates and continued elevated medical trends. medical trend. We are projecting rate increases in the range of six to 7% in aggregate for the year, but that will continue to be below our And we do expect some, membership contraction as we continue to manage the business. For January 1, our rates are somewhat in line with our expectations. And, again, we expect our rates to range between six to 7% for the year. As we think about 2026. Thanks for the question. Next question, please. Operator: And our next question comes from Lisa Gill with JPMorgan. Lisa Gill: Thanks very much and good I wanted to ask a couple of questions on OptumRx side. First, Wayne, you made a comment that due to Part D, we're going to see earnings more first half driven Can you talk about the changes around the subsidies and the impact that we have on Part D And then secondly, when we think about OptumRx, you talked about the member contractions because of what happened on The United side, but 800 new clients on that side. Last quarter, you talked about combining prescription and medical benefit trends. Can you just talk about those eight new clients and if there's anything different that you're seeing in them as we think about 26? Stephen Hemsley: So maybe the first question of Bobby and then John to second part. Bobby Hunter: Yeah. Hey. Thanks, Lisa, for the question. So, maybe just kinda hit quick on the Part D side. I mean, Wayne did talk about the seasonality dynamic You know, we've been pretty clear, I think, now with the implementation of the IRA, we do see more of a even, kind seasonal trending throughout the year. So you know, that element is certainly, kind of foundational in the outlook. When you think about the actual, you know, 2026 benefit design, the way that we position the benefits, on the Part d both for stand alone PDP and MAPD I think it's very reflective of the way that the IRA has evolved the program, the way that the industry has largely of evolved the design. So I feel like we're in pretty good lockstep there with where overall industry is moving. As I look at just kinda how 2025 closed out on the pharmacy cost for us inside the health plan, I feel pretty good about the overall, you know, trend on balance. Between all the key drivers, things like specialty trend, brand utilization, etcetera. So it it gives me, you know, pretty good belief in our outlook and our positioning for 2026. And early in the year, I haven't seen anything to, suggest otherwise. For the question. Wayne DeVeydt: Fantastic, Bobby. And Lisa, thanks for the question. So maybe building on the the membership growth, I'll pick up, you know, where Patrick left off and some of his opening comments. Strong selling season. In 2026 combined with retention allowed us to backfill you know, continued high nineties, re from UHC. you know, about half, maybe more than half of the of the membership loss And so that puts us in a nice position to deliver a modest 2% earnings growth in 2026 for a business that we expect to return to the low double digit to high single digit low single digit to high excuse me. High single digit to low double digit, earnings growth. And if I unpack that, Lisa, to your question on what are we seeing in the market and why are we winning? Why did those 800 new clients choose OptumRx? Couple of points. You know, we our businesses are performing strongly. Each of our core businesses growing in the high single digits. And the reason we're winning threefold, affordability, transparency, and execution. From an affordability perspective, our clients have never needed us more than now. And good perspective activity there. We're committed to bringing affordability to those that we serve. For our clients, OptumRx generates more than a $100 billion in savings annually through negotiations with drug manufacturers and network pharmacies. And then for our members and patients, we deliver more than $1 billion savings annually through our Price Edge and Specialty IQ. Solutions. From a transparency perspective, frankly, we're we're proud to be leading the the transparency transformation in this industry. Industry. And this begins with the industries only fully transparent pharmacy and therapeutics commit and then it continues through the supply chain with with wholesome instrumentation around manufacture network and wholesaler drug pricing. And so we couple all of this with our commitment to through 100% of rebates to clients by 2028, and then we wrap that in a in a transparency guarantee. Around our offering for our clients. And then finally, rounding out on experience. You know, we're making it easier for all those that we serve, providers, clients, and members, to interact with us. In our pharmacies, record high NPS in our home delivery pharmacy. Our 90% NPS for for the patients that we serve. And in our hospital based specialty pharmacies, high nineties NPS for patients and low nineties for providers. And then finally Lisa, we're eliminating provider and patient abrasion. So as Patrick mentioned, we reduced or removed reauthorization requirements for more than 180 drugs that have the net effect of reducing our overall prior authorization 10%. So in summary, transformational vision is compelling. Our offering is resonating. Our team is executing, and, we're we're well positioned for 2026. Thanks for the question. Stephen Hemsley: Thank you. Next question, please. Operator: And our next question comes from Scott Fidel with Goldman Sachs. Scott Fidel: I guess, I'll slip over to the commercial business. And interested if you could just provide us with the breakdown of the 1.3 million to 1.4 million commercial risk lives, that you're expecting to decline in 2026 how that breaks out between commercial group and then the exchanges. And then also just in terms of margins year over year progression for commercial group and the exchanges. What you're thinking about for '26. Obviously, we know that you're planning to to rebate the the the profits from the exchange business. Thanks. Stephen Hemsley: Thanks, Scott. Dan? Dan Schumacher: Yes, Scott. Thanks for the question. Addressing your membership first and then moving to to margin. On membership pertaining to the risk based decline, the largest share of that membership decline is connected to our exchange business for 2026, where we continue to expect meaningful decline between now and the end of the year. Beyond the exchange business, general market decline of risk based customers, our pricing posture supporting margin recovery, and continued deliberate migration to our self self funded, level funded small employer offerings. All contributing to a decline in risk based membership. So to parse that out specifically, 500,000 plus attributable to the exchange business, the remainder to those three factors. Moving to margins and first addressing, the exchange business, Over the course of the decade plus in which we have operated, in that market. It has never been a significant contributor of earnings for us. Our pricing posture for 2026 coming out of 2025 is going to return that market to a positive margin business for us. However, I would expect those margins in the exchange business for 2026. To be in about the 1% range. Plus or minus 1% for that business. Related to margin for the group business, in 2026. I'm encouraged by our January performance and how that has set us up for our full year plan. Specifically, for January, we found the market to be firm and competitive. And that supported us yielding the required renewal rates and membership persistency to deliver on the 2026 margin improvement that Tim alluded to in his opening remarks. Specifically, I expect us to close more than half of the gap between our 2025 margin performance and our historical margin range. Which we expect to achieve in 2027. Thanks for the question, Scott. Thanks, Dan. Next question, please. Operator: We'll go next to AJ Rice with UBS. AJ Rice: Hi, everybody. Thanks for the question. I think as as you guys came back on board and got your arms around the business. You talked about, modest growth in '26. Getting back to low double digit earnings growth. In '27, and then something more like what we're used to seeing from United in '28. You're talking about the rate notice impacting benefit design and being felt by seniors. And I think your underlying assumption is generally in Medicare, and with OptumHealth had been for gradual margin improvement, not dramatic margin improvement over the years. You've got now a view on all the other business lines Do you still think you can get, to low double digit growth in '27 and back to traditional growth in '28 as you put it all together? Stephen Hemsley: Yeah. Well, AJ, thanks for the question. So we're not gonna really talk to '27. Obviously, it's January '26. So I would say that's a business is meaningfully stronger than it was just a few months ago. And in '26, our agenda is to strengthen it even further We'll continue to be focused on, you know, doing you know, smart intelligent things to serve that total mission, but well within the margins that we have, operated in. And continue to believe we can strengthen that. So I can't speak to '27, but I will speak, let's say, to a longer term and that is you know, very much feel that we can be operate within our long term growth rate margins, that 13% to 16% When you take a look at the needs in the marketplace, and the opportunity for this total enterprise to operate at its full potential And actually, the elements in the marketplace, the actual pressures that have been discussed on this call actually to respond to those effectively across the marketplace really speaks to what I think our overall business approach can achieve. When you think about just solid organic growth and retention, again in the margins that we have been talking about. The enormous potential of AI driven productivity which is already in in line with a organization that is driven towards productivity and scale. Innovation and approaches to kind of serve the broader health care marketplace AI as applied to health care in a practical way. As a platform to really energize OptumInsights business agenda. The need and emergence for value based care, You combine that with thoughtful capital stewardship and continued measured thoughtful expansion of into the value added markets. That's why I think that the long term growth rate for this enterprise and and responding to the margins or the pressures in the marketplace has actually never been better But we have to play to full potential. And we have to execute. And that really is what we're about. But we have an amazing set of resources to respond to the needs of the marketplace. And that's why I think the long term growth for this enterprise is kind of more compelling than ever. Okay. Thanks. Next question, please. Operator: And we'll go next to Anne with Mizuho Securities. Ann Hynes: Hi, good morning. In your prepared remarks, talked about your trend expectations for 2026. Is up 10%. You tell us what that is Medicare, Medicaid and commercial? And maybe how 2025 ended what was different versus your expectations? Thanks. Timothy Noel: Yeah. Thanks, Anne, for the question. So you're correct. The 10% is a number. assumptions inside of Medicare. That reflects our utilization 2025 closed out around 7.5%. Which is what we've kinda reset our expectation through middle point of the year. So that really is, playing out well at a high level in terms of historical care utilization patterns in line with our RESET expectations. We have historically or recently talked about the commercial trend approaching 11%. I think that's probably still a good place to orientate to. Due to some of the nuance in the Medicaid market, where it's not quite as instructive to give a point estimate there, But I think you can just think about the themes really being similar across all the businesses. Seeing elevated trend that elevated in the earlier part of 2025. Remains at those elevated levels. And our expectation is that will persist into 2026. Thanks, Tim. I think we have time for maybe just one more question or two. Because we're gonna try to wrap it up at eight. So next question, please. Operator: And our next question comes from Erin Wright with Morgan Stanley. Erin Wilson Wright: Great, thanks. So it seems like you're progressing according to plan with the Optum turnaround, but has there been any surprises that have come out of some of the initiatives there, especially at OptumCare? And just I think you're still saying that the long term margins target, 6% to 8%, is still intact. I just want to confirm that. And then just in light of the rate notice and policies, top of mind, how are you thinking about this administration support of value based care initiatives and they integrated, you know, Optum offering. And you mentioned just how important value based care is to operate in this environment. So some context there would be helpful. Thanks. Krista Nelson: Yeah. Absolutely. Thanks, Erin, for the question. So a couple of things. You asked about just you know, our how we're progressing and if we've seen any surprises. No. Think as we've you know, gone through the evaluation I described in the fourth quarter and as we've started to look at performance in each business and as we've made some decisions to improve our footprint and our market portfolio, and getting some of that, you know, behind us. I I actually feel better about our 2026 position and our foundation by which we will be building off of. Your second question was on the six to eight. Percent and if that's still intact. And the answer is yes. Like I mentioned earlier, the examples I described in Houston, we have a number of examples like that where I described our mature evaluative cohorts already performing inside that. Again, those are reasons to give us confidence You know, that being said, we do have work to do, which is we've we've laid that out thoughtfully. And I think as, you know, in terms of progression of earnings, you know, we're looking at modest basis point improvement inside 2026. As investments take shape and as we overcome the last year of V-twenty eight. With building stronger momentum in the back half of the year setting us up for 2027, And then, you know, the last part of your question around just the support of value based care you know, what we've got is a very unique integrated value based care delivery system that continues to demonstrate value to patients served higher quality outcomes, and a total cost of care that is significantly better than all market alternatives, And, you know, this system, like I mentioned earlier, is aligned around an aligned payment model which incentivizes preventive care and holistic care. And comparing that to assessment and rewards for volume, is just, you know, a system that we need more of, and I we feel even stronger today about that need. And the greater possibilities for OptumHealth than we have before. So thanks for the question. Totally perfect. And, you know, the pressure in the marketplace just actually makes value based care more compelling, and the retention of patients to value based care is very strong. One last question, please. Operator: Our last question comes from Jessica Tassan with Piper Sandler. Jessica Tassan: Hi, thank you so much for the So what would you highlight for investors from the independent reviews of UNH business practices that you all published in December? And is there any way to draw confidence around UHC and OptumHealth's ability to contend with adjustment reform from some of those reviews? Thank you. Stephen Hemsley: Sure. I'll just, offer broadly. They were actually very positive. They really did speak. They were more focused on the overall environments, the controls, the oversight, the governance. With respect to those areas of practice. And particularly in risk assessment. And so we were we were pleased with that, and we are following that, with really our own independent review in terms of risk accuracy. Chris? Krista Nelson: Yeah. I'll just I'll just follow-up to say that I think the the reports really are are focused on trying to advance trust and transparency in these metrics that come out of it while 2025 was really focused on the policies, procedures, compliance, oversight, all of which were strong and robust. 2026 will focus on risk assessment accuracy, and metrics clinical policy accuracy, and pharmacy services. And we have reviewed these with the administration. We are very much open in continuing this course Again, recognizing the long term responsibility for trust and transparency in this So I really appreciate the question, a good one to end with. It is really all we have time for now. What I would say is that palpable the the momentum inside this organization is palpable. We still have work to do to continue to successfully build and progress over the next several months, and we are eager to get to it. But I very pleased with the performance and outlook that we have. You for your time today. Operator: And ladies and gentlemen, this does conclude today's conference. We thank you for your participation.
Operator: Greetings. Welcome to the Kimberly-Clark 4Q 2025 Earnings Call. At this time, participants are in a listen-only mode. A question and answer session will follow the opening remarks. Please note this conference is being recorded. I will now turn the conference over to your host, Christopher Jakubik, Vice President of Investor Relations. Chris, you may begin. Christopher Jakubik: Thanks so much, and good morning, everyone. This is Christopher Jakubik, head of investor relations at Kimberly-Clark, and thank you for joining us. I would like to remind everyone that during our comments today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties, and these are discussed in our earnings release and our filings with the SEC. We will also discuss some non-GAAP financial measures during these remarks. And these non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. You can find the GAAP and non-GAAP reconciliations within our earnings release and the supplemental materials posted at investor.kimberly-clark.com. Finally, I will apologize in advance if there are issues with quality or delays in our audio today because we are all working remotely due to the winter storms. So, with that, I'll turn it over to Mike for a few opening comments. Michael Hsu: Alright. Thank you, Chris. Two years ago, we launched Power and Care to unlock Kimberly-Clark's next chapter of growth, building on our 150-year legacy. Since then, we've made tremendous progress and accelerated our momentum across the board. Our execution of Powering Care is driving strong results even amidst a dynamic external environment. In 2025, we continued to advance our volume plus mix growth, delivering an eighth consecutive quarter of solid volume plus mix performance in Q4. We gained enterprise-weighted share and marked a second straight year of industry-leading productivity with our fourth quarter being the strongest of the year. The energy across our company is palpable. We are introducing consumer-directed, science-based innovation and breakthrough marketing across brands and markets faster than ever before. We're exercising cost discipline and our greatest capabilities across the enterprise to optimize our margin structure, and we've rewired our organization for growth, including strengthening our bench of exceptional leaders and pivoting our portfolio to higher growth, higher margin personal care categories. We've hit the ground running in 2026 and are energized by the opportunity ahead. We've built a robust, achievable plan focused on further differentiating our trusted brands and ensuring we have healthy levels of investment across our value chain. We expect pressure on the consumer and a focus on value to persist. We're confident in our strategy and committed to giving our brands the fuel to thrive. Powering Care has put Kimberly-Clark on a virtuous cycle of growth and positioned this great American company for a better future. We have the right foundation and a proven playbook to capitalize on our pending acquisition of Kenview. Acquiring Kenview is a powerful next step in our transformation that will compound our momentum. It will advance our trajectory toward higher growth, higher margin spaces, and create a global health and wellness leader positioned to serve consumers at every stage of life. We're excited to seize the vast opportunity ahead and confident we will create significant value for our consumers, our partners, and our shareholders. So with that, let's open the line for questions. Operator: Thank you. At this time, we will be conducting a question and answer session. In the interest of time, we ask that participants limit themselves to one question on today's call. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. And the first question today is coming from Bonnie Herzog from Goldman. Bonnie, your line is live. Bonnie Herzog: Alright. Thank you. Good morning. So I guess I was hoping to hear some color on the state of the consumer and what you're doing different in this environment. Mike, I ask because you're growing volumes, whereas this really has been challenging for others. And then how are you thinking about this going forward? You guided organic sales growth to be in line to ahead of the category in '26. So hoping you could share what your expectations are for category growth this year and whether it will accelerate from the 2% growth currently. I guess, essentially, do you need end market growth to improve to hit your mid-single to high-single digit EBIT growth guidance? Thanks. Michael Hsu: Okay. Hey, Bonnie, great question. Thanks for that. I'll open, and I think Russ has a lot more texture that he's raring to inform you all of. And then I might even ask Nelson Urdaneta to cover a little bit about how it affects the outlook. But one, and I think you raised the point that we are growing, and it's a tough environment out there. However, I think the big thing is that maybe two, two and a half years ago, Bonnie, we did see that pressure in almost all markets was gonna increase on the consumer and, in North America, given the state of the middle-class consumer. And so we started to focus on delivering superior propositions at what we said is every rung of the good, better, best ladder. Right? And so we've worked really hard to do that, and we continue to see ample opportunity to do that and do that better. And also continue to elevate and expand our categories globally. A couple additional comments. We feel consumers remain interested in better-performing products, and that's at all price tiers. In this environment, as I think you're pointing out, Bonnie, a strong value proposition is the paramount thing. And so we're growing because what we're doing is strengthening our offerings at every rung, and that means we're continuing to bring great innovation at the top end. And then we are rushing that innovation through into our value tiers. And I think our consumers are really noticing that. We've really worked hard to deliver superiority at a very, very competitive cost. So we see further opportunity to expand our categories, expand penetration, and premiumize over time. We've developed a robust pipeline of innovation the world hasn't seen yet. And I will tell you parenthetically, I'm more excited about our next three years of innovation than what we've done in our past three. So we're really excited about what the company's been working on. So with that, maybe I'll kick it to Russ, and maybe you can provide a little texture. Russell Torres: Yeah. Thanks, Mike. Hi, Bonnie. You're right. I don't think we are expecting, as Mike noted, the consumer focus on value to change anytime soon. And as Mike noted, I really think our mantra has been to meet consumers where they need us. And that's where the combination of innovation, marketing, and activation. Like other categories, we are seeing consumers' demand shift across channels. They're looking for different pack sizes. Purchase frequency in some parts of the world, especially in developing markets, is being impacted a little bit, and that's clearly led to kind of more choppy month-to-month consumption data. So in terms of your question, I think Mike nailed it. I would just add a little bit more texture on it is that we're really focused on serving consumers on every rung with a compelling value proposition. I think that's the reason why we're growing volumes right now. We have made a number of targeted price pack adjustments as well as paying extra special attention to channel participation and ensuring we have really compelling offerings at the good tier as well as the better and the best tier. We put an extraordinary effort into driving elevated benefits on the trade upside to maintain that category growth. And I think if North America, if you pick that as an example, that's really helped us on the volume side. In Q4, as you saw from our results, our volume mix was up 1.7%. But on a two-year stack basis in Q4, it was up 3.6%. And on the full-year basis, in North America, volume mix was up in Q4 2.1. And on a two-year stack basis, it was up 4.1. And I agree with Mike, '26 should probably be one of our best years for innovation, and we're gonna continue executing that strategy and are optimistic we'll continue to be able to deliver what consumers are looking for. Michael Hsu: Yes. And then, Bonnie, just to follow-up on the final part of your question. I think our 26% kind of implies our category outlook is around 2% globally, plus or minus. And there's been a little choppiness around that. But if you look specifically at our categories, we tend to be more resilient, and demand tends to be a little more stable because of the categories that we're in. Bonnie Herzog: Alright. Thank you. I'll pass it on. Operator: Thank you. The next question will be from Lauren Lieberman from Barclays. Lauren, your line is live. Lauren Lieberman: Thanks so much. Just wanted to follow on some of those thoughts. And particularly honing in on price and mix. In North America, we've seen pricing took another step back this quarter being up in 3Q and mix persistently negative. I know you look at vol mix, but probably, but, you know, price mix is decelerating, not improving. So just wanted to give a comment on that. Because you'd mentioned price investments a couple places in the release. Thanks. Russell Torres: Let me take that one, Mike. Michael Hsu: Yeah. Go ahead, Russ. Russell Torres: Yeah. Hey, Lauren. How are you doing? Good to talk. I would say, you know, there's really three things going on there on the price mix. The first thing that I would say is, there's a promo dynamic. If you recall, the third quarter call, we talked about the competitive activity in North America in the second half being some fairly significant promotional activity. And as a result of that, we rephased some of our planned activation activity around innovation into the fourth quarter. So you're seeing that come through. And specifically, just to remind you, as Mike said, we're in essential categories. We believe that promo drives incremental consumption, but we will use it as a tactic to drive trial, especially related to innovation that is really sensorial. We did have a strong agenda of innovation in 2025, and you probably saw some of that. For example, we did move some of that programming on Snug and Dry, which we have a great innovation. It's the softest diaper in the value tier. Our new Generation two core, which provides better protection and more comfort, was named the number one diaper with good housekeeping, disposed diaper, great consumer rating. So we wanted to get that in the hands of consumers to drive trial. We had other innovations as well, and we did that in the fourth quarter. And those performed relatively well. I would say, just last thing on the promo dynamic, before I move on is our end market promotional activity for the year remains below the category and 2019 levels. And again, we expect that to flow with our innovation. The other two dynamics I'll hit briefly. One is club mix. That's just the consumer moving channels, and that has come through a little bit in our pricing because they're buying larger pack sizes at a lower price per unit. So you see more volume, but a little bit of a drag on pricing piece there. And again, that's our philosophy of just serving consumers in the channel that they want to shop in. And then the last thing is we did talk about several times making strategic investments in pack sizes and choices to better align our good, better, best pricing value ladders across the channels, especially ahead of some of the innovation we have coming. And we had made some choices to sharpen the competitiveness of our value proposition. So over the long term, we're going to stay focused on maintaining PNOC's discipline while growing volume and mix profitably. And that will be led by innovation and the focus on category development. And we have a great lineup in '20 to that end. So that's kind of the direction we're headed, and we're excited about it. Lauren Lieberman: Great. Thanks so much. Operator: Thank you. The next question will be from Nik Modi from RBC Capital Markets. Nik, your line is live. Nik Modi: Yes. Thank you. Good morning, everyone. I just like a quick clarification, I didn't see anything in the release regarding any updates on closing timing or regulatory filing timing. So if you can provide any clarity on that, that would be helpful. But my main question is really just the state of the U.S. Diaper category. Especially the dynamics at play at Costco, you know, given Proctor is now entering after decades of exclusivity for Huggies. So if you could provide any kind of thoughts on that? Is that kind of embedded in your outlook? How are you going to respond, etcetera, etcetera? Michael Hsu: Okay. Morning, Nik. Maybe I'll ask Russ, maybe you can talk about the U.S. diaper category, and then I'll come back, Nik, and answer your questions on the acquisition. Russell Torres: Yeah. Sure. Hey, Nik. How are you doing? Yeah. In terms of diapers, you know, again, you know, we're growing by driving innovation and brand building that grows the category and cascading that to all tiers. And that model has worked well for us around the world, you know, in the United States before I get to the U.S. I've just, you know, hit a couple highlights around the world in the fourth quarter. We grew share in many of our key markets, including China, up 210 basis points, Korea, up 30 basis points, Brazil, up 50 basis points, Indonesia, up 230 basis points. So that strategy that we're executing is working in North America as well. In the fourth quarter, we grew share about 100 basis points, and we've grown share in diapers two years in a row. But with just with the club situation, you know, the way we look at it is we're really focused on providing consumers with differentiated brand value propositions, no matter what channel they're shopping in. And we're widely available. You know? So is our competition. However, you know, we did see a major club player has moved away from, you know, branded exclusivity in our category. And so we'll see partial loss of diapers and pull-ups distribution in the North America club channel, and that'll start in the first quarter here. And this is incorporated to your question in our full-year expectation of growing. Nelson mentioned, in line or to better than weighted average category growth. So we're focused on continuing to execute the strategy and there might be some ebbs and flows over time, but we're very confident in the long term. We're going to continue to move in the right direction as our current performance indicates. Nelson Urdaneta: Okay. Thanks, Russ. Go ahead, Nelson. Sorry. Just to clarify for, what's built into the forecast, Nik, we, as Russ mentioned, we expect this distribution loss to commence in Q1. It is reflected in our full-year outlook and it's a headwind of around 60 basis points for the full year. Michael Hsu: Okay. And then, Nik, just regard to the Kenview process, the shareholder vote is on the 29th this Thursday. I will tell you, I expect the vote to reflect the very positive feedback we've heard from our investors. And so through yesterday, a good chunk of shareholders have already voted, and it's well in excess of 90% in favor. So we feel good about that. And then with regard to timing of close, we still expect somewhere in the back half. I think the regulatory process is on track and consistent with our initial expectations. And maybe you didn't ask this part, but I will tell you our IFP transaction remains on track for a mid-year closing this year, still subject to regulatory approvals. And then we work closely with Kenview to file shortly after announcing the transaction, submitted to US antitrust filing, and we'll complete filing all of applicable international jurisdictions by early February. And so, again, I think we're on track to close in the second half of this year. Nik Modi: Excellent. Thank you. I'll pass it on. Operator: The next question will be from Stephen Powers from Deutsche Bank. Stephen, your line is live. Stephen Powers: Great. Good morning, everybody. Thank you. Maybe just to round out the line conversation a bit. Just maybe a little bit more precision around how you expect the overall 2% category growth to shake out North America versus rest of world. And I guess in light of the 4Q dip that you noted, and the overall choppiness we've seen, do you see that 2% backdrop existing pretty steadily in '26, I guess, inclusive of the first quarter? Or will it are you assuming that it takes more time to ramp? That'd be helpful. And if I could, I know I'm supposed to have one question, but I'm gonna try to get two. Nelson, you know, in the prepared remarks, you talked about visibility and achieving that the 40% future adjusted gross margin before the end of the decade, I'm assuming that target existed before Kenview. So it's independent of Kenview contributions. I guess, maybe just an update on how you're seeing the primary drivers shaking out there, and then just how much progress roundabout think you might be able to make in '26? Thanks very much. Michael Hsu: Okay. Sure. Thanks, Steve. Hey. Let me just open with maybe just an overall comment on the sales outlook. You know? And then Nelson will give you more a little more on the pacing, and we can hit the margin thing, Steve. But one, I just wanted to kind of emphasize that our volume momentum, and I think Bonnie noted that, you know, the volumes were in our minds, you know, performing well. The volume momentum really this year in '20 or last year in '25 really reflects, I think, the compelling offering that we have. And, you know, as I mentioned earlier, we're even more bullish on our innovation and marketing initiatives this year. And so I think our focus on strengthening the value at every tier has been very, very important. We have a very strong pipeline coming this year, and so we expect a meaningful step up as we get through the year to support our new launches. And so we feel very good about the plan for this year. But I'll let Nelson you may wanna comment a little bit more on the pacing. Nelson Urdaneta: Sure, Mike. So a few things, Steve. And I'll unpack a little bit Q4. But to start with, you know, for 2026, as Mike mentioned in his prepared remarks, I mean, we have a very strong and I'd say, you know, the strongest pipeline of innovation and activation programs that we've had in quite a few years, across all of our markets. And we are, our plan is to continue to build the momentum on volume plus mix led growth that we saw play out in 2024 with an acceleration in 2025. Now as you rightfully mentioned, for the 2025 on the surface, weighted global average category growth dropped to around 0.6%. And that compares to about 2% that we were staring at right around between Q1 and Q3 of last year. And there were a few discrete factors that weighed on this drop particularly in North America. And as you know, we have the impact in 24 of hurricane Helene, the port strikes, panic-related buying, and to a lesser extent, in 2025, there was a little pantry loading in North America diapers in '25. So that all kind of played out into the weighted average growth of 0.6% for the category in the last quarter. For the full year, as I mentioned, category grew weighted right around 2%, and our categories have remained resilient. As we think about the last four weeks, data that we've got, we're hovering around that 2%. So we think that a good starting point for weighted average category growth for the start of the year is around that level. We are maintaining our disciplined approach to grow in the categories and the brands through the innovation, the differentiation. And we expect both North America and our international personal care business to grow in line or ahead of the categories for the full year. In terms of net sales, we expect both the first half and the second half to be roughly 50/50, so pretty even. But when you look at the growth, in terms of quarterly pacing, we are planning, you know, for the innovation and the brand support, to ramp up as we progress through the first quarter. And then into Q2 and the balance of the year. So I would expect, as we build our outlook, to see organic growth to accelerate in the back half versus the first half of the year. As it relates to the visibility of achieving the 40% before the end of the decade, and, you know, the drivers and the progress. A couple of things. I mean, as we've stated, margin progression is not gonna be linear quarterly or year on year. However, we've made very strong progress over the last two years. We took a little bit of a step back on gross margin in 2025, and that partly was impacted by one, the inflationary elements that we were dealing with. As a reminder, we had around $200 million of input costs that we dealt with last year. And that included the headwinds, which were unexpected, related to tariffs. As we go into this year, though, we're not expecting that. I mean, we're expecting cost actually to be largely flat. So that's one. Secondly, we are expecting to deliver very strong productivity in the year. Another year that'll hover around 6% building on what we achieved in 2024 and 2025. So all in, we expect to expand margins both gross and operating profit margins in the year. In 2026, putting us well on pace to achieve our objectives of at least 40% before end of the decade, for gross margin and at least 18 to 20% in operating profit before 2030. So well on pace to deliver that. And, again, that excludes any favorability or impact as we carry out the integration in Kenview. Stephen Powers: Perfect. Thank you both. Very, very clear. Appreciate it. Operator: Thank you. The next will be from Christopher Carey from Wells Fargo Securities. Chris, your line is live. Christopher Carey: Hi, everybody. Chris. Hope you're well. You gave some information just about the model from 2026 kinda through 2028. With phasing and obviously implied in there is some medium-term growth expectations as well. You also established some of these expectations in the S-4. And can you just help reconcile or clarify whether there's been any evolution in the expectations, you know, as of the S-4 relative to where we are today? And maybe just because so much of this, you know, medium-term CAGR is anchored to an acceleration in 2028. Just help us understand the visibility that you have and the confidence that you have that you can achieve those outcomes in a few years from now. Thank you. Nelson Urdaneta: Sure. So from a modeling standpoint, let me walk you through what we had in the S-4 and what we have for 2026. And to your point, our visibility and confidence in getting to our ambitions before the end of the decade. So firstly, a couple of things. We've built into the outlook for this year the momentum that we've got. Based on the innovation and all the activation plans that we've been building on through 2025 and what we have in place as we commence this year. There are two factors that are coming into the picture as we speak for the outlook for the year, and they've come up in the past couple of months. The first one is we've had a bit of softer than anticipated fourth quarter in the demand in North America and enterprise markets. And this resulted in a lower base of volumes and EBITDA for 2025. And that's reflected in the outlook. Second bit is really around the partial loss of the diapers and training pants distribution in the North America club channel. That we just talked about, both Russ and myself, which we are not able to fully offset in 2026. And as I mentioned, that will be a headwind of around 60 basis points of growth on the year. That is reflected in our outlook. And that, of course, will be a difference that you would see versus what we would have had in the S-4. That said, our ongoing business is well positioned to deliver results consistent with the long-term algorithm that we laid out in March 2024. And these two factors are reflected in the outlook. On the top line, based on all the innovation plans that we have, the commercial plans, we expect to deliver growth that is at or above global weighted average category growth globally. We are aiming for operating profit growth that's at the higher end of our mid to high single-digit range. And, you know, as we support a significant step up in new product activations across key markets, in another year of gross productivity that will approach 6% of cost of goods sold, and we will maintain our discipline on SG&A savings that you've seen flow through in the last couple of years. Through our Power and Care transformation. If you look at adjusted EPS, on a constant currency basis, we expect to be in line with 2025 levels, Chris. And, you know, this will reflect two things. One, the underlying growth, which will be consistent with our long-term algorithm. But there will be an offset. And that's because of the reduction in income from discontinued operations, which we expect to be roughly half of what we saw in 2025 levels. With a midyear projected close of the IFP transaction. Michael Hsu: Got it. And then, Chris, you know, I think you may not have asked us specifically, but I would say from the Kenview perspective, you know, I'll tell you, you know, and we've been getting knee-deep into the integration management process. You know, I would tell you we haven't seen anything that would change our view on the potential of this combination. You know, Kenview is gonna be set to report the results on their usual timing, I think, which is early to mid-February. And then, you know, if you looked at the S-4 pretty hard, we did take a fairly or a somewhat more conservative view of their outlook and near mid-term financial profile. We plan to make pretty good investments into their brands and their portfolio and capabilities. And so we still see a generational value creation opportunity by putting these two companies together. You know, what our focus is on making sure that both companies have great earnings capacity over the long term. Nelson Urdaneta: Okay. Thank you, both of you. Yeah. You have a question on the visibility, and I'll reiterate that we have strong visibility into our plans on the productivity front. To achieve the margin expansion and fund the brand investments that we have for the following years. As well as on the top line, our ability to grow at or ahead of the categories, largely driven by the very strong innovation pipeline that we've got for the next few years as well as our executional plans across the globe. Christopher Carey: Okay. Thank you both. Michael Hsu: All right. Thanks, Chris. Operator: Thank you. The next question will be from Michael Lavery from Piper Sandler. Michael, your line is live. Michael Lavery: Thank you. Good morning. I just wanna follow-up a little bit, I guess, on Steve's bonus question on margins. Just would love to understand, called out the significant reinvestment that you're expecting post-deal. Just maybe how you know, you said, of course, that it's not linear, but maybe how bumpy does it get? And we know of the synergy pacing and how that plays out, but it, you know, kinda just maybe how much more can you unpack the path to 40% gross margins and 18% EBIT? Michael Hsu: Yes. Well, hey, Michael, thanks for the question. Just a comment, I would say, and I'm presuming you're talking about our standalone on that our path to forty. You know, I think we're overall, we feel like we're making strong progress. We have very good visibility into our path to the 40% and 18 to 20% OPROS aspiration 2030. In fact, I think we're probably pacing slightly ahead of what we originally planned. Just to confirm or reiterate, Michael, these margin targets are milestones, not a destination. And so, you know, we expect to kinda exceed that when we can. And then you'll note that the IFP transaction does create a one-time impact in a better business for both businesses longer term. You know? And we'll update you on that as we get closer to close. But, you know, I think we feel very good about our productivity delivery. We feel very good about the innovation that we have in the pipeline that's enabling us to drive positive mix and premiumize at the top end of the category. And then grow volume by cascading those features down through the tiers. So I'll pause there. I don't know if there's anything else you wanna click on there. Michael Lavery: No. That's really helpful. Yeah. Thank you. Michael Hsu: Okay. Thanks, Michael. Operator: Thank you. The next question will be from Robert Moskow from TD Cowen. Robert, your line is live. Robert Moskow: Hey. Thanks for the question. Nelson, the argument for gross margin expanding this year, I think, reflects hey, you had $200 million of input costs last year you didn't expect. And then it's not going to happen this year. But if I look back at '25, I mean, one of the was that pricing turned negative environment got a lot more competitive. You know, what's to stop that from happening again in 2026? It seems like the environment continues to be really competitive. You're losing some distribution in Costco. You might have to take steps to defend your turf and other retailers mentioned the name of the club. I'm just speculating, of course. But so how much cushion do you have in the model in case you know, it does get into that kind of environment again? Nelson Urdaneta: So a few things, there, Robert. First, yeah, as you rightfully say, as you unpack why we expect margins to expand. One, costs are projected to be neutral year on year. First two years, in which we faced about $200 million of costs. Secondly, productivity, gross productivity is expected to be right around the 6% level, which will be at the high end of our five to six and, again, another record productivity level for us in the year. And then on the pricing bid, I think it's very important to go back to, you know, what we chatted early last year and what Russ mentioned. We made some strategic price pack architecture and channel price investments, particularly in North America, towards the 2024. So as you head into 2026, we're gonna be lapping largely that. So that is gonna be something that, again, based on what we've modeled, what we put together, that is one aspect that'll be different as we go into the year. So that changes, year on year, and it's reflected there. The channel mix and all that bit, that'll continue to play out to some extent. But that's factored into the model, Robert. So hence why, you know, we do see a little bit of a difference between twenty five and twenty six from that end. And why we're, you know, at this stage, confident in our ability to expand margins in 2026, back to where we had modeled before. Michael Hsu: Okay. Maybe that's what I'll tack on to Robert. You know, I think part of it is also philosophically, you know, we're really not interested in renting share through promotion. And especially, I think Russ mentioned it earlier on the call, which is, you know, it doesn't make sense in a category where consumption is relatively stable or almost fixed. You know, in a category like fat tissue or diapers. And so what we're really focused on and I think we had this in our prepared remarks, is kind of having an operating model on a culture that's driving this notion of the elusive virtuous cycle which, you know, we think is delivering great results. You know? And that includes innovating at all rungs of good, better, best, especially the top end and pulling it through through the value tiers. And then as you're kind of asking about making sure that we can invest for impact. And I think we've done a very good job of increasing our over the last several years. But also improving our maybe the effectiveness of our advertising and our marketing. And, for us, you know, we feel like that's a much more powerful lever to pull than trade promotion. And so that's kind of what we've been investing, and we're really seeing great results. And I think that's leading to that's been a driver of our last couple years of strong volume plus mix growth. And, you know, and we feel very well positioned for, you know, more volume and mix growth in 2026. At the same time, you know, to get this virtuous cycle, we have to have leading productivity, which we're delivering, and so we're really proud of. And so I think that's our focus and you know, that's how we're gonna run the play in '26. Robert Moskow: Yeah. I get it. I guess my question is you know, Nelson, you said that price realization was lower in 'twenty five. Because of decisions you made in '24. But was, from our modeling, the pricing was weaker than expected during the course of '25 compared to the original guidance. Am I wrong? Or was asking a down year for pricing always part of the plan? It seems like it was weaker than you thought. That's all I was asking. Nelson Urdaneta: We always factored into the plan one the, you know, the pricing actions that we were gonna take at the end of the quarter. In 2024. And there's always gonna be a little bit of shift in programming Robert, that plays into the year and that comes up in actuals. But that was largely it. I mean, there will be a bit of move across channels, as Russ referred to. But overall, you know, based on what we're planning, you we wouldn't see what we saw in '25 at this stage. Russell Torres: And, Robert, keep in mind, I think Russ had mentioned earlier that, you know, and we talked about on last quarter's call where, because of competitive activity, we held back on some of our Q3 programming. So that would explain some of what you're looking at on a sequential basis. And we shifted it into Q4. Robert Moskow: Thank you. Great. If we could take one more question. That'd be great. Operator: And the final question today is coming from Edward Lewis from Rothschild and Co. Edward, your line is live. Edward Lewis: Thanks very much, guys. Yes. I guess a quick one, just looking at the international business, so good share gains. You know, to get and obviously a good end to the year there. As I look at the results for nine months on the international gross margins, there's around about a seven percentage point gap between that and North America. So am I right in thinking that the international gross margin is a big opportunity? And what do you see as the growth drivers there? Michael Hsu: Yeah. Hey, Ed. Good to hear from you. You know? Yes. International margins are an opportunity. It's something we're focused on improving. I'll let Russ talk a little bit more about it. We feel very good about the progress we're making in international. Especially our focus markets. Russell Torres: Yeah. I would say a few things. First, you know, I do think that a key part to the equation for us growing is to meet consumer demand at every tier. And we've talked a lot about the good and the better, but the best is a big opportunity for us. And we've seen that where we've expanded margins in international geographies is developing that premium segment. And we believe that there's very, very significant upside in that, especially in geographies where the consumer is still developing and GDP growth continues to allow people to have more money to spend. And so, that's one. I think second thing is we've had no less of a focus on productivity, internationally, and we've come up with some really great ways through the wiring that we've executed to be able to leverage our global scale that we've got in markets like North America and China in other geographies. To help drive costs down. And so that's another big component. And I would just note that we've been growing significantly, and we've seen that sequentially unfold for us in the markets outside of North and China. Brazil diapers organic growth mid-single digit South Korea diapers, positive organic growth. Indonesia, positive organic growth gaining share in Australia. So in fem care and adult care. So that's another element to it. It's just the leverage we'll get as we continue to scale the business. And looking forward to Kenview, we think that's another really big opportunity potentially for us. So those that's that's kinda what I would say. Michael Hsu: And then, Ed, I would I'm excited about our share momentum. I mean, we did see significant growth across IPC. Markets in 2025. Just to give you a few examples, I mean, overall, our focus markets are top six markets in IPC were up about weighted share 50 basis points. China was up 270 basis points on diapers. And then outside China, you know, Fem Care In Indonesia was up almost 200 basis points Korea was up 60. Australia up 50. Brazil up 40. And so I think we're making, you know, very good progress. Oh, okay. Across the board. And then, you know, if you think about international, in 26, you know, we expect to drive positive volume and mix led growth ahead of the category. You know, we are targeting weighted share growth again along by led by our strong innovation and premiumization. And then expect, you know, operating profit dollar and margin gains reflecting the strong productivity and overhead management that we're doing. So thanks for the question, Ed. Operator: Thank you. And that does conclude our Q and A session for today. I will now hand the call back to Christopher Jakubik for closing remarks. Christopher Jakubik: Great. Well, thanks, everybody, for joining us today. For analysts who have follow-up questions, the investor relations team will be around day to take them. So have a great day, and, again, appreciate the interest. Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, ladies and gentlemen. And welcome to the RTX Fourth Quarter 2025 Earnings Conference Call. My name is Olivia, and I'll be your operator for today. As a reminder, this conference is being recorded for replay purposes. On the call today are Chris Calio, Chairman and Chief Executive Officer, Neil Mitchell, Chief Financial Officer, and Nathan Ware, Vice President of Investor Relations. This call is being webcast live on the Internet, and there is a presentation available for download from RTX website at www.rtx.com. Please note, except where otherwise noted, the company will speak to results from continuing operations excluding acquisition, accounting, and judgment, and net nonrecurring and/or significant items, often referred to by management as other significant items. The company also reminds listeners that the earnings and cash flow expectations and any other forward-looking statements provided in this call are subject to risks and uncertainties. RTX SEC filings, including its forms 8-K, 10-Q, and 10-K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Once the call becomes open for questions, we ask that you limit your first round to one question per caller, to give everyone the opportunity to participate. To ask a question, you will need to press 11 on your touch-tone telephone. You may ask further questions by reinserting yourself into the queue as time permits. With that, I will turn the call over to Mr. Calio. Chris Calio: Thank you, and good morning, everyone. Delivered strong sales, adjusted EPS, and free cash flow in the fourth quarter, underscoring our momentum and focus on execution across RTX. For the full year, adjusted sales were $88.6 billion, up $9 billion year over year or 11% organically. Driven by 10% growth in commercial OE, 18% growth in commercial aftermarket, and 8% growth in defense. Adjusted EPS of $6.29 was up 10% year over year on drop through from higher sales. And free cash flow was a robust $7.9 billion, up $3.4 billion year over year. Our performance continues to be driven by the durable demand for our products and services, and operational improvements enabled by our core operating system. On the orders front, we ended 2025 with a full year book to bill of 1.56, resulting in another record backlog of $268 billion, up 23% year over year with roughly $161 billion of commercial orders, and $107 billion of defense awards. On the commercial side of the business, our backlog is up 29% year over year driven by growing aircraft production rates, and resilient passenger air travel. Orders and commitments during the year included 1,500 GTF engines, and over 2,400 Pratt Canada engines. On the defense side, our book to bill for the year was a very strong 1.31, and included several significant fourth quarter awards. For example, Raytheon booked $1.2 billion to supply Spain with additional Patriot air and missile defense systems. It was also awarded a $1.2 billion contract for Tamir missile production, with work to be executed in our recently completed Camden, Arkansas facility. Raytheon booked $40 billion of awards in the year, and their international backlog mix is now 47%, up three points from 2024. At Pratt, the military business booked $2.2 billion in sustainment contracts to support multiple engines including the F135, and the F119. And at Collins in the fourth quarter, the business was awarded a $438 million contract from the FAA to deliver radar systems for the broader radar system replacement program, which will help modernize the US air traffic control system. So overall, a very strong year of orders across the company, highlighting the growing demand of our products and services and setting us up very well heading into 2026. Neil will walk you through the details of the fourth quarter and our 2026 outlook in a few minutes, but first, let me briefly comment on the operating environment that we see today. Demand remains strong, which combined with our existing backlog and focus on execution positions us well for another year of top line growth. Commercial air travel is expected to grow again, with global RPK projected to increase around 5% this year, on top of the 5% we saw in 2025. On the commercial OE front, given the substantial airframe backlogs, we expect OEM production rates to increase again this year, particularly on the A320 NEO, 737 MAX, and 787 platforms, as well as on business jet and general aviation aircraft. All platforms where we have significant content. In commercial aftermarket, our growing installed base, which now includes about $105 billion of out-of-warranty aircraft content at Collins, and expanding fleet of engines at Pratt, positions us well for sustained commercial aftermarket growth. On defense, there's a heightened need for munitions and integrated air and missile defense as the US and partner countries work to replenish inventories, modernize existing systems, and invest in new capabilities. We understand that our products are critical to maintaining security around the world, and we fully support the Department of War's transformation objectives to significantly increase capacity and accelerate production over a sustained period. And given the commercial expertise in our business, we are very well positioned to bring a commercial approach to the department's transformation initiatives. On the international side, NATO allies, which today spend around 2% of GDP on defense, have committed to increasing their core defense spending to approximately 3.5% of GDP by 2035. And across the Asia Pacific and Middle East regions, defense budgets are projected to grow at an average of 3% to 4% annually over the next five years, with several countries at record levels. Altogether, these growing global demand signals support another strong financial outlook for RTX. For 2026, we expect adjusted sales to be between $92 billion and $93 billion with 5% to 6% organic growth year over year. Increased volume, along with pricing and our continued focus on productivity and our cost structure, will support another year of consolidated segment margin expansion. We expect adjusted EPS to be between $6.60 and $6.80 with between $8.25 billion and $8.75 billion of free cash flow for the year. Consistent with 2025, our performance will be underpinned by our strategic priorities, and a relentless focus on operational execution. Moving to slide four, let me highlight how we continue to drive execution, improve productivity, and increase output utilizing our core operating system and digital solutions. At Raytheon, the team leveraged core to significantly increase munitions output across the business in 2025. Notably, we saw output increase by 20% across a number of our critical programs, including GEMT for the Patriot Air and Missile Defense System, AMRAAM, which is the premier air-to-air combat proven effector, and Coyote to support counter UAS capabilities. In 2026, we expect to significantly increase output again on these programs as well as on other critical munitions, including SM-6, and Tomahawk. We're also continuing to deploy our proprietary data analytics and AI tools across our factories to monitor daily key performance indicators, identify bottlenecks to reduce work in process, and track equipment health and performance. All to enable more informed decisions, reduce costs, and improve output. Across RTX, we've now connected factories that represent over 50% of our annual manufacturing hours to our digital platform. And we're seeing the benefits. For example, Pratt has reduced aged inventory by about 45% at its Lansing, Michigan facility, which manufactures GTF fan blades. And within Raytheon's Andover, Massachusetts facility, we've reduced circuit card production cycle times by about 35%. In 2026, we continue to see these benefits as we connect more equipment and expand coverage across our footprint. On the GTF fleet management plan, our financial and technical outlooks remain on track. As planned, PW1100 AOGs declined in the fourth quarter, and we expect this trend to continue as we move throughout the year. MRO output was up 39% in the fourth quarter, up 26% for the full year, even as heavier shop visits increased 40% in 2025. We also announced the addition of two new MRO shops with the UAE Sinad Group and Spain's ITP Aero joining the GTF MRO network. We expect this momentum to continue in 2026 with year over year growth in PW1100 MRO output in line with what we saw in 2025. To support our operational growth, we continue to make significant investments in capacity and technology. In 2025, we invested over $10 billion in CapEx and company and customer funded research and development, with a concentration on expanding our production capacity, and factory automation, bringing new products to the market, and our cross company technology road maps. On the CapEx front, we invested $2.6 billion last year. This included significant capacity expansion at Raytheon in areas such as Tucson, Arizona for Tomahawk and classified programs, and Huntsville, Alabama to increase output for the standard missile family. We also made investments to increase production in other key facilities across the company, such as Spokane, Washington to support Collins' carbon brake production, and Asheville, North Carolina to expand Pratt's turbine airflow machining and coating capacity for the GTF and F135. In the fourth quarter, we received the EU certification of the GTF advantage engine and expect aircraft certification soon. We have begun production cut in of the advantage engine and expect entry into service later this year along with certification and first installations of the associated hot section plus upgrade package for MRO customers. We're also progressing on our strategic partnerships. In 2025, we made $85 million in investments across 19 companies through RTX Ventures, in areas such as autonomy, advanced manufacturing, space, and propulsion. This included a successful demonstration of Raytheon's DeepStrike autonomous mobile launcher vehicle in collaboration with multiple RTX Ventures portfolio companies. In 2026, we plan to invest another $10.5 billion in CapEx in company and customer funded research and development, including another $3.1 billion in CapEx on top of the $2.6 billion I just highlighted for last year. Specifically, Raytheon will continue capacity investments in areas such as Tucson and Andover, building on projects completed last year, and creating additional capacity for munitions and sensors, including the standard missile family, AMRAAM, Tomahawk, Patriot, and LTAMDS. Collins will increase CapEx this year to support growing commercial and defense platforms, including the expansion of the Richardson, Texas facility, the Survivable Airborne Operations Center, and the E130J programs. And Pratt will continue to invest in capacity across multiple sites including Columbus, Georgia to increase forging production and Asheville to establish a foundry to produce turbine airflow castings. We've got great momentum heading into 2026. We feel very good about how our company is positioned to drive another year of strong growth in organic sales, segment margin expansion, and free cash flow generation. With that, let me turn it over to Neil to take you through the fourth quarter results, and more details on our 2026 outlook. Neil? Neil Mitchill: Alright, Chris. Thanks. I'm on Slide five. As you saw, we had very strong financial performance to finish the year. In the fourth quarter, adjusted sales of $24.2 billion were up 12% on an adjusted basis and 14% organically. By channel, organic growth was driven by commercial OE, which was up 18%, commercial aftermarket, which was up 17%, and defense, which was up 10%. Adjusted segment operating profit of $2.9 billion was up 9% year over year. Adjusted earnings per share of $1.55 was up 1% from prior year as strong segment operating profit growth was partially offset by expected higher corporate expenses and a higher effective tax rate in the quarter. On a GAAP basis, EPS from continuing operations was $1.19 and included $0.31 of acquisition accounting adjustments and $0.05 of restructuring and all other nonrecurring items. This included a $0.15 settlement charge associated with a pension transaction we completed in the quarter. Free cash flow for the quarter was very strong at $3.2 billion bringing our full year free cash flow to $7.9 billion as Chris said. This included approximately $1 billion of powder metal related compensation, approximately $600 million of tariff related impacts. Lastly, in the quarter, we paid down $1.1 billion of debt and completed the divestiture of the Collins Simmons business. Okay. With that, let me hand it over to Nathan to take you through the segment results and then I'll come back and share some details on our 2026 outlook. Nathan Ware: Okay. Thanks, Neil. Starting with Collins on slide six. Sales were $7.7 billion in the quarter, up 3% on an adjusted basis and 8% organically, driven principally by strength across commercial OE, and aftermarket. Adjusting for divestitures, by channel, commercial OE sales were up 9%, driven by higher volume on wide body and narrow body platforms. Commercial aftermarket sales were up 13%, driven by a 24% increase in provisioning, an 11% increase in parts and repair, and a 7% increase in mods and upgrades. Defense sales were up 2% versus the prior year on a difficult compare, driven by higher volume across multiple programs. Recall that the prior year was up 13%. Adjusted operating profit of $1.2 billion was up $16 million versus the prior year as drop through on higher commercial aftermarket and OE volume was partially offset by the impact of the divestitures completed during the year and higher tariffs across the business. For the full year, Collins generated $30.2 billion of adjusted sales and $4.9 billion of adjusted operating profit, resulting in 9% organic sales growth and 30 basis points of year over year margin expansion. Shifting to Pratt and Whitney on slide seven, sales of $9.5 billion were up 25% on both an adjusted and organic basis, driven by strength across all channels. Commercial OE sales were up 28% driven by increased deliveries and favorable mix in large commercial engines, with large commercial engine deliveries up 6% for the full year. Commercial aftermarket sales were up 21% driven by higher volume, including heavier content, and large commercial engines and Pratt Canada. In military engines, sales were up 30% driven by higher F135 production volume and higher sustainment volume across multiple platforms, including the F135, and F100. Adjusted operating profit of $776 million was up $59 million versus the prior year driven by drop through on higher military and commercial aftermarket volume as well as favorable military and commercial OE mix. This was partially offset by the impact of commercial aftermarket mix, higher tariffs across the business, higher SG&A expense and the absence of an approximately $70 million prior year insurance recovery. For the full year, Pratt generated $32.9 billion of adjusted sales and $2.7 billion of adjusted operating profit, resulting in 17% organic sales growth and 20 basis points of year over year margin expansion. Turning to Raytheon on slide eight. Sales of $7.7 billion in the quarter, were up 7% on both an adjusted and organic basis, driven by higher volume on land and air defense systems, including Patriot and GEMT, and higher volume on naval programs including EVOLVE Sea Sparrow missile, and Tomahawk. This was partially offset by the absence of a prior year benefit related to a restart of contracts with a Middle East customer. Adjusted operating profit of $885 million was up $157 million versus the prior year driven by improved net productivity, higher volume, and favorable program mix. Bookings in the quarter were $10.3 billion resulting in a book to bill of 1.35 and a record backlog of $75 billion with a full year book to bill of 1.43. In addition to the awards Chris mentioned earlier, other key awards in the quarter included over $900 million of classified bookings, and approximately $600 million for NASAMs. For the full year, Raytheon generated $28 billion of adjusted sales and $3.2 billion of adjusted operating profit, resulting in 6% organic sales growth and 130 basis points of year over year margin expansion, including $157 million of improved net productivity. With that, I'll hand it back over to Neil to provide some more details on our 2026 outlook. Neil Mitchill: Thanks, Nathan. Turning to Slide nine, let me take you through the drivers of our 2026 outlook that Chris highlighted. Starting with sales, given our current backlog and the demand environment we've discussed, we expect total RTX sales to be between $92 billion and $93 billion for the full year. On an organic basis, this translates to between 5% to 6% top line growth. By sales channel at the RTX level, and adjusting for divestitures, we expect both commercial OE and defense to grow mid single digits and commercial aftermarket to be up high single digits. Moving to EPS. Let me take you through the year over year walk. For the year, the most significant driver will be segment operating profit, which will drive approximately $0.59 of EPS growth at the midpoint of our outlook range. Included in this segment growth is a headwind of roughly $0.03 associated with the divestitures we completed last year at Collins. And with lower average debt, we expect a tailwind from lower interest of about $0.06. Partially offsetting these items is approximately $0.13 from lower pension income driven primarily by the actions we've taken to derisk our pension plans including the transaction I just mentioned. Finally, we expect a $0.05 headwind from a higher share count and anticipate a $0.06 headwind from all other items largely related to higher minority interest associated with our joint ventures. All in, this brings our adjusted EPS outlook range to between $6.60 and $6.80 for the year. Moving to our free cash flow walk. Operational performance, primarily segment operating profit growth, will drive an improvement of approximately $1.1 billion. This operational improvement includes a slight working capital tailwind as we continue our company wide initiatives to improve inventory management. Specific to powder metal compensation, we expect around $700 million for the year, which results in a tailwind of about $300 million year over year. Partially offsetting these items will be the impact of higher CapEx of approximately $500 million as we invest to support the growing customer demand that Chris discussed. For the full year, we expect to invest approximately $3.1 billion in CapEx. Lastly, we expect a headwind of approximately $300 million for all other items including the net impact of pension, interest, taxes, and other investments. All in, we expect free cash flow to be between $8.25 billion and $8.75 billion for the full year. With that, let's turn to Slide 10, and I'll provide the details around our segment outlooks. Starting with Collins, we expect full year sales to be up mid single digits on an adjusted basis and up high single digits organically. Adjusting for the divestitures we completed in 2025, we expect commercial OE to be up approximately 10% driven by double digit growth across narrow body and wide body production, along with single digit growth across business jet and civil rotorcraft platforms. Commercial aftermarket is expected to be up high single digits, driven primarily by further growth in out of warranty flight hours and global RPKs. Defense sales are expected to be up mid single digits driven by multiple programs including the F-35, other mission systems platforms. With respect to Collins' adjusted operating profit, we expect it to grow between $425 million and $525 million versus the prior year. This is driven by drop through on higher volume across all three channels, higher pricing, the benefit of continued cost reduction efforts across the business. Keep in mind, this profit outlook includes an approximately $50 million headwind associated with the completed divestitures. Shifting to Pratt and Whitney, we expect full year sales to be up mid single digits on both an adjusted and organic basis. By channel, we expect commercial OE to be up low single digits as increased large commercial and Pratt Canada engine deliveries are partially offset by engine mix within large commercial engines. Commercial aftermarket is expected to be up high single digits driven by higher volume across large commercial engines primarily GTF and Pratt Canada. Within the military business of Pratt, sales are expected to be up mid single digits driven by higher F135 production and sustainment volume. For Pratt's adjusted operating profit, we expect growth of between $225 million and $325 million versus the prior year. This is driven by drop through on higher commercial aftermarket and military volume, and cost reduction efforts across the business. Partially offset by increased commercial OE deliveries and mix. Turning to Raytheon. We expect sales to grow mid to high single digits on both an adjusted and organic basis, principally driven by growth across land and air defense systems. Raytheon's adjusted operating profit is expected to be up between $200 million and $300 million versus the prior year, driven by drop through on higher volume, favorable contract mix and improved net productivity. In addition to the segment outlooks, we've included guidance for pension and some of the other below the line items in the appendix of our earnings presentation. All in, 2026 is expected to be another strong year of financial performance for RTX. With all three segments delivering growth in organic sales and operating profit with continued margin expansion and solid cash conversion. Okay. With that, I'll hand it back over to Chris to wrap things up. Chris Calio: Okay. Thanks, Neil. Looking at our 2025 results, it's clear we have built great momentum across RTX. Delivering both top and bottom line growth throughout a dynamic year. I want to thank all of our employees across RTX for their hard work, dedication, and commitment to our mission that led to these results. As we move into 2026, our strategic priorities remain consistent. We are committed to making the right investments in the business to support the favorable long term demand we see and drive sustainable growth this year and beyond. With that, let's open it up for questions. Operator: Thank you. Ladies and gentlemen, as a reminder, in the interest of time, to allow for broader participation, you are asked to limit yourself to one question. To ask a question, you will need to press 11 on your telephone. The first question will come from the line of Peter Arment from Baird. Peter Arment, your line is open. Peter Arment: Hey. Thanks. Good morning, Chris, Neil, Nathan. Nice results, and congrats on all the momentum in the business, Chris. Chris Calio: Hey. Thanks so much, Peter. Peter Arment: Yeah. So so many topics here to talk about in '26, but I guess I'd want to start with the GTF fleet management plan. It's year three here, and your financial and technical outlook has remained on track the entire time. Maybe can you give us the latest kind of update in any key items we should expect, going forward with the plan? Chris Calio: Thanks. Yep. You got it, Peter. And you're right, Peter. Like, I always start this way. You know, our financial technical outlook remains on track and consistent with our prior comments. AOGs did come down in Q4, and they're down over 20% from the highs of 2025. So making good progress there. As I've said before, you know, MRO output remains a key enabler, and that continues to improve. The 1,100 output, as we said upfront, was up 26% last year, and that was with heavier shop visits increasing 40% year over year. So really good improvement in the shops. You know? And importantly, we exited the year on a strong note. Output was up 39% in the fourth quarter, which included a 16% reduction in turnaround time and a significant increase in repair volume which, as you know, takes some pressure off of the need for new material. So all in, this positions us pretty well to grow MRO output at a similar level in 2026. Which in turn, you know, enables us to continue to reduce AOGs throughout the year. Continues to be our top priority, making sure we get the fleet in a better condition and we're making progress there. Peter Arment: Appreciate the color. Thanks, Chris. Operator: Thank you. The next question will come from the line of Ronald Epstein from Bank of America. Ronald Epstein, your line is now open. Ronald Epstein: Yeah. Hey. Hey. Good morning, guys. Chris Calio: Good morning. Ronald Epstein: Morning, man. Kinda kinda like Peter alluded to it. Sort of like everything everywhere all at once so far this year, and we're only a couple weeks in. Maybe broadly, Chris, how are you thinking about you know, we got this executive order about how defense companies deploy capital you know, RTX was highlighted in, you know, a social media post by the administration. How are you broadly thinking about that? And, you know, what's it mean to you as a manager of the business? Like, how do you handle all that? Chris Calio: Yeah. Thanks for the question, Ron. Let me break it down, maybe, in a couple parts here. Know, number one, you know, we understand that our products are critical to national security. Security of our partners and allies. And I can tell you across the organization, we absolutely feel the responsibility and urgency to deliver more and to deliver it faster. And, you know, candidly, we understand the frustration. And I can tell you our focus and resources are fully aligned with the department's mandate to ramp production and invest in capacity. And as we said upfront, we made some progress in 2025. I think some very good progress. Output was up over 20% on a number of the critical programs. But there's more to do. We expect to significantly increase output again this year. We're also gonna increase our CapEx to enable that ramp. As it relates to capital allocation, again, we recognize our shareholders rely on our dividends. They've come to expect our dividends. We've been paying them for decades on a quarterly basis. So we remain committed to the dividend. That said, again, we're comfortable we can accommodate both that and the investment needs that come with delivering the current backlog and the potential future volumes on key programs. I can tell you that we continue to have active and constructive engagement with the department on its future needs and how we can fulfill those. Strengthening the industrial base. So we've gotta do it all. Ronald Epstein: Got it. Thank you. Operator: Thank you. The next question will come from the line of Kristine Liwag from Morgan Stanley. Kristine Liwag, your line is now open. Kristine Liwag: Hey. Good morning, everyone. You know, maybe Chris Neil, you know, RTX is now the largest aerospace defense company in the world by sales, and we're living in a very dynamic period seeing unprecedented demands for your products. But, also, you know, unique actions from the government where they're willing to invest in supporting CapEx. Guess, like, are you thinking about the portfolio composition and potential monetization for shareholders given, you know, the recent move from one of your competitors where they're carving out emission solutions business, receiving a billion dollar investment from the government, with an IPO in the second half of the year. How do you think about your portfolio, and where do you see the opportunities? Chris Calio: Yeah. Thanks, Kristine. I'll start. Again, I continue to believe we continue to believe and have strong conviction that RTX is constructed to meet the moment. By the moment, I mean, the ramp both in defense and commercial. And to drive long term value for customers and shareholders. I've said this before. Our breadth and scale provide a competitive advantage in our mind in terms of technology, cost structure, customer and market knowledge, and talent. And as you know, in this industry, you make big bets on large platforms, and that requires a strong balance sheet, an ability to innovate and invest over the long term, and the ability to manufacture at scale for a sustained period of time, all things that are within, you know, the RTX core competency. And, you know, you're also starting to see this convergence of commercial and defense tech. You're seeing a lot of that given the transformation initiatives that the Department of War is pushing forward. I think we're just uniquely positioned to compete in that environment. And I think that provides us a real opportunity as opposed to perhaps some of our competitors. And as we said before, we're gonna continue to invest and we've got the balance sheet to continue to invest in the capacity and in technology to meet both the current backlog and the programs of the future. Operator: Thank you. For the color. Thank you. The next question will come from the line of Robert Stallard from Research. Robert Stallard, your line is open. Robert Stallard: Thanks so much. Good morning. Chris Calio: Good morning, Rob. Robert Stallard: Hey, Rob. Probably a question for Neil regarding the 2026 guidance. Your forecast for Pratt and Whitney particularly on the OEM side, looks a bit conservative, particularly given what Airbus is planning on the A320 and A220 going forward here. So I was wondering if you could perhaps delve into the components a bit more, particularly aerospace OEM. Thank you. Neil Mitchill: Yes. Thanks, Rob. I appreciate the question. Let me give you a little bit of color. I think it's important to kind of see underneath the covers there on the Pratt side. I would start by saying in 2025, we had our large commercial engine deliveries up 6% as Nathan said. As we think about 2026, I think the large commercial engine output in terms of deliveries is likely to be up call it, mid to high single digits. So, you know, it's growing on top of the number that we put up for 2025. We've talked at length for a number of years about the mix in the OE and balancing the need to support the flying fleet today as well as installs in Airbus. We think we put together a plan that does just that. And so we will see continued growth on the MRO side at Pratt. That will support the GTF aircraft in particular. And the rest will go between Airbus and spares. I think if we look inside of the install side, we still see growth on both the installs and probably flattish on the spare engine deliveries for 2026. So little mixed headwind on the top line, but in terms of output, strong output throughout the course of this year. You know, if it's better, you'll see that, but, you know, we're really trying to make the right balancing decisions for between MRO and install. And Chris has a couple other Yeah. No. I just add a couple other other notes here. You know, again, know, our 2025 total deliveries were up over 50% versus 2019 levels. I think that's important to continue to reinforce. And, you know, as Neil said, we're always gonna try to support our customers. There's a balance that we've gotta bring to bear given what's going on with the fleet. But the backlog on the program is very strong. And we've got key investments coming online over the next 24 months to continue to support a new powdered metal tower, new forging press, some additional capacity in Asheville where we do turbine airfoils. So we're 100% in support of continuing to drive deliveries on the program over the long term because the backlog is there and the customer demand is there. Robert Stallard: That's right. Thanks so much. Neil Mitchill: You're welcome. Operator: Thank you. Next question will come from the line of Scott Dorsley from Deutsche Bank. Scott Dorsley, your line is now open. Scott Dorsley: Hey. Good morning. Neil, why does Pratt commercial aftermarket growth slow to high single digits in 2026? Particularly given the strength you saw here in the fourth quarter? And then the commentary on GTF MRO volumes. And then for Chris, I was wondering if you might give us an update on when you expect casting's output to begin to ramp up at Asheville. Thank you. Neil Mitchill: Yeah. Thanks, Scott. I will start with the Pratt I'll fill in where I left off. We're talking about the OE side. About 70% of Pratt's growth in '26 is going to come from commercial aftermarket. We talked about that being up high single digits. If you kind of look at the pieces here, I'll start with Pratt Canada. We'll see growth in their aftermarket that's in the high single digit range. So, you know, very solid there. You know, growing ahead of, you know, RPKs in the market. Within the large commercial engine business, you know, on a V2500 shop visit basis, we talked last year about, you know, doing 800 or so shop visits with probably did a little bit more than that. Think for 2026, we're expecting it to be more or less the same, probably within 20 shop visits of, 2025. So steady and above 800. There's a little bit of offset on the PW4000s and 2000s as those older engines start to retire. Those are expensive overhauls, and know, we're seeing a little bit of headwind there, probably about $100 million for 2026. All things that we saw coming and we planned aligned with, our customers, fleet plan. So inside of the aftermarket, those are a couple of moving pieces on the legacy side of the business. And, of course, the GTF aftermarket is continuing to grow, as you point out. Chris talked about stepping up again, similar to the growth level that we saw in 2025. The shop visit content varies, though they're getting heavier, and so we will see that in the top line. Maybe just a comment on on the profitability there. You know, we've seen you know, solid margins, you know, in progression on the GTF aftermarket. So, you know, I'd call it low low double digit kinda margins. See one to two points maybe of expansion here in '26. So that GTF aftermarket revenue stream is moving in the right direction as we get further away from entry into service and start to put in new contracts and gain durability improvements that we've talked about and the pricing in the contract structures. Chris Calio: Yeah. And, Scott, maybe on the second part of your question, the casting piece. So the casting foundry investment has has been approved. We moved out on that investment. We're in that sort of build up phase and and working to make sure the yields where we need them so that when we're going into production, we're getting the yields, you know, that that we need. And, you know, I think that impact, we'll start to feel that more in the 2028-2029 time frame. Scott Dorsley: Thank you very much. Neil Mitchill: You're welcome. Operator: The next question will come from the line of Myles Walton from Wolfe Research. Myles Walton, your line is now open. Myles Walton: Thanks. Good morning. Good morning. This might be might be for Neil. So, Neil, could you pull back the covers on the Raytheon segment in terms of the growth rates of maybe some of the larger SDUs I heard the comment about the 20% growth in some of the effectors, but maybe just a little bit of color there. And then, Chris, following the comments by the administration, have you engaged to change any behavior? And if so, what is it that they're requesting? Thanks. Neil Mitchill: Great. Thanks, Myles. I'll start here. As I pointed out in our opening comments here, the majority of that sales increase is coming from the Land and Air Defense Systems. I'd say over half of it, frankly, obviously, that's supported by material growth. We've seen 11 consecutive quarters of growth. We're expecting mid- to high single digit growth in mid material again here in '26. That's the heart of the Raytheon business obviously, on the munitions and the sensors. So that's where the bulk of it's coming from. Supporting programs that that you all know about, Patriot, GEMT, LTAMDS, etcetera. I think, importantly, for Raytheon, about 85% of our 2026 sales are sitting in our backlog today. So I'm feeling very confident in in the outlook that we put out today for them. And as I think about, you know, the rest of the year, what we should you know, be able to fill that remaining 15% nicely. And, you know, it's all about, you know, coordinating the supply chain and getting things synchronized with we're seeing continued improvement in over the last twelve to eighteen months. Chris Calio: Yeah. So, Myles, I would say that we're obviously fully supportive of the transformation initiatives that the department is pushing forward. And and we are working in partnership with them on ways to move output faster and to accelerate, whether that be through, you know, different requirements or testing protocols or anything within our shop that can make things, you know, more efficient in in partnership with the customer. We're also talking to them about how do we get the most out of our existing capacity. What suppliers do we need help with, whether that be from, you know, a throughput perspective or an investment perspective? And then, you know, again, where do we need to invest in capacity as we as we see the, you know, demand continuing to ramp. So it's a partnership on a number of fronts. It's been very constructive and collaborative. And we're gonna I hope to start to see the benefit of that here in '26 as we gotta continue to ramp on some critical programs. Myles Walton: Alright. Thank you. Chris Calio: You're welcome. Operator: The next question will come from the line of Seth Seifman from JPMorgan. Seth Seifman, your line is now open. Seth Seifman: Hey. Thanks very much, and good morning, everyone. So yeah. Good morning. Well, wanted to ask another one about defense and maybe a slightly different topic. But in terms of missile defense and the Golden Dome initiative, you know, we understand that the administration's looking for contractors to step out a little bit more there in in terms of, you know, fronting our R&D to, you know, to be involved in in that effort. Particularly with with space based interceptors. And wondering how you're thinking about that given both Raytheon's traditional capabilities in missile defense, but also know, we're we're pretty full plate in terms of ramping up some of the the existing programs. Chris Calio: Yeah. Thanks, Seth. Overall, we're looking at Golden Dome as as a real opportunity for us. You just step back and look at what we continue to believe is the multilayered architecture. We believe we've got solutions at at each of those layers. And and you know those those systems very well, whether it be Patriot, whether it be GEMT, Spy six, Coyote. And the like. So between effectors and sensors, have a have a full suite of products that we think can meet the needs of Golden Dome. Think there are also some opportunities, you know, in space. Can't talk about them too much, but you know, again, I think we've got some unique capabilities there. That we're discussing, you know, with the department. As with all things, we're always looking at the opportunities for us to increase capacity for some of this demand. As you know, there are long lead time items in some of these areas. There are suppliers that we need to continue to, sort of, you know, rejuvenate and make sure that they can meet the demands that we need. So all of those things are are going on, identifying a long lead material we might need, everything that'll help us accelerate production. So when those awards come down, we're ready. Neil Mitchill: Seth, I would just add that with respect to the investment and our our willingness to invest, we we, of course, would invest in in good business. And so we're prepared to, you know, make the right choices there. Our R&D for 2026 is gonna approach $3 billion with a healthy portion of that sitting in Raytheon, obviously. So, you know, we're prepared to make those investments when it makes sense to do so. Seth Seifman: Great. Very much. Operator: The next question will come from the line of John Gordon from Citi. John Gordon, your line is now open. John Gordon: Hey, guys. Thanks for taking my question. All the businesses are experiencing tailwinds and it's been quite a good run for the last few quarters. I know it can be hard to pick your favorite child, but I was hoping you could just help us sensitize the outlook a bit. In the context of the segments. Which one do you think has the most scope for exceeding guidance based on the demand signals that you're seeing recently? Neil Mitchill: I'm gonna give this one to Chris. Actually, I'll answer it, John. It's obviously early in the year, and we love all of our children here at RTX. So I think all three businesses have tailwinds behind them, frankly. I think, you know, it's early in the year. We set our guide based on where our backlog sits today. Got a number of initiatives that are obviously in the pipeline here in terms of cost reduction. So when I think about Collins in particular, they kicked off a pretty, significant transformation effort there to drive cost out of both production side as well as the back office. So I see tailwinds supporting the Collins margin trajectory. If I go to Raytheon, we've talked a lot about it already this morning. The defense business, the demand, the product improvements that we're seeing in Raytheon. We've seen about $160 million year over year improvement for each of the last two years. Now that may tail off a little bit. We'll see probably another 25 or so million dollars year over year improvement. But we're in the we're in the zone where we're seeing positive productivity coming out of the the Raytheon business, and that's because of the significant volume the synchronization with the supply chain, and the you know, execution mode that we're in there. So that's you know, that's how I kinda think about the Raytheon business. And over at Pratt, obviously, there's there's a ways to go there, but, know, we know that the GTF program is growing significantly. We're performing well. We're growing out of the older contracts. We're getting pricing, and the legacy businesses continue to be intact there, and we see that, you know, you know, staying steady for the next several years. So great businesses. Hard to pick one. But, clearly, you know, all of them have margin potential. Over the next several years, and that's what we're focused on. And I think if we execute and deliver the backlog we have today, that we'll naturally see that margin expansion over the the next couple of years. Importantly, that will convert to cash. And you're seeing that in the '26 outlook, saw it as we exited '25, exceeding where we had thought we would exit the year on strong collections. So really good position to be in. And, again, it affords us the opportunity to take on that extra investment to build for the future capacity that's not even yet sitting in our backlog. Chris Calio: I think you said it really well, Neil. And and the only thing that I would emphasize, John, is that each of the businesses is fully focused on getting to its full potential. I'll tell you that Neil outlined some time frames for each of those. Some are closer, as you might imagine. But all you know, dedicated to driving operational improvement through core, structural cost reduction and a and a and a, you know, maniacal focus on execution given the backlog. John Gordon: Thanks a lot, guys. Operator: The next question will come from the line of Gautam Khanna from TD Cowen. Gautam Khanna, your line is now open. Gautam Khanna: Thanks. Good morning. I had two quick ones. One, a follow-up to the prior question just on Raytheon Defense. Productivity. And you also have you know, higher volumes and better mix over time with the foreign backlog conversion and the sales. So what's your updated thoughts on eventual margin entitlement for that segment? And then wanted to just ask on GTF, could you remind us again in the guidance for 26% what the cash customer compensation payments are, and if there's gonna be any tail to that in 2027, and if you could just give us the final number for 2025. Thanks. Neil Mitchill: Thanks, Gautam. Let me start with the last question. So in our outlook for 2026, we have $700 million place held as the cash outflow. We exited 2025 with $1 billion. So cumulatively, we're at $2.8 billion when you get through the end of 2026. We had talked about that being about a $3 billion cash headwind to us over over the period of time we execute the FMP. So that leaves a couple $100 million. You know, I as I sit here today, we've been very prudent in our management of the compensation. We've got agreements with customers, and very, very disciplined there. So that's how I see it today, in good shape for the 2026. As it relates to, the Raytheon margin potential, you know, we're exiting 2025 strong. Our outlook for 2026 puts us, you know, pretty close to the 12% range that we talked about. And as you pointed out, the international mix is increasing. Today, our backlog has about 47% international mix in it. And we expect the sales mix to grow. I will say, you know, as we talk about increasing our capacity for munitions and sensors, that will have a different sort of mix impact as well, but you know, there's no reason to believe that the Raytheon margins can't be north of 12%, and we're certainly well on our way in this outlook that we put out today. Chris Calio: The other piece of tailwind that I would add there to Neil's comments is just look at the backlog composition. Neil talked about the international component. If you just if you think about the products that are continuing to grow in that backlog, those are those are products in our core competency mature products. That are gonna continue to help drive productivity improve margins. And we think about where of this future demand is as part of this defense transformation, whether it be, you know, defectors, Golden Dome, again, these are gonna be the products in integrated air and missile defense that are core to Raytheon. Gautam Khanna: Thank you. Operator: The next question will come from the line of Sheila Kahyaoglu from Jefferies. Sheila Kahyaoglu, your line is now open. Sheila Kahyaoglu: Good morning, guys, and thank you. Good morning. I wanted to ask about Collins because I feel like it's a bit forgotten. Given everything else going on. You know, Collins embed 70 basis points of margin expansion. 40 basis points of that is the divestiture benefit. So only 30 bps organically. But it seems like there's a lot of good good things going on in the segment, whether it's double digit OE narrowbody growth, which I presume is in line with segment margins, 10% aftermarket, productivity plan in place. Maybe if you guys could bridge us and obviously a full year of tariffs is maybe some of that offset. Neil Mitchill: Thanks, Sheila, for the question. So let me start with '25. You're right. We had about 30 basis points of margin expansion there. Would tell you that from a tariff perspective, that was a a 90 basis point drag. So if you were to add that back you know, we saw Collins, I'll call it, organic margins at 17.1%, which was really, really nice to see. Obviously, we're still living with the tariff situation. We do expect to see a bit of a tailwind as we move from 2025 to 2026 on tariffs, probably $75 million lower. And keep in mind, we're picking up an extra quarter of tariff expense in 2026. So the first quarter will be a little bit depressed on the Collins margins. As they pick up an extra quarter. But nonetheless, I'm still seeing real really good margin expansion there. As you as you go to 2026, inclusive of tariffs, we're gonna see another 80 basis points of margin expansion at the midpoint. As I said a couple minutes ago, Collins has a ton of effort going into digitizing the back office, streamlining their footprint, and we're seeing the benefits of that cost reduction activity already come through in these margins. And I think that there are several years of benefits ahead of us as a result of the work they're doing. So we are seeing that improved drop through. Obviously, '26, we've got OE growing about 10%. Those margins are probably consistent with what you'd expect for sort of a defense kind of margin, you know, low double digits. And some really robust aftermarket. About 45% of their growth coming, from the aftermarket business with the kind of drop through that you'd expect in the business at Collins. So well positioned, growing installed base, RPKs are strong, and we're getting the pricing benefit too that we've been you know, pushing for in light of, these headwinds we've been dealing with over the last couple of years. Neil Mitchill: You're welcome. Operator: The next question will come from the line of Douglas Harned from Bernstein. Douglas Harned, your line is now open. Douglas Harned: Good morning. Thank you. Chris Calio: Hey, Doug. Douglas Harned: When you look at the GTF right now, when you talked about how AOGs are coming down off at peak, the other thing going on at Pratt is as you talked about, you've got increasing work scope on V2500s, which is very good for margin. You've had you're getting life extensions. But how should we think about the longer term margin at Pratt? Because on one hand, you have that benefit, but as AOGs start coming back, you may have two other effects, which are you may see some PW1100 powered airplanes lead to parking of some V2500s. And you're gonna have some decline in spare engine ratio. So how should we think about combining all of those things? For the long term Pratt margin? Chris Calio: Yeah. I'll start, Doug, and Neil, feel free to chime in. You're right on a number of those tailwind components, Doug. The V2500 is gonna continue to be strong. Shop visits are gonna stay in that 800 range in the in the content gonna continue to be strong. We see low retirements there. A lot of continued demand, you know, for that for that platform. When you think about the margin trajectory at Pratt, obviously, there's gonna be some headwind associated with continued OE deliveries. You know that, you know, what that, you know, margin profile sort of looks like there. We're also continuing to grow, you know, the GTF in the, you know, installed base. So a big part of this is gonna be continuing to drive GTF aftermarket margins. And so how do we go and do that? Well, number one, you know we've put in place a number of durability improvements. A number started going in, you know, last year, and you can start to see that benefit throughout the fleet. You've got the GTF Advantage that's gonna be coming into play. We got the EU engine certification in Q4. Expect the aircraft certification relatively soon. We started producing that engine and that production cut over. Expect EIS on that, you know, later in the year. And then the third piece, and it's related to the GTF advantage, that we're also anticipating the incorporation of our hot section plus retrofit package. Into MRO later this year. That's 90 to 95% of the durability benefits of the GTFA, and that's gonna be going into the the installed base today as part of that retrofit package. It's gonna be the GTF aftermarket that's gonna need to continue to grow and profitability. That'll take the margins, you know, up at Pratt. Neil Mitchill: And maybe just to add a couple points, Doug. I think with respect to the size of the fleet, today's GTF fleet is about the same size. In fact, I think it's a little bit larger than the installed flying V2500 fleet. So sort of to compensate for what will ultimately be retirements as you look out a number of years, that GTF fleet is just growing at really significant rate. And so that will overcome sort of lost revenues and and profits that will, you know, see on the V2500 as it retires. As it relates to the spare engines, I mean, you talk about the ratio. I think, you know, another way to think about that might be there's just gonna be continued demand for spare engines. So, again, as that fleet gets bigger, while the ratio might come down, we'll still be selling a lot of spare engines and I expect that to be a continued steady stream of revenue and profits. And what we like about that, of course, is it helps the fleet. Which helps the aftermarket contracts, but it also generates its own aftermarket because those engines will ultimately come in for overhauls as well. So that's how I would frame, you know, a couple of the the data point behind what Chris said. Douglas Harned: Very good. Thank you. Neil Mitchill: You're welcome. Operator: Next question will come from the line of Scott Mikus from Melius Research. Scott Mikus, your line is now open. Scott Mikus: Morning, Chris and Neil. Very nice results and solid guide. Wanted to touch on Ron's and Miles' question. So this administration seems more willing to allow M&A deals to go through. They also want defense companies to invest ahead of contract awards and expand capacity. I've always just thought that the primes get somewhat unfairly blamed because a lot of the bottlenecks, the higher production, actually lie deeper in the supply chain. So does it make sense from a capital deployment perspective to pursue vertical integration at Raytheon, whether it's organic or inorganic? Chris Calio: Yeah. Thanks for the question, Scott. And, again, when when we talk to the department I will tell you that, you know, we are our supply chain. They pay us to manage, you know, our supply and deliver whether it be an all up round or a full system or whatnot. So yeah, and we've been working in partnership with them on how do we continue to strengthen the industrial base because to take production to the levels that the department needs, you're just gonna need to continue to invest in that industrial base and bring new suppliers into the fold. And that's where I think I'd I'd sort of, you know, direct your second part of your question. I don't necessarily think it's about vertical integration. I think about strengthening what we have today and bringing new source, you know, into the industrial base. You've seen there's been a number of activities and investments on solid rocket motors for instance, because that has continued to be a bottleneck for the industry, you know, writ large. We continue to look for other casting suppliers because that affects not only what's going on in commercial, but defense as well. So I think it's really infusing more capital into the supply base, strengthening that supply base, and then finding new suppliers in some of the constrained value streams. Scott Mikus: Alright. Thank you. Operator: Thank you. And the last question will come from the line of Matt Akers from BNP Paribas. Matt Akers, your line is now open. Matt Akers: Yeah. Hey. Good morning. Thanks for the question. Most of mine have been answered, but I just just wanted to ask about debt maturities. A fair amount coming due this year. Just curious what your your plans are to address those. Neil Mitchill: Yes. Thanks, Matt. Appreciate the question. We've talked for a couple of years now about our debt repayment priorities. We made a payment of $1.1 billion in the fourth quarter. And we've got about $3.4 billion of payments that are coming due this year that we anticipate to make and bring that debt down further. So, you know, that's what I would say today about our plans for, you know, paying down the debt that's on the balance sheet and making great progress. As Chris said, balance sheet's really strong and positions us well for continuing to make the investments that we've talked at length about today. Matt Akers: Great. Thank you. Operator: Thank you. And with that, I will now send the callback to Nathan Ware. Nathan Ware: Alright. Thank you very much. That concludes today's call. As always, the Investor Relations team will be available for follow-up questions. Thank you all for joining us today, and have a good day. Operator: Ladies and gentlemen, this now concludes today's conference. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to Commvault Q3 Fiscal 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press star 1 again. I would now like to turn the conference over to Michael Melnyk, Vice President of Investor Relations. You may begin. Michael Melnyk: Good morning, and welcome to our earnings conference call. Before we begin, I'd like to remind you that statements made on today's call will include forward-looking statements about Commvault Systems, Inc.'s future expectations, plans, and prospects. All such forward-looking statements are subject to risks, uncertainties, and assumptions. Please refer to the cautionary language in today's earnings release and Commvault's most recent periodic reports filed with the SEC for a discussion of the risks and uncertainties that could cause the company's actual results to be materially different from those contemplated in these forward-looking statements. Commvault does not assume any obligation to update these statements. During this call, Commvault's financial results are presented on a non-GAAP basis. A reconciliation between the non-GAAP and GAAP measures can be found on our website. Thank you again for joining us. Now I'll turn it over to our CEO, Sanjay Mirchandani, for his opening remarks. Sanjay? Sanjay Mirchandani: Good morning. And thank you for joining us. Q3 was another solid quarter for Commvault Systems, Inc. We reinforced our position as an innovation leader and garnered accolades from partners and industry analysts. Some financial highlights in the quarter include subscription revenue grew 30% to $206 million. This was fueled by a record land and expand quarter with the addition of 700 new subscription customers. Subscription ARR increased 28% to $941 million, SaaS ARR increased 40% to $364 million, and we achieved the rule of 40 with a healthy balance between growth and profitability. Our momentum in Q3 and year-to-date reflect the growing need for next-generation cyber resilience. In an AI-driven, hybrid, and multi-cloud world, resilience cannot be reactive, manual, or fragmented. It needs to be continuous, always on, and unified through a single control plane. Commvault uniquely delivers this innovation. I'm proud to share that in Q3, we were awarded our 1,600th lifetime patent. I want to thank our engineering and IT teams for their continued commitment to excellence and innovation focused on customers. At our shift event in November, we took innovation to the next level with the Commvault Cloud Unity platform release. Unity brings together data security, identity resilience, and cyber recovery on one platform all enabled by the Metallic AI fabric. With Unity, customers are now equipped to drive their res ops, or resilience operations. Res ops is a discipline that unifies operations, security, and infrastructure across the business. By bringing these silos together, organizations can plan, prepare, and recover from a disruption or cyber attack. Customer, partner, and industry feedback has been overwhelmingly positive. Dave Novak, Deloitte's cyber resilience lead said, the Commvault Cloud Unity platform brings these elements together in a way we don't see elsewhere in the market. We're pleased to team with Commvault, help joint customers respond faster, reduce risk, and confidently adopt AI and cloud at scale while advancing resiliency. IDC further validated this approach stating, we believe res ops has an opportunity to resonate with customers as it is concise, with powerful implications operational value. ResOps is a fundamentally different approach from what legacy vendors provide today. Resilience in the age of AI requires us to, one, continuously secure data at the source and monitor for anomalies. Two, control the identities human and nonhuman, that access and use the data autonomously. And three, predictably, recover data applications and operations at massive scale with the lowest total cost of ownership. Let's take a moment to discuss each, starting with data security. As enterprises embrace AI and move to the cloud, they must also grapple with evolving and more sophisticated attacks. By combining Commvault's Metallic AI fabric with our multipoint stress scan synthetic and clean room recovery offerings, customers can secure data as a source, identify, analyze, and quarantine suspicious files, monitor for anomalies, and conduct recoveries with precision so they're ready for an inevitable attack. Case in point. By embracing our threat scan and risk analysis capabilities, UNC Health, a long-standing customer, is now able to scale its security with its data growth. Saving time, reducing risk, supporting compliance, and advancing cyber resilience. Next, let's talk about identity resilience. According to CrowdStrike, approximately 80% of breaches involve compromised identities. Attackers don't start by encrypting data. They compromise valid credentials and escalate privileges. Putting identity at the center of cyber risk. Commvault Cloud's growing identity resilience capabilities enable enterprises to easily track, and mitigate unauthorized or accidental changes to identity systems like active directory, and TriD, and Okta. As Eric Beer of Jazzwares of Berkshire Hathaway company explained, Commvault innovation with identity resilience will allow us to detect, and roll back malicious identity changes as they happen. So that we can maintain reliable authentication and access control while strengthening our overall cyber resilience. In Q3, hundreds of customers embraced our identity resilience capabilities. And ARR from just our active directory offering has more than doubled year over year. In just two years, it has become one of our largest SaaS offerings. And finally, we cannot discuss resilience operations without addressing recovery. Particularly for cloud-native and cloud-bound enterprises. In Q3, we saw accelerated momentum with our cloud-native offerings including Glumio. For example, Clarity, a pioneer AI-driven predictive health chose Plumio to safeguard sensitive AI data that fuels next-generation risk prediction models. Our ongoing innovation with Clumio also speaks to our long-standing collaboration with Amazon Web Services. In Q3, we achieved AWS resilience competency in the recovery category. And we were named the 2025 AWS global storage partner of the year. Additionally, GigaOM named Commvault a leader in its cloud data protection radar. Commvault Cloud also supports recovery of massive AI workloads, and pipelines like object stores, data lakes, analytics platforms, and vector databases. In Q3, announced a new partnership with Pinecone that will bring greater resilience the vector databases within enterprise AI stacks. Delivered via Commvault Cloud, the solution will support Pine deployments across AWS, Azure, and Google Cloud. It's targeted for general availability, in 2026. We believe that AI is an emerging tailwind for us, It dramatically increases the volume of data that needs to be protected. Introduces new threats that need to be addressed, and requires a solution that brings resilience to the services, models, and databases that power AI. Our Commvault Cloud Unity platform is ideally suited to help customers address these evolving AI required. I'd be remiss if I didn't discuss our focus on data and cloud sovereignty. Over the years, we've always met our customers evolving needs. Including their data sovereignty requirements. Now we're taking it a step further by supporting regional sovereign clouds. In December, we announced that Commvault is a launch partner for the AWS European sovereign cloud. Together, our plans are to provide European organizations, with a secure solution that is purpose-built for cloud. Delivering cost-optimized resilience at scale for AWS customers. We're working closely with other partners on cloud sovereignty as well. This is an emerging space. We'll have more to say about this soon. Let me close with this. This quarter, we continue to capitalize on strong market growth through innovation leadership, and execution excellence. And we're seeing record customer engagement and adoption. We believe Commvault Cloud Unity is the breakthrough platform customers need in the AI era. And we anticipate we will finish the year with solid results that reflect both our leadership in the market and the trust our customers place in comp. Thank you. Now I'll turn it over to our chief accounting officer, Daniel Abrahamson, to discuss the financial details. Danielle? Daniel Abrahamson: Thanks, Sanjay, and good morning, everyone. As Sanjay highlighted, our Q3 results reflect the growing demand for our Commvault Cloud platform. As customers continue to rely on us to keep them resilient in the face of attacks, while advancing their hybrid cloud and AI journey. I'll recap our Q3 results and operating metrics. Followed by an update on Q4 and fiscal 2026 guidance. As a reminder, all growth rates are on a year-over-year basis unless otherwise noted. For Q3, total revenue growth accelerated 19% to $314 million driven by a 30% increase in subscription revenue, which reached $206 million. Subscription revenue was led by a robust 44% increase in SaaS revenue, and one of our strongest customer acquisition quarters in years. Term software revenue grew a healthy 22%, to $119 million. We saw strong growth across all geographies and customer sizes, with notable strength from large enterprise accounts. Revenue from term software transactions over $100,000 rose 25%. Driven by notable gains in both transaction volume and average deal size. Additionally, the volume and dollar value of million-dollar software deals increased year over year. Underscoring our standing as the preferred vendor for enterprise customers. We added approximately 700 new subscription customers and we ended the quarter with over 14,000 subscription customers. Q3 was our best quarter ever for net new term software customer additions, and our second-best ever SaaS customer acquisition quarter. Now I'll discuss ARR. Subscription ARR, which we believe is the best indicator of the company's health and growth, increased 28% to $941 million. This was driven by 40% growth in SaaS ARR to $364 million. Subscription ARR now represents 87% of total ARR. Compared to 83% one year ago. Total ARR increased by 22% to $1,085 million. Existing customer expansion was healthy in Q3. With SaaS net dollar retention of 121%. Consistent with best-in-class SaaS platforms. Our SaaS, net dollar retention reflects a few things. One, a growing install base, which is now over 9,000 customers. Two, the impact of rapidly adding new SaaS customers. Which is forward-looking and not yet reflected in our net dollar retention, and three, a mix shift of some product capabilities with certain early adopter customers. We saw solid momentum across our identity and resilience offerings which collectively represented approximately 30% of net new ARR. Now, I'll discuss our profitability and free cash flow. Fiscal Q3 gross margins improved 100 basis points sequentially to 81.5% which reflects a higher mix of software sales. In addition, we saw improved economies of scale and product efficiencies that we expect to continue in Q4. Operating expenses of $193 million represented 62% of total revenue. Operating expenses reflect higher commissions and bonuses on strong year-to-date sales performance and the trailing run rate of initiatives to support our ongoing growth trajectory. Non-GAAP EBIT $61 million reflecting in a margin of 19.6%. In fiscal Q3, we achieved the Rule of 40, reflecting a healthy balance between revenue and profitability. Year to date, we're operating at a rule of 41. Consistent with our responsible growth philosophy. In line with this approach, at the end of Q3, we initiated a cost optimization program. Aimed to align our cost structure to the evolving needs of the business. Turning to key balance sheet and cash flow indicators. We repurchased $41 million of stock during the quarter. Bringing the year-to-date amount to $187 million. We ended the quarter with a diluted share count of approximately 45 million shares. Year to date, we have generated $105 million of free cash flow. Q3 free cash flow of $2 million was impacted by the timing of collections from sales made later in the quarter and an additional payroll cycle for both The U.S. And Canada. We expect this to normalize in Q4. Now I'll discuss our outlook for Q4 and our updated outlook for fiscal year 2026. For fiscal Q4 '26, we expect subscription revenue, which includes both the software portion of term-based licenses and SaaS, to be in the range of $203 to $207 million. This represents 18% growth at the midpoint. We expect total revenue to be in the range of $305 million to $308 million with growth of 11% at the midpoint. As a reminder, Q4 fiscal year 2025 benefited from several multiyear strategic land transactions. At these revenue levels, we expect Q4 consolidated gross margins to be approximately 81%. We expect Q4 non-GAAP EBIT margins of approximately 19%. Now I'll discuss our updated fiscal year 2026 guidance. As a reminder, ARR guidance is in constant currency using FX rates as of 03/31/2025. For historical comparison, please refer to our Q3 earnings presentation. We expect constant currency fiscal 2026 total ARR growth to be approximately 18%, driven by an estimated 24% growth in subscription ARR. This guidance reflects the flow through of our Q3 results and is within our prior range. From a full-year fiscal 2026 revenue perspective, we are raising subscription revenue to be in the range of $764 to $768 million. Growing 30% at the midpoint. We are also increasing total revenue to a range of $1,177 million to $1,180 million representing growth of 18% at the midpoint. Moving to our full-year fiscal 2026 margin, EBIT and free cash flow outlook. We now expect gross margins to be 81% to 81.5%. This increased range reflects continued growth in our SaaS platform. And we are increasing our non-GAAP EBIT margin guidance to a range of 19% to 20%. We now expect our full-year free cash flow outlook to range from $215 million to $220 million. This guidance reflects approximately $12 million to $15 million in one-time payments related to our cost optimization program. Finally, from a capital allocation perspective, our Board of Directors approved recommitting our share repurchase authorization back to $250 million. Share repurchases remain an important part of our capital and we intend to remain active and opportunistic in the market. To summarize, the scale and product initiatives we undertook over the last eighteen months have contributed to our improved momentum and positioned us as the cyber resilience provider of choice for large enterprises. Commvault Cloud Unity further extends our innovation leadership and we are excited to capitalize on the strong customer reception to our enhanced platform in fiscal 2027 and beyond. Now I will turn it back to the operator to open the line for questions. Operator? Operator: At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Aaron Rakers of Wells Fargo. Your line is now open. Please go ahead. Aaron Rakers: Yeah. Thank you very much for taking the question. I have two if I can real quick. First, I was wondering if you could unpack the I guess, it's the free cash flow, but particularly the accounts receivable increase and the DSO increase in the quarter. I know you had alluded to, you know, later in the quarter kind of receivable collection. So you know, can can you unpack that? Just help me understand why DSO has gone up so much and what you saw towards the end of the quarter just given linearity? Daniel Abrahamson: Yeah. Hey, Aaron. This is Danielle. Good to talk to you again. So I know I talked about this in my prepared remarks, and and you you kind of hit on it. Right? But one of the things we saw this quarter and it's it's not uncommon in Q3. I'll be honest. One Q3 has a tendency to be one of our most pressured free cash flow quarters, and it's really just because the way the sales cycles work with the calendar year end. We have a tendency to see more deals close in the last few weeks of the quarter, and this quarter was no exception to that. I can tell you over 60% of our deals actually closed in the last few weeks of the quarter. And so what you see in free cash flow is really the reflection of that. The other thing I'll call out is we had an additional payroll cycle for both The US and Canada. That's not normal for us in a quarter. Obviously, The US is one of our largest payrolls. Right? So both of those things are putting pressure on free cash flow. I do wanna highlight free cash flow guidance for the year. If you normalize for the one-time payment, that we're making in Q4 tied to the cost optimization program. Remains unchanged. Aaron Rakers: Mhmm. Yep. And and then as a quick follow-up, you know, I can appreciate you're not giving a guidance beyond this fiscal year, but I know in your slide deck, you highlight again kind of the TAM expectations growing at a 12% CAGR, I think $38 billion kind of the longer-term total addressable market opportunity. I'm curious when you're asked about kind of the longer-term growth narrative, is the 12% a good underpinning growth rate to think about as we look out beyond this year? Or how are you thinking about the competitive landscape? The ability to take share in the context of that TAM growth expectation? Thank you. Daniel Abrahamson: Yes. No, thanks for the question again. We're not we're not gonna talk about next year right now. Right? We will obviously alongside, you know, the new CFO conversations, we will talk about what we're thinking for next fiscal year at a later time. Sanjay Mirchandani: Hey, Aaron. And just this is Sanjay. You know, again, just to just to reiterate, the the business is in a good place. The you know, we had our best LAN software quarter ever. We had a second-best LAN SaaS quarter ever. We you know, our rule of 40 continues to be consistent. You know, across the board, the the platform the new platform releases both really well based on everything we've seen. So you know, we we will obviously, the right time, share more of that. So you know? But we we are you know, we we have no I think we will definitely outpace market. Yeah. Aaron Rakers: Yeah. Thank you, Sanjay. Sanjay Mirchandani: Thanks. Operator: Your next question comes from the line of Jason Ader with William Blair. Please go ahead. Jason Ader: Yeah. Thank you. Just first on the currency situation. Was this in line with your expectations? I know you gave guidance You had a nice beat on the revenue and the ARR. Did did it was there an extra benefit relative to your expectations from currency? Daniel Abrahamson: Sorry, Jason. I think I'm a little confused by your question. Which metric are you referring to? Jason Ader: Well, UK UK guidance on a reported basis. Right? And I just wanna know You're talking about for rep for revenue? NARR. Both. Operator: Yeah. So we give currency in line with your expectations? Daniel Abrahamson: Yeah. So, on a reported basis, for revenue, currency was in line with our expectation. From an ARR perspective, we actually give only give annual guidance on ARR, and we do that on a constant currency basis. Jason Ader: Okay. I gotcha. Alright. And then the net new ARR, I think constant currency was for total net new AR was $39 million. I believe on the last earnings call, you guys talked about mid-forties. So just want to understand, was that was that below what your expectations were? And if so, why? Daniel Abrahamson: Yeah. So let me let me unpack that a little bit. Right? So and as we mentioned on the call, we had a really strong new customer quarter. It was actually our top term software new customer quarter and our second-highest customer acquisition quarter for SaaS. For SaaS in particular, I will tell you, 70% of our net new ARR was driven by SaaS. As a reminder, we land those customers at lower ASPs on average typically two to three times what we would land a a software customer with. And so what you're seeing in the ARR is just a reflection of that math. We're still very happy about that because what that does is give us the opportunity to go out, cross-sell, and gain further value with those customers. The other comment I'll make is going back to the software land piece. We have a tendency to land those customers at a longer duration. So that does have some modest dilution on ARR. Jason Ader: Okay. I I guess what I'm what I'm getting at is You know? What what I'm getting at, guys, is just what was the delta versus the $45 million that you guys had talked about? You ended up with $39 million. Something must have not played out the way you expected. Sanjay Mirchandani: Yeah. So so it this is Andre. Jason, it's it's really just we sold a lot of SaaS deals, land deals this quarter. And and, you know, when you that's why you have to look at it on an annual basis. Because there will be variation quarter to quarter. We sell a lot of software, and it was also a big software. And quarter for us. So when you when you take the the you know, you take that together, it's it's you know, that kinda explains the you know, the delta, if you would. But if by by by every stretch of the imagination, it was a very strong quarter. Daniel Abrahamson: And and, Jason, let me let me just add a little bit more with the number. Too, which I think might help. Last quarter for perspective, 61% of our net new ARR was SaaS, This quarter, that's 70%. Again, when you're talking landing these customers at a, you know, two to three times smaller ASP than software, that's that does have a significant impact on ARR. Jason Ader: Gotcha. Okay. So so the explanation I can summarize, is just you're you're seeing a a bigger shift to SaaS than maybe you expected at the beginning, you know, when when you gave the guidance, and that had an impact on the number. Yes. Correct. And and and larger and larger software deals as well. Planned software deals that with longer durations. Yeah. Sanjay Mirchandani: K. Thank you. Daniel Abrahamson: Thank you. Operator: Your next question comes from the line of James Fish with Piper Sandler. James Fish: Hey, guys. Appreciate the the questions here. First, how much does Unity impact this shift from sort of term to to SaaS, if at all? And and second, can you just help us understand if SaaS is is so strong? And I get at the base is getting bigger and and more anniversary in Clumio, but why the 4% sequential drop in cloud net retention rate this quarter? Sanjay Mirchandani: Okay. Jim, it's Andre. So Unity so we announced it in November. So it's what? You know, shy of three months ago. And what what Unity really does if I could if I could just reiterate, is it brings together workloads, data wherever they live under one control plane. So we're giving customers the ability to manage anything in, you know, what we call in the AI era under one control plane. And and and that is something that is we, you know, we see as being the future. Now what what we do is we also, as you know, cater to customers with large on-premise software and growing SaaS capabilities. And and that is their decision on how they to implement and the journey they take. So they work hand they work in tandem. So as far at this point, you know, we're not committing to change the model unilaterally in any way next fiscal year. It's a natural thing. We'll meet customer customers where they are. And what we've really done is take away the any kind of complexity a customer may face in the journey to the hybrid and multi-cloud. And really make it seamless. Daniel Abrahamson: And, Jim, I can take the second part of your question. So as it relates to our staff NRR, and I talked a little bit about this in my prepared remarks, but let me double click into it. Right, so a couple things went into our SaaS NRR this quarter. So the first thing and and you kind of, you know, you briefed this on on your question, right, is that we're dealing with a much larger customer base. So our SaaS customer base is now exceeding 9,000 total customers. So from an absolute dollar perspective, right, adding those same numbers of dollars, you're not getting the same level of uplift that you have you know, historically. The second thing, and, again, you'll hear this. Right? It's a it's a theme this quarter. We had such a strong new SaaS customer quarter Obviously, though those dollars don't show up in our NRR number yet. And I'll remind you. Right? We have one Salesforce that's doing both. Right? So that's number two. The last thing I will call out is there was a modest mix shift in some of our product capabilities among certain early adopter customers. Right? We have the benefit of having customers adopt our different innovation early But with that, we also deal with changes that need to happen over time. That's the beauty of what we offer customers and what Sanjay was describing with the Unity platform that we'll be able to to take to a to a different level next year. But we you know, these customers are still our customers. We're not seeing uptick upturn. This is really just you know, our business going through natural maturity. There's no there's no turning back here. Okay. Any unusual. That's important. James Fish: Got it. If I could on that 9,000 SaaS as as my question here. You have over 9,000 SaaS customers, 14,000 total subscription customers plus. Where does SaaS penetration get to, and how much are stand-alone SaaS customers? Daniel Abrahamson: Yep. So we I think we've said before, but of those over 9,000, roughly 30% of them also have software tied to them. On growing base. Yeah. On a growing base. Sanjay Mirchandani: And and one that I look at closely also is that nearly 50% of our enterprise SaaS customers use more than one offering. Okay? That's up eight, nine points from last year. So that that also shows you that as the hybrid journey becomes real for our customers, the the the advantage of our platform becomes apparent. Especially in the larger, complicated enterprise journeys. Hybrid cloud space. We'll go to the next question, Bella. Operator: Thank you. Your next question comes from the line of Eric Heath with KeyBanc. Capital Markets. Please go ahead. Eric Heath: Hey, Sanjay, Danielle. Thanks for taking the question. I just want to follow-up on some of the prior questions. But on the on the SAS NRR, is there anything from a go to market perspective incentive wise to shift the Salesforce focus over to landing new logos as opposed to expansion? Is that some of the reason to potentially explain why the SaaS new logos is maybe a little bit stronger while the NRR was a little bit softer? Sanjay Mirchandani: We do a camp comp plans on an annual basis. Eric. And so there's been no mid-quarter or midyear change to that. It's just you know, between the fact that what we've what we're delivering to our customers in in SaaS as part of the platform in conjunction with our our software capabilities is what they need. And so we're seeing a healthy healthy there. And, also, the work we're doing with our ecosystem partners is also making it easy for customers to get access to and use it. So I think the product stands on its on its own. The SaaS capability stand on its own. Eric Heath: Got it. Thanks. And and just one more maybe clarification. Just help understand what drove some of the term duration elongation this quarter after being on the shorter side the last quarter or two? And then just anything on expectations for duration on term for next quarter. Thanks. Sanjay Mirchandani: Yeah. So, you know, the way to think about it is what really affects term within a quarter is the number of large deals. That's the biggest contributor to to that. And this this quarter, the term was heavily influenced by some large new customer deals. So in Q3, we saw a modest pickup and instead of an uptick in the duration quarter on quarter, And and and we're winning large customers that are multiyear, which is which is a a darn good thing. What's also important that for me to underscore is that our median duration remains in a normal range. Okay? And and I guess we could have done a better job explaining term last quarter. Operator: Your next question comes from the line yes. Your next question comes from the line of Howard Ma with Guggenheim. Please go ahead. Howard Ma: Thanks. I I wanna follow on the on this this constant currency net new ARR thread. You said the 39 in the quarter. So just given so Sanjay and Danielle, given your comments earlier, net adds were strong. I think we have more clarity on the SaaS. And our decline. But on the turn side, the term that new ARR was, I think, was about $17 million. So it it seems like maybe there was a shortfall in term net new ARR, and last quarter, average duration compressed. This quarter, average duration seemed like it upside a little bit. So so I'm I'm deducing that maybe it's average term expansion ARR was an in aggregate. And I understand that there were some large multiyear deals but maybe the expansion was a little weaker than expected. And and and really more importantly, how should we think about it? Like, if if if 17 is kind of a a baseline going forward, like, what what gives you confidence, especially in light of the of Unity coming out that that you you can sustain this level of of term expansion. Daniel Abrahamson: And I'm sorry, Howard. I wanna make sure I understand the question. You're suggesting that the net new ARR for was 17%? I'm just trying to understand where I'm getting where you're getting the 17% Yeah. Maybe I'd look. Maybe my number is incorrect, but what whatever that number was worth I I'm I'm seeing eighteen. Is it so I guess on a constant currency basis, is that correct? That term constant currency net new ARR was was 18 and that average expansion was maybe weaker than you expected and and what to think going forward. Daniel Abrahamson: Oh, I I understand what you're saying. So you're just looking at the term software piece. So it so this isn't about expansion. I'm gonna right. I I talked about this before, but maybe let me let me make sure I'm clear on that. What we saw this quarter is land customers. And, again, we had our strongest land term software customer quarter. We saw land customers come in at at much longer duration. Now them coming at a longer duration is part of the business. We've talked about this historically, too. Actually, I think if you look at Q4 of last year, we had kind of a similar type pattern here. But that's really what's driving that change. I mentioned already the SaaS you know, the growth in the new SaaS customer. I also wanna highlight our sub our subscription our subscription ARR, if you look at it, it's actually our second-best subscription ARR net new ad that we've had the history of the company. Or organic. Right? Gotta look organic. So, again, I I talked about the pieces with the new customers. But overall, I'm I'm we're really happy with with where we're at, and know, where we'll be for the year. Sanjay Mirchandani: And we could follow-up on the one on on the public callback. If if you have. And and maybe just to a a quick follow-up for you, Sanjay. The restructuring efforts that or I should say the incremental restructuring efforts, it seems to be entirely focused in your r and d org and and perhaps operations. So r r and d and operations is that so, you know, number one, is that true? And what gives you confidence that these cutbacks won't impact your growth prospects? Sanjay Mirchandani: Hey, Howard. I I'm I'm not sure where you're getting that from. That's no. We we time and time again, as part of our regular process, as we get close to the fiscal year and we look at what our priorities for the next year are and align our our p and l to to prioritize what we think is going to be part of the future. This this quarter you know, this was no this exercise was no was no exception. Now you know, without getting into too much of the detail, some of it is recurring. Some of it is not recurring. We ran a volume retirement program that was well received. And you know, so so it wasn't on one group or another. It was something we offered up to the whole company. And and some of the some of the savings you saw on the EBIT line this quarter and and beyond and then others are gonna be put back into the business where we need it. You know, just to because I got it from in your in the press release, it says business technology is is the the unit. So can can you just expand on what does business business technology that function entail? Daniel Abrahamson: No. No. No, Howard. Sorry. So there's two restructuring plans that we have throughout the year. The first one, we talked about in the beginning of the year, and that was tied to some changes we were making in our business technology team. That's that's not our r and d team. That's our internal business technology team. IT. The second restructure plan, which is really you know, the one that we talked about in the press release this time, and I made the comments on related to some of the cash flow impacts That one is a company-wide initiative. Sanjay Mirchandani: Yeah. And, Howard, you know, actually, to to to be both direct, what this does is strengthen where we wanna go, not weaken. So we're not cutting back on r and d or any such thing. This is really about strengthening where we we where we think the, you know, the opportunity lies. So just aligning the business. This is it's a good thing. Howard Ma: Okay. Thank you for clarifying. Sanjay Mirchandani: No worries. Absolutely. Thanks, Howard. Operator: Your next question comes from the line of Param Singh with Open Oppenheimer. Please go ahead. Param Singh: Yeah. Hi. Thank you, and thanks for taking my questions. I had a couple. First, look, you know, this ARR question would be new debt, but I had a slightly different question on it. As I look the future and, again, I'm not asking for guidance. But as I look forward, typically, these lower ARR SaaS customers will scale. Right? And then based on historical trends, do you think it is you know, should we assume that there will be some reacceleration with these customers as they come back with the potential of higher NRR? Dipping from this lower baseline and potential increase in net new ARR, Or do you think that since there's a systemic shift towards more SaaS customers coming into the ecosystem, this will kind of be a new baseline for the next few years. Until you have a larger SaaS base. How should we think about it logically in the long term? Daniel Abrahamson: Hi, Param. So I'm gonna I I think I understand your question, so I'm gonna answer it. But if if I'm not answering what you're asking, please feel free to to clarify. Right? So, yes, so we land these customers at lower ASPs as I talked about. Historically and I I think we've said this. Historically, our we land at roughly $40,000. That's our a that's our ASP for customers. Right now, we see anywhere from 30 to 40% depending on the quarter, right, of our customer. That that cross-sell. I will tell you actually we're seeing even better traction in our enterprise customers Our enterprise customers 50 per we are approaching 50% of them having more than one SaaS product. That's up 700 basis points from a year ago. Without giving you specific guidance for next year, what I can tell you is we have a history of growing the lifetime value of these customers, and we aspire to continue to do that. Sanjay Mirchandani: And I think I think, Param, that with the Unity platform, it will make it even easier for customers to absorb new capabilities seamlessly. That is part of the design of the technology. So, you know, we think that being able to cross-sell over time is definitely part of our strategy as we've shared before. Param Singh: So let me segue into my second Yeah. Go ahead, Danielle. Daniel Abrahamson: No. I I I just wanted to add one more thing, which I thought would maybe be helpful. Our SaaS customers over a $100,000 are actually up over 45%. Param Singh: Great. So so let me segue to my my second part of my question, which is on Unity. Obviously, it's very early days, but if you could share some feedback And and how should we think about you know, based on that feedback, the adoption of Unity driving higher basically, SaaS ARR over time. Is there any way to conceptualize that? Sanjay Mirchandani: We have conceptualized things around that platform. We're very excited about it, Param, as you could imagine. You know, at Shift, you saw how much how much we shared. The the platform is Yeah. Just literally you know, we announced it in November. It was broadly most of it was broadly available. End of the year, we're in the early days of it. The pipeline looks great. The feedback from industry, I shared some on my prepared comments. Is is very positive. And, you know, it's early days to to to put out any any pattern matching on it. But everything in the product, especially around its AI capabilities, and our ability to bring together data security identity resilience, you know, and true recovery is second to none. My goal our goal when we built and designed this product was to make it super easy for customers to embrace logical extensions of their resilience capability. So translated into a go to market piece, cross-sell becomes friction-free. Param Singh: Right. Okay. And and do you do you feel you need to update your sales team a little bit to pivot to some of these you know, expanding capabilities? Or do you feel They just deliver. The right part of it. Go ahead. Sanjay Mirchandani: They just delivered an amazing quarter. These guys are doing a great job. We're executing well. Of course, enablement of our team is job one. They're only as good as help help help. Confident they are with the technology. So we continue to invest in our people. It's a big part of how we do things. And and I'll be honest with you. I'm very proud of our sales team. Param Singh: Okay. I'll get back in line. Thank you so much for answering my questions today. Sanjay Mirchandani: Thanks, Param. Operator: Your next question comes from the line of Rudy Kessinger with D. A. Davidson. Rudy Kessinger: Hey, guys. Thanks for taking my questions. So on the net new ARR, last quarter, you said you expected 60% of net new ARR to come from SaaS. And 60% of $45 million would be $27 million. And you did $27.1 million of SaaS net to ARR. And so You got In Q3. that lens, it would look like SaaS net new ARR is kind of in line with expectations. And then back to Howard's point, it would thus look like term license net new ARR would was was below expectations or the primary you know, reason for the $6 million delta versus the $45 million kinda baseline that was expected. So could you just again, follow-up on maybe the term net new ARR? Was was that below expectations? What was the impact of maybe longer duration on some deals than expected that resulted in some price compression, thus AR compression, I'm just not understanding how basing these numbers term was not below expectations. Daniel Abrahamson: No. I I I understand what you're asking, Rudy. And and you're spot on with the with the SaaS net new ARR. So I'm I'm glad you called that out specifically. So what we were assuming for term is that Duration would remain consistent with Q2. What we saw is because of these large multiyear quite frankly, like, just long durations new software customers, we did see some pressure on term ARR tied to that. You are correct. Sanjay Mirchandani: And and and, Rudy, I just I I've shared this over, like, repeatedly. You know, we have to look at this on a on a on a broader term basis. Quarter to quarter because of the type of business we do, the kinds of customers we cater to, the complexity of the projects that they embark upon, the mix of software versus SaaS, there will be a little bit of variability in how this stuff gets land. The good news is we're adding a ton of new customers in in subscript in in SaaS which bodes well for the long term. And we're and we had a record absolute record quarter of of software land customers with longer durations. So the it's you know, yes, the numbers are off a little bit, but it's it we need to be expect a little bit of variability in this over time because this is an end annualized thing. Now if you look at overall ARR for the year, you know, we're we're talking 22% rough rough tough growth on a $167 million year on year increase. So it's actually very handsome. I just, you know, I just feel like, there will be a little bit of quarter to quarter variability because we sell hybrid solutions for customers, and they have the option of being able to deploy it in the manner in which they want. So you know, I I guess we could have done a better job explaining that last last quarter. It comes back to the term and that that stuff, but I'll I'll keep explaining it till we get it right. Daniel Abrahamson: Yeah. The the only the only other thing I would call out the only other thing I would call out, Rudy, to your point is and we we've talked about this other ARR. Right? Other ARR the last couple of quarters has been consistent. We actually saw it decline. The decline almost doubled quarter over quarter, and that's really tied to some of our conversions. So that was the other piece just to kinda bring it all together. Rudy Kessinger: Okay. And then as a follow-up, I'm curious. There was some commentary about, you know, you sold maybe more SaaS deals than in I seem to maybe interpret that as meaning that prohibited you from also selling some term deals. So I'm guessing curious, like, in your pipe for the quarter, did you have a lot of customers where reps were working with them on boats? Potential SaaS and term deals? And more of the land tilted towards fast, than than term in the quarter. And then sorry for a two-parter here, but on your SaaS ARR, what percentage of your SaaS ARR comes from or is calculated from consumption, in the current quarter times four versus TCV over duration. And I'm curious if you were to you know, look at the quarter, your staff, and the ACV bookings you know, standpoint relative as opposed to ARR. You know, how much stronger might that number have been if you were calculating all of your SaaS ARR as PC over duration? Sanjay Mirchandani: Yeah. That's a that's a that's a tough question. Maybe maybe give us a little time to the exact number on that, but let me take the first part of your question. But our sales team the reason the way we the reason we have our go to market team the way it is because our platform delivers two sets of capabilities. So you can't segment them and say, do this versus that or that versus that. It really depends on where the customer is. And how we meet them where they are. So if a customer wants to start with Air Gap Protect and Clean Room and then move backwards into pipe you know, our our our our on-premise capabilities. That's what we'll do. So the sales team is is is absolutely aligned to the customer. Buying model and their buying capabilities and their needs. So we we internally don't trade off one license type versus another. That's not ever what we do. It's what the customer needs and how we best align to it. Could you repeat the second part of your question? Rudy Kessinger: I the the second part of my question, guess, like, if I just take your $364 million of SaaS ARR, how much of that is calculated from, like, Flumio products that are just consumption times four versus how much is just TCV over duration, the same way you calculate your term by since ARR? Because I'm trying to you know, you're talking about the ASPs being much lower and the the ARR not necessarily showing up yet from some strong bookings. And so I'm trying to understand you know, how much of your net new SaaS bookings come from products that are going to have ARR calculated on a consumption basis as opposed to TCV over duration. Daniel Abrahamson: Yeah. So I I'm not gonna give the exact breakout, Rudy. What I can tell you, though, is it's it's small. It's immaterial on on the whole ARR number. So you're not it's it's it's not overly meaningful. In the percentage. Rudy Kessinger: Okay. That's helpful. Thank you. Operator: Thanks, Rudy. Your next question comes from the line of Michael Romanelli with Mizuho Securities. Please go ahead. Michael Romanelli: Yeah. Hi. Thanks for, yeah, for taking the question. So, yeah, I guess I was just, you know, wondering if there are any regions and or verticals that perform better than your internal expectations this quarter? And maybe conversely, were any more challenged than you were anticipating? Sanjay Mirchandani: What was the second part, sorry, Michael? Michael Romanelli: Yeah. If if any, you know, regions or or verticals were perhaps more challenged than you were anticipating. Sanjay Mirchandani: Yeah. It was actually, as a quarter, it's very evenly distributed. And and almost by design. You know, we we've over over time, we've we've worked to derisk the business in both geography as well as in in particular verticals. This quarter was you know, our international business did very well as did our US business. Was very, very even. Our SaaS business did well. Our software business did well. So there was no there was no particular call out. I think overall, a well-delivered quarter from my from my point of view. Michael Romanelli: Got it. Okay. That's helpful. And then maybe just building on the prior question, I apologize if I missed it. But you guys have obviously noted that you expect SaaS to comprise about 60% of total net new ARR for the fiscal year. Just how should we be thinking about that mix shift for the 4Q? Daniel Abrahamson: Yeah. I would even this quarter, we talked about this. I think Rudy called this out, right? From a SaaS perspective, we're we're still about 60%. So I I I think that 60% baseline is is the right way to think about it. Michael Romanelli: Got it. Okay. Alright. That's helpful. Thanks. Operator: Yep. Your next question comes from the line of Tom Blakey with Cantor. Please go ahead. Tom Blakey: Hey, guys. Thanks for squeezing me in here. Just a couple quick ones. On this, duration topic, Danielle, what what is the I guess just bluntly, what is the expectation for duration in the guide for fiscal 4Q Daniel Abrahamson: Yeah. So so we're continuing to assume that duration remains Specifically, and Sanjay called this out in his earlier remarks, right, median duration will remain in normal range. So that's what assuming in our guide. Tom Blakey: So I doubt so, basically, like, just quarter to quarter a downtick in duration, so to speak. And then go ahead. Daniel Abrahamson: No. No. Yeah. I I I would say, again, that the duration median will remain the same. And the guide is neither aggressive nor conservative. Right? We wanted to give you where we feel like we can meet. And, frankly, we're getting better at this as customers deploy more complex scenarios, we have to, you know, internally be spending a lot time really, really finessing how we how we look at this. You know? And and we'll be completely transparent about Sanjay Mirchandani: Yeah. No. You have always, Sanjay. I I just said, you know, duration was an impact to ARR this quarter, so I was just trying to understand. I know because, you know, it's it's it's a tale of two cities. Right? Here we get the you know, we get larger duration. More land deals, and it affects the other side. So then we got a lot of new SaaS deals you know, and smaller duration. And so the you know, a little bit of a a variability is to be expected. We're getting better. I hope at being able to tell you what that is. Tom Blakey: Yeah. And and this just goes hand in hand with the the complexity and the expanding kind of sales motion that you guys are going to market with in terms of adding cyber resilience the last year or so a year or two, Sanjay. So maybe if you could talk about you you know, this these increasing hybrid deals the sales cycles. Maybe talk about, you know, what on a like for like basis, you know, where are sales cycles going you know, this last fiscal quarter or maybe going forward in your mind? Are they expanding? Maybe if you could touch on discounting for everybody on the call. Is there an element of discounting just to address that topic with the extended durations? And that's it. For me. Thank you so much. Sanjay Mirchandani: No worries. No worries. So that you know, so hybrid deals if you if you start on the software side, you look at large enterprise customers, and they have a they have a you know, they have technology that goes back to the legacy technology. The the process of getting, you know, getting that conversation going where it becomes a combination now in resilience terms. Of really looking at data security of all of all data types looking at identity resilience, and then and then attaching that to world-class recovery, that becomes a fairly sophisticated conversation and that takes time. And when we get into it, then you realize that some of the workloads, they wanna start the cloud. They want to keep on-premise. They want they have a timeline under which to move it to the cloud. So then you start working through that. And we've gotten good at it because we've been doing this now, you know, the cyber resilience conversation. Security conversation for a couple of years. We think the new platform and the bringing of the capabilities under one pane of glass will just allow customers especially with our discovery capabilities, to quickly get on get up and understand what they have and what is protected, what isn't, at what level, what policy. So, you know, I think the new platform in time will will help shrink our ability and and the customer's decision points, I think, to to do things. Now the Salesforce is taking this to market comprehensively. Okay? It's not if we try not to go and and talk about workloads because that's not a resilient solution. A resilient resilience in in my simple way of thinking about it is is only as good as as the entirety of the workload that you put the workload you protect. And so that's that's kinda how we look at it. These deals, when you start, can you know, it's it's it's a very sophisticated sales process, and it's a very and and you have to but customers are open to it. You know? Cyber threats going down. AI in in a in a good way generates more data, and that data needs to be protected. And and we're good at that. Okay? So that's kinda how we think about Tom Blakey: Go ahead. You saw that, Sanjay. You you know, you you sorry. As a follow-up to that, Sorry. I thought I was done there. But you saw that in your net new term record additions. Again, I just wanted to just triple click on is this maybe you know, in addition to all these records, and and solid results, is there an element of pipeline building related to this, you know, possibly Yeah. A sales elongation going on? Yep. Sanjay Mirchandani: No. So so so I was gonna I was gonna you know, I think that firstly, you said discounting earlier in your earlier part of your question. There is no you know, we keep a very tight control on that. Yeah. You know, our chief commercial officer was our chief financial officer. So there's a very high degree of discipline that goes into discounting. Inside of the company. So that, I don't I I don't worry about day in and day out. That's not that's not my concern at all. The sales cycle, we believe, and it's early days. So we could talk about it over over the quarters to come. We believe that our Cloud Unity platform will reduce the time it takes for customers to understand resilience the way we've designed it and get up and running with us faster. And then we also released a framework for them to sort of look at to to operationalize it. We call that res ops. We released that. We we announced that in in tandem with the platform. And the the the collective capabilities in in there we think, will allow our team, our partners, and our customers our prospects in this case to to truly understand how fast they can get up and running with true resilience. So I'm very hopeful about where the platform is. Tom Blakey: Thank you very much, Sanjay. Sanjay Mirchandani: Thank you. Operator: Your next question comes from the line of Khasari with Baird. Please go ahead. Khasari: Hey. Thanks for taking my question. So, Danielle, you you noted, of course, strong new SaaS customer this quarter, but that these dollars of course, haven't flowed into NRR yet. Can can you just clarify And I I believe Sanjay was was getting to that in terms of that lag effect. Is it is it purely a function of like, how you recognize your SaaS ARR sort of ramping off actual usage consumption versus potentially some of the peers who use and and kind of use that linearity around duration and TCV. So that's part one, and I had a follow-up on on Unity. Thanks. Daniel Abrahamson: Yeah. So so I just wanna make sure I understand because I I I think you're asking two different things. So you mentioned SAS NRR. Right? And I had made the comment, you know, one of the things we saw is we had a really strong SaaS new customer quarter. And so, obviously, the way that we calculate NRR is we take that same customer cohort from last year, and look at where they are this year. So any new customers would not be considered in that calculation. Does that help answer your question? I I think that's what you're you're getting at, but if I'm if I'm missing it, let me know. Khasari: No. No. That that was it. Yeah. Thanks. Yeah. Okay. Daniel Abrahamson: Perfect. So it's all future value? Sanjay Mirchandani: Future value lifetime value of the customer. Got it. And and, Sanjay, so my my then is of course, you have the the SASE recognition due to this kind of ramps. And I I was just curious would in that case, kind of a SaaS ACV booking offer, like, a much cleaner, better lens into your to my I I think you were getting to that. And with Unity gaining traction, should help improve your overall TCV and AR dynamics. Just curious. And, also, your net new AR come from SaaS. Just has there been any internal discussion around looking at some of those metrics kind of ACV or backlog RPO. Yeah. Daniel Abrahamson: Hey, sorry. This is Danielle again. So I I just wanna make sure it's clear. Right? So we do have some consumption and some utility, It's a it's a small portion of our of our ARR. Most of our ARR is tied to what I'll say, is true subscription SaaS customers, and that you know, they buy a a you know, fixed amount for one year, and then that amount is annualized. So I I I I don't I don't know if there's I hope that answers your question. Khasari: That's clear. Thanks a lot. Yep. Operator: Your last question comes from the line of Junaid Siddiqui with Truist. Please go ahead. Junaid Siddiqui: Great. Good morning, and thank you for taking my question. Just wanted to ask about Satori. Sanjay. I know it's in early days, but could you just discuss how Satori is influencing customer adoption and deal sizes? Yeah, you know, in these ransomware driven evaluations. And, you know, what specific capabilities within Satori you know, are proving most differentiating in these competitive wins? And how do you think about its contribution to growth over the next let's say, twelve, eighteen months? Sanjay Mirchandani: Okay. Sounds good. So where we are with Satori, is we're in the throes of integrating the product into our platform. And when we when we acquired Satori, we were I think, very clear that this would not be a stand-alone capability, but the value, the true value of Satori was giving our customers the ability to inspect and look at their data structured, unstructured, you know, and and really have a policy-related compliance capability. So that that that was the premise. That work we are in the throes of incorporating into the platform. Our belief is that customers need that capability as part of the platform unlike some others in the business, because standalone, it's another integration point. And with us, it's it's a feature you just turn on and then you are protected, and you're looking at, you know, the compliance requirements and policies across the board. So it's it's an, you know, it's an implicit part of the platform. Okay? We believe that the value comes for customers being better protected out of the box without having to do more infield integrations with third-party products. And and we think that's gonna raise the value. And it is already raising the value in conversations that we're having. So it's early days, but kinda where we expected it. To be. Junaid Siddiqui: Great. Thank you. Sanjay Mirchandani: Thank you. Operator: Alright. There are no questions at this time. Ladies and gentlemen, that does conclude our conference call for today. Thank you all for joining, and you may now disconnect. Everyone, have a great day.
Matthew: Good morning. My name is Matthew, and I will be your facilitator today. I would like to welcome everyone to the United Parcel Service, Inc. fourth quarter 2025 earnings conference. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. Any analyst that would like to ask a question, now is the time to press star then one on your telephone keypad. It is now my pleasure to turn the floor over to your host, Mr. PJ Guido, Investor Relations Officer. Sir, the floor is yours. PJ Guido: Good morning, and welcome to the United Parcel Service, Inc. fourth quarter 2025 earnings call. Joining me today are Carol Tomé, our CEO, Brian Dykes, our CFO, and a few additional members of our executive leadership team. Before we begin, I want to remind you that some of the comments we will make today are forward-looking statements and address our future performance or operating results of our company. These statements are subject to risks and uncertainties, which are described in our 2024 Form 10-Ks and other reports we file with or furnish to the Securities and Exchange Commission. These reports, when filed, are available on the United Parcel Service, Inc. Investor Relations website and from the SEC. Unless stated otherwise, our discussion refers to adjusted results. For 2025, GAAP results include total charges of $238 million or $0.28 per diluted share, comprised of a non-cash after-tax charge of $137 million due to a write-off of the company's MD-11 aircraft fleet and after-tax transformation charges of $101 million. A reconciliation of non-GAAP adjusted to GAAP financial results is available in today's webcast materials. These materials are also available on the United Parcel Service, Inc. Investor Relations website. Following our prepared remarks, we will take questions from those joining us via the teleconference. If you wish to ask a question, press star and then one on your phone to enter the queue. Please ask only one question so that we may allow as many as possible to participate. You may rejoin the queue for the opportunity to ask an additional question. And now, I will turn the call over to Carol. Carol Tomé: Thank you, PJ, and good morning. Before I discuss our results, I would like to start by remembering those who lost their lives in a tragic crash of United Parcel Service, Inc. flight 2976. Our thoughts and prayers remain with their families and everyone affected. I am incredibly proud of our team at Worldport and how they responded to this accident. I would like to thank the Louisville community as well as our business and industry partners for their outpouring of support. I also want to express my deep appreciation to UPSers around the globe for their exceptional dedication and tireless commitment to serving our customers. For the eighth year in a row, we were the industry leader in on-time service during peak. Looking at the fourth quarter, our results exceeded our expectations driven by strong revenue quality, solid cost management, and overall great execution. All three of our business segments contributed to our outperformance, with U.S. Domestic and Supply Chain Solutions delivering year-over-year operating margin expansion and International Small Package reporting record revenue with the highest fourth quarter revenue in four years. In the fourth quarter, consolidated revenue was $24.5 billion, consolidated operating profit was $2.9 billion, and consolidated operating margin was 11.8%. Looking at the full year, consolidated revenue was $88.7 billion, consolidated operating profit totaled $8.7 billion, and consolidated operating margin was 9.8%. Brian will provide more detail about our financial results in a moment. In 2025, we operated through a very dynamic macro environment, including significant change in global trade policies and increasing geopolitical concerns. But at the same time, 2025 was a year of considerable progress for United Parcel Service, Inc., as we took action to strengthen our revenue quality and build a network that's designed to deliver differentiated logistics capabilities. To that end, here's some of what we accomplished in 2025. By the end of the year, we reached our volume reduction target and reduced Amazon's volume in our network by approximately 1 million pieces per day. As planned, we delivered $3.5 billion in savings from our network reconfiguration and efficiency reimagined initiatives. We closed 93 buildings in the U.S. and deployed automation in 57 buildings while maintaining the high level of service our customers expect. We were disciplined on revenue quality and product mix and grew U.S. Revenue per piece by 7.1% year over year. We increased small and medium-sized business or SMB penetration to 31.8% of total U.S. volume. Brian Dykes: Driven by GAAP. Carol Tomé: Our digital access program, which grew revenue 25% year over year and delivered $4.1 billion in global revenue. As a percentage of total U.S. volume, we grew B2B to 42.3%, a 250 basis point improvement versus 2024. And importantly, we expanded our U.S. operating margin in 2025. On an average daily volume or ADV decline of 8.6% for the full year. We leveraged artificial intelligence and our next-gen brokerage capabilities to process nearly 90% of all cross-border transactions digitally, including in the U.S., where we saw more than a 300% increase in daily customers' entries compared to last year. We completed our acquisitions of Frigo Trans and Ann Lower Healthcare Group, further expanding our healthcare cold chain capabilities. In 2025, our global healthcare portfolio generated $11.2 billion in revenue, putting us well on our way to achieving our goal to become the number one complex healthcare logistics provider in the world. Our United Parcel Service, Inc. digital business, which includes Roadie and Happy Returns, saw revenue grow by 24% compared to 2024. We deployed SmartPacket Smart Facility, our RFID labeling solution, to 5,500 UPS store locations and completed installing RFID readers in all U.S. package cars. We maintained a disciplined and balanced approach to capital allocation by generating $8.5 billion in cash from operations and returning $6.4 billion to shareholders in the form of dividends and share repurchases. While we made great progress in 2025, we have more work to do. Let's start with our network reconfiguration. One year ago, we announced our Amazon accelerated glide down plan for the actions we plan to take that would drive future operating margin expansion and greater operational agility. Specifically, we set out to reduce the Amazon volume in our network by 50% over an eighteen-month period while at the same time reconfiguring our network in line with our new volume levels. We are in the final six months of our Amazon accelerated glide down plan, and for the full year 2026, we intend to glide down another million pieces per day while continuing to reconfigure our network. Given the success of our glide down and cost-out efforts in 2025, we are confident that we will be able to complete our network reconfiguration plans without impeding our ability to grow in targeted markets. Brian will provide the details of our Amazon glide down plans in a moment, which remain anchored on reducing hours, labor, and fixed costs in line with new volume levels. Deliberately shrinking a network is a daunting task, and our success was driven by disciplined planning and effective execution, as well as the added flexibility and efficiency that's coming from deploying state-of-the-art technology and automation across a smaller and nimbler network. This year, we plan to further automate our network, and as a result, we expect to increase the percentage of U.S. volume we process through automated facilities to 68% by the end of the year, up from 66.5% at the end of 2025. Brian Dykes: Our airline is a key part of our network. Carol Tomé: And over the past several years, we've taken a systematic programmatic approach to modernizing our global air fleet. To that end, we made the decision to accelerate our plans and retire all MD-11 aircraft in our fleet. Over the next year or so, we will replace much of that capacity with new, more efficient Boeing 767 aircraft. Now let's move to our economy product we call Groundsaver. At the end of the fourth quarter, we formalized a new relationship with the United States Postal Service to support last-mile delivery of this product. Our new agreement improves the economics associated with this product while ensuring our service expectations are met. Ramp-up has already begun, and over the next several weeks and months, we will continue to increase the flow of Groundsaver volume to the USPS. As in the past, we will use density matching technology to determine which packages will be delivered by United Parcel Service, Inc. versus the USPS. And touching on our activities outside the U.S., our new air hub in The Philippines is slated to open towards the end of 2026, and our expansion in Hong Kong is on track to open in 2028. Both gateways give us broader access and faster time in transit in the trade lanes that are growing in Asia. Now let me move to our 2026 outlook. In 2026, growth in the U.S. Small Package market, excluding Amazon, is expected to be up low single digits. Outside the U.S., export volume growth is expected to be subdued, partly due to the tough comparisons coming from the boost of tariff upfront running in 2025. Now looking at United Parcel Service, Inc. in 2026, two important framing comments. First, for the first six months of the year, we will be working through the revenue and operating margin impacts of completing the Amazon glide down, the outsourcing of Groundsaver to the USPS, and adjustments to our international business in response to trade policy changes. Second, for the back half of the year, we will be operating a more efficient U.S. network and lapping trade lane disruptions. For the full year 2026, we expect to generate consolidated revenue of approximately $89.7 billion and a consolidated operating margin of approximately 9.6%. Brian will provide more details, but let me touch a bit more on the shape of the year, focusing specifically on the U.S. Brian Dykes: In the U.S., Carol Tomé: we expect revenue to be flattish year over year, with revenue declining in the first half of the year due to the Amazon glide down plan and then sequentially increasing in the second half as the Amazon glide down efforts will have concluded. Brian Dykes: While we expect overall U.S. Domestic revenue to be flat, Carol Tomé: we are planning to grow SMB and enterprise revenue in the low single digits in the first half of the year and then accelerate that growth to mid-single digits in the second half of the year. From an operating profit perspective, higher expenses are expected to weigh on operating profit early in the year. These higher expenses are mostly related to the Groundsaver transition to the USPS and our network reconfiguration. We know that variable costs come out as volume exits the network, but I have learned that reductions in fixed and semi-variable costs lag. We expect to return to operating profit growth in the second half of the year. The way I think about the year is like a bathtub effect. The halves will look different: first half down, second half up, but for the year, the U.S. Revenue and operating margin will be flat, and we will exit 2026 with a leaner, more agile U.S. network, one that's built for growth and sustained margin expansion. As I wrap up, I am extremely proud of our team and the progress we've made in executing our strategy. June 2026 will be the inflection point. Our strategy is not a shrink-the-company strategy, but rather one where we grow in the best parts of the market, including enterprise, SMB, B2B, healthcare, and international. Our strategy is about delivering differentiated value to our customers, improving the long-term profitability of our company, and delivering value for our shareholders through effective capital allocation. So with that, thank you for listening. And now I will turn the call over to Brian. Brian Dykes: Thank you, Carol, and good morning, everyone. Before I begin, I would also like to recognize and remember those affected by the crash of United Parcel Service, Inc. flight 2976. I would like to thank our team at Worldport for their steadfast commitment to the community, their teammates, and our customers. Now let's move to our performance. This morning, I will cover four areas, starting with our fourth quarter results, then I will review our full year 2025 results, including cash and shareholder returns. Next, I will discuss the Amazon Glide Down and our network reconfiguration and cost-out efforts. Lastly, I will close with our financial outlook for 2026. Moving to our results, starting with our consolidated performance, in the fourth quarter, revenue was $24.5 billion, and operating profit was $2.9 billion. Consolidated operating margin was 11.8%, and diluted earnings per share were $2.38. As noted in our earnings press release and financials, in the fourth quarter, we took a $137 million after-tax charge to write off our MD-11 fleet. During the fourth quarter, we proactively grounded our fleet of MD-11 aircraft and leveraged the flexibility of our integrated network to seamlessly operate through peak season. Specifically, we repositioned some aircraft from other parts of the world to the U.S., increased the amount of volume we moved on the ground, and leased additional aircraft to meet capacity demand. With the learnings from operating during peak season, we made the decision to accelerate the retirement of our MD-11 fleet, which was completed in the fourth quarter. Over the next fifteen months, we expect to take delivery of 18 new Boeing 767 aircraft, with 15 expected to deliver this year. As new aircraft join our fleet, we will step down the leased aircraft and associated expense. We believe these actions are consistent with building a more efficient global network positioned for growth, flexibility, and profitability. Now moving to our segment performance. U.S. Domestic demonstrated strong performance in the fourth quarter, driven by the combination of revenue quality and great execution. We delivered a very efficient peak, which is a testament to the transformational effects from the additional automation and network reconfiguration we made throughout the year. Importantly, we continue to take care of our customers during their busiest time of the year and provided industry-leading service during peak for the eighth consecutive year. For the quarter, total U.S. average daily volume was down 2.4 million pieces or 10.8%. More than half of the decline is from the glide down of Amazon volume and our deliberate actions to remove lower-yielding e-commerce volume from our network. Total air average daily volume was down 11.9%, driven by the glide down of Amazon. Ground average daily volume was down 10.6% compared to 2024. Within ground, Groundsaver ADV declined 27.7%, mainly due to our revenue quality actions. Moving to customer mix, SMB average daily volume was flat to last year. However, in the fourth quarter, SMBs made up 31.2% of total U.S. volume, an increase of 340 basis points compared to last year. This is the highest fourth quarter SMB penetration in our history. B2B average daily volume finished down 5.2% in the fourth quarter compared to last year, but returns were a bright spot and increased 1.6% year over year. B2B represented 37.5% of our U.S. volume, which was a 220 basis point improvement versus 2024 and was the highest fourth quarter B2B penetration we've seen in six years. B2C average daily volume was down 13.8% compared to 2024. The product and customer mix improvement we saw in the fourth quarter demonstrate the progress we are making as we shift our U.S. mix to more premium volume with a focus on revenue quality. Moving to revenue, for the fourth quarter, U.S. Domestic generated revenue of $16.8 billion. This was a decrease of 3.2% year over year against an ADV decline of 10.8%, with strong revenue per piece growth largely offsetting the lower volume. In the fourth quarter, revenue per piece increased 8.3% year over year, which was the strongest fourth quarter revenue per piece growth rate we've seen in four years. Breaking down the components of the 8.3% revenue per piece improvement, base rates and package characteristics increased the revenue per piece growth rate by 340 basis points. Customer and product mix improvement increased the revenue per piece growth rate by 320 basis points. The remaining 170 basis point increase was from fuel. Turning to cost, in the fourth quarter, total expense in U.S. Domestic was down 3.3%. The decline in total expense was primarily driven by our efforts to remove hours and operational positions to align with volume. Cost per piece increased 8.9% year over year, primarily due to costs associated with the insourcing of Groundsaver, as well as additional costs to secure air capacity after we grounded our MD-11 fleet. Even in the face of unexpected challenges, the U.S. segment delivered $1.7 billion in operating profit, and operating margin was 10.2%, a 10 basis point improvement compared to last year. Moving to our International segment, we continue to adjust the network to support our customers through evolving trade policies and delivered strong top-line growth driven by revenue quality efforts in all regions. In the fourth quarter, total international average daily volume declined 4.7%, 3.5% compared to last year. International domestic ADV decreased, led by a decline in Europe that was partially offset by growth in Canada. On the export side, average daily volume in the fourth quarter decreased 5.8% versus last year, led by declines on U.S. destination lanes resulting from the change in the de minimis exemption. U.S. imports in total were down 24.4% year over year, led by an ADV decline from Canada and Mexico of 30.5%, and the China to U.S. lane was lower by 20.9% compared to last year. Turning to revenue, in the fourth quarter, we generated revenue of $5 billion, up 2.5% from last year, despite the decline in volume. Operating profit in the International segment was $908 million, down $154 million year over year, with more than half of the decline related to trade policy changes, which resulted in a shift away from more profitable U.S. import lanes. As a result, international operating margin in the fourth quarter was 18%. Looking at Supply Chain Solutions, in the fourth quarter, revenue was $2.7 billion, lower than last year by $388 million. Looking at the key drivers, within Air and Ocean Forwarding, demand softness resulted in lower market rates, which drove a decline in revenue year over year. Logistics revenue was down year over year, driven by a decline in mail innovation. This was partially offset by revenue growth in Healthcare Logistics. United Parcel Service, Inc. Digital, which includes Roadie and Happy Returns, grew revenue 27% compared to 2024. In the fourth quarter, Supply Chain Solutions generated operating profit of $276 million, and operating margin was 10.3%, up 100 basis points compared to last year. Now let's move to our full year 2025 results. For the full year 2025, on a consolidated basis, revenue was $88.7 billion, operating profit was $8.7 billion, and operating margin was 9.8%. We generated $8.5 billion in cash from operations and continued to follow our capital allocation priorities. We invested $3.7 billion in CapEx and spent $2 billion on acquisitions. We distributed $5.4 billion in dividends. Lastly, we completed $1 billion in share repurchases. In the segments for the full year, U.S. Domestic operating profit was $4.6 billion, and operating margin was 7.7%. The International segment generated $2.9 billion in operating profit, and operating margin was 15.8%. Supply Chain Solutions delivered operating profit of $1.1 billion, and operating margin was 10.6%. Now let me provide an update on our Amazon Glide Down, cost-out, and network reconfiguration efforts in 2025. We are pleased with the progress we've made after four quarters of a six-quarter glide down, and we remain on track to achieve our targeted volume reductions. As Carol mentioned, we delivered $3.5 billion in savings from our network reconfiguration and efficiency reimagined initiatives. The savings came from three buckets. Starting with variable costs, in line with the declines in volume, we removed 26.9 million labor hours in 2025. Looking at semi-variable costs, which reflect operational positions, we finished down 48,000 positions, including 15,000 fewer seasonal positions compared to 2024. Moving to our fixed cost bucket, we completed the closure of 195 operations, including closing 93 buildings. We saw savings from our efficiency reimagined initiatives continue to accelerate in the fourth quarter. As we've discussed, offsetting some of these savings was the incremental costs associated with insourcing Groundsaver, which we expect to moderate in 2026. This brings us to 2026 and the last two quarters of our six-quarter glide down of Amazon volume. In total, for the full year, we intend to glide down another million pieces per day of Amazon volume. Along with this reduction in volume, we will continue to reconfigure our U.S. network and take out variable, semi-variable, and fixed costs. Looking at the variable costs associated with the Amazon volume decline, in 2026, we plan to reduce total operational hours by approximately 25 million hours. In terms of semi-variable costs, we expect to reduce operational positions by up to 30,000. This will be accomplished through attrition, and we expect to offer a second voluntary separation program for full-time drivers. In the fixed cost bucket, we have identified 24 buildings for closure in the first half of the year, and we are evaluating additional buildings to be closed later in the year. Plus, we plan to further deploy automation across the network. Pulling it all together, we are targeting $3 billion in savings related to the Amazon glide down. Moving to our 2026 financial outlook, for the full year 2026, on a consolidated basis, we expect revenue to be approximately $89.7 billion. Operating margin is expected to be approximately 9.6%, and diluted earnings per share are expected to be about flat to 2025. As a reminder, 2025 EPS included a $0.30 benefit from a sale-leaseback transaction. Lastly, our guidance for 2026 does not reflect any significant changes to the current tariff landscape. Now let me add color on the segment. Looking at U.S. Domestic, we are going through significant structural changes, and 2026 marks the inflection point of our strategy. Full year 2026 revenue is expected to be approximately flat year over year. We expect ADV to be down mid-single digits year over year due to our actions with Amazon, which will be offset by a strong revenue per piece growth rate in the mid-single digits. Full year operating margin is expected to be flat to 2025. Looking at the shape of the year, revenue and our cost structure in the back half of the year will be meaningfully different than in the beginning of the year. In the first half of the year, we expect a decline in revenue compared to 2025, driven by volume decline. Looking at 2026, we expect to generate an operating margin in the mid-single digits. This is due to short-term transition expenses related to Groundsaver, the timing of removing Amazon-related costs, including the execution of a voluntary driver separation program, and additional expense associated with the aircraft leases related to the retirement of our MD-11 fleet. In the second half of the year, we expect high single-digit operating profit growth, reflecting the completion of our strategic actions. We will still be comping year-over-year declines from Amazon, but we expect enterprise and SMB revenue growth. First half cost pressures are expected to be behind us, and we will be running a more agile U.S. network. The USPS will be delivering some of our Groundsaver product, and our driver staffing will align with our new delivery volume level. Our results in the second half of the year will be more indicative of our go-forward financial algorithm, with an emphasis on both top-line growth and operating margin expansion. Moving to the International segment, we expect the dynamic environment we experienced in 2025 will continue in 2026, primarily due to the tariff and de minimis policy changes that will continue to drive changes in trade lane mix. With that in mind, we anticipate revenue growth to be in the low single digits year over year, driven by a solid increase in revenue per piece. Operating margin in the International segment is expected to be in the mid-teens. Looking at the first quarter, we expect revenue to be approximately flat with a year-over-year decline in operating profit due to changes in trade lanes and tough comps from the front-running of tariff and de minimis changes in 2025. In Supply Chain Solutions, for the full year 2026, we expect revenue to be up high single digits, which includes revenue from our Andalar acquisition. Operating margin in SES is expected to be in the low double digits. For modeling purposes, in total below the line, expect approximately $760 million in expense, which includes pension income of approximately $250 million, and we expect the tax rate for the full year to be approximately 23%. Now let's turn to our expectation for cash and the balance sheet. We expect free cash flow to be approximately $6.5 billion, including our annual pension contribution of $1.3 billion, but before we factor in the financial impact of a voluntary driver separation program. Capital expenditures are expected to be about $3 billion. We are planning to pay out around $5.4 billion in dividends in 2026, subject to Board approval. To close, I would like to echo Carol's comments and express how proud I am of our teams for executing the strategy while continuing to take care of our customers. Our efforts today are setting our business up for future margin expansion and greater operational agility. We are focused on growing in the best parts of the market to deliver long-term value for our shareholders. With that, operator, please open the lines for questions. Matthew: Thank you. We will now conduct a question and answer session. If you have any questions or comments, please press 1 on your phone at this time. We do ask that while posting your question, please pick up your handset if listening on speakerphone to provide optimum sound quality. We do ask that participants please ask one question, then reenter the queue. Once again, if you have any questions or comments, please press 1 on your phone. Our first question comes from the line of David Vernon from Bernstein. Your line is live. David Vernon: Hey, good morning, guys, and thanks for taking the question. So I guess, Brian, maybe just a big picture question in terms of what's embedded in the guidance and sort of the exit rate as we are leaving 2026. I think you mentioned full year domestic margin is expected to be flat. Can you kind of give us a sense for what the second half or the exit rate margin should be? And then as far as kind of what's embedded in the domestic cost outlook, is there any sort of numbers you can put around the cost of the retirement of the MD-11s? Or additional stuff maybe that we did not know before the earnings release today? Thanks. Brian Dykes: Yeah. Great. Good morning, and thank you, Dave. So let me first just address the MD-11. I think in the fourth quarter, including our results, was about $50 million of incremental lease cost that we incurred to replace the capacity. It will be about double that in 2026 that's included in the guidance. About 90% of that in the first half. The 767s are scheduled to come in through the course of the year, with five in the first half and 10 in the second half, and then we will have three in 2027. So that's the first part. I think, when we think about the shape of the year, there are a couple of really important things to think about. First, as we saw as we went through 2025, and Carol mentioned in her remarks, there's a timing lag between us taking the cost out and realizing the benefits in the P&L along with volume. So as we go through the quarter, we are going to have a step down in the Amazon volume in the first quarter. We are taking actions in order to right-size the variable cost, semi-variable cost, and fixed cost, but there will be a lag in that that will hit the second quarter. So you do see pressure from three things in the first quarter. The drawdown of the Amazon volume and the timing of the cost out. The transition cost of moving Groundsaver back to the USPS will go through the first half of the year. We will see benefit come through in the second half of the year. And then as I mentioned before, this incremental MD-11 cost. That's going to put margin pressure on domestic in the first half. The way to think about it is really about a 100 basis points of pressure in the first half that will release in the second half, most of that pressure coming in the first quarter. In our international business, you have a similar dynamic, where we've got pressure from de minimis in the third quarter and fourth quarter, that's going to roll into Q1. Additionally, as I mentioned in my prepared remarks, we had a lot of pull forward in 2025, so we've got a really tough comp. That's not only going to put pressure on the margin as we saw in the fourth quarter, but also push down profit in international. We expect profit to be down about 30% in the first quarter and then recover as we go throughout the year. In the second half, we will look at a very different business. As I articulated, SMB and enterprise will be growing mid-single digits. We will be in a much more efficient cost structure. We will still be driving good mid-single digit rep per piece improvement through our pricing, and our cost per piece will normalize as we right-size the driver staffing, realize the benefits of automation, and we will be exiting at a healthy double-digit margin that will take us into 2027. David Vernon: Alright. Thanks, guys. Matthew: Thank you. Your next question is coming from Tom Wadewitz from UBS. Your line is live. Tom Wadewitz: Yeah. Good morning. Wanted to see if you could give some thoughts on just kind of like the algorithm post the glide down with Amazon. Do we think about it as for domestic package, so do we think about it as kind of low single digits revenue growth? Would that be kind of what you would aim for? And what kind of pace of margin improvement can you consider? I know obviously, macro matters, so there are a lot of things you do not necessarily know. But maybe high level how you think about that. And then I guess within that, if we look into 2026-2027, I think you've talked about maybe like $400 to $500 million of EBIT headwind in '25 from the insourcing of SurePost. So now that you're handing that back to postal, I do not know if you get that fully back and if that's kind of like half of a benefit in the second half of this year. And then you know, half of it in 2027. So just some thoughts on kind of that overall domestic pack margin and how to look at it. Thank you. Brian Dykes: Sure. Yes. Yes. Thanks, Tom. So as we think about the kind of go forward with the algorithm, as I mentioned, look, we expect to see kind of mid-single digit enterprise and SMB volume growth in the back half. Now our rev per piece will normalize because of the mix benefits that we've seen as the Amazon volume has come down. Also come down, but we've had healthy base rate increases that have been continuing. So I would think about a couple percent on the base rate. From the cost side, our cost per piece will normalize as well. Right? And we expect to see cost per piece come down below the rep per piece, so we're driving unit cost improvement. As we have, you know, prior to the Amazon Glide Down. And that will drive kind of structural long-term margin improvement as we go forward. So look, I think what we'll see in the back half of the year is we're exiting with non-Amazon revenue volume and revenue growth and margin improvement. Will be the go-forward algorithm. On the USPS cost, so the, we will be transitioning a portion of our Groundsaver delivery back to the USPS through the first half of this year. We do expect that we'll see benefit start to materialize in the second half. It will look slightly different than what we have before because, obviously, we're going back at a different rate than what we had before with the USPS, but that will translate into savings in the second half of this year and going forward. It also helps us with aligning our product strategy with how we want to think about an economy product as a holistic part of our product portfolio. Tom Wadewitz: Do you think you get back the full $400 to $500 million you gave up in '25 or maybe not? Brian Dykes: As we right-size the driver staffing levels and moving forward, then, yes, over time, I think we'll get that back. It will take time though because we've got to migrate the work back, and we have to right-size the position levels commensurate with the new delivery stop levels. Carol Tomé: I wouldn't expect to see that full benefit until 2027. Tom Wadewitz: Right. Okay. Thank you. Matthew: Thank you. Your next question is coming from Ken Hoexter from Bank of America. Your line is live. Ken Hoexter: Hey, Greg. Good morning. Threw out some costs pretty quickly there, Brian. I just want to clarify. Did you throw out the costs in the first quarter on the driver out and the postal service costs impact that margin? But my question is just on the rate increases. For both domestic and international. I think you threw out there that it was going to be low single digit for domestic. Your thought on how this should trend for core rate, both domestic and international? Brian Dykes: Yeah. So if you think about rev per piece for the year, Ken, it's about four and a half percent. Right? Rep per piece growth. But you're going to be higher than that in the first half and then normalize to about three in the second, right, as some of the mix benefit comes out. Look, in the fourth quarter, we saw a 340 basis point improvement in base rates. We've been seeing kind of around this 300 basis point improvement in base rate. I would expect that as you think about going forward. Related to the driver buyout, we didn't give a number because we have not yet launched the program. It's too early to make an estimate. Look, this is a tactical move that we used to do something similar last year in order to help us to right-size the position levels and the network infrastructure with the new volume and delivery levels. Right? Because it could include the change in the Groundsaver stops as well. We'll keep you updated with that as we go through the course of this year. Matthew: Thank you. Your next question is coming from Ari Rosa from Citigroup. Your line is live. Ari Rosa: Hi, good morning. So I wanted to dig a little bit further into the cost per piece trends. Obviously, it was elevated a bit in the fourth quarter, but you talked, Brian, about that normalizing on a go-forward basis. Maybe you could separate those things out. Just like if we think about normalized CPP run rate, how we should think about that? And then as we think about the improvement in revenue quality and the kind of shift in mix, does that assume kind of a higher cost per piece to handle that business? Or can we get that back to kind of a low single-digit run rate more in line with inflation? Thanks. Brian Dykes: Yes. So, Ari, I think as you think about the cost per piece profile, again, it's going to trend down as we go through the year. Right? It will look similar in the first quarter as it did last year, but by the time we get through the year and we transition Groundsaver, we've finalized the execution of the network reconfiguration, and our cost out. We're deploying additional automation that will go online with the network of the future. Yes, we will see the cost per piece normalize to that kind of normal inflation level. Right? And with a 3% rep per piece growth rate and a lower cost per piece, right, we'll be able to get back to that kind of, you know, 100 basis point separation that we see to drive unit cost and margin improvement as we grow. Carol Tomé: Perhaps we just comment on how we are driving this productivity. One way is through automation. We have 127 buildings that are automated. We are adding another 24 in 2026. The cost per piece in these automated buildings is 28% less than the cost per piece in our conventional buildings. So automation is one way that we will continue to drive productivity. And then we're just getting better from a capacity perspective and a production perspective. Nando, maybe you want to comment on that. Nando Cesarone: Yeah. Sure. So I think the first six months of this year will be very similar to last year. In fact, we've already started optimizing some of the closures of sorts and buildings because we didn't stop automating until December 31. We did take a day off, but we're right back at it. And just for some proof points, as we work through the month of December, the activity was up 4.4%. By activity, I mean, a lot more stops out there to serve our customers. When in fact the volume was soft and negative. That is going to flip on us. So I'm very confident that the cost per piece will be in a much better position as we align to the driver buyout proposals that we're discussing, network of the future implementations, building closures, short closures, and, of course, the outsourcing of the USPS one. Ari Rosa: Very helpful. Thank you. Matthew: Thank you. Your next question is coming from Chris Wetherbee from Wells Fargo. Your line is live. Chris Wetherbee: Hey. Thanks. Good morning, guys. Maybe if we could touch a little bit on the international segment, make sure we just sort of move through the moving pieces there. Obviously, we talked a lot about the domestic side. But just get a sense of some of the pressure there, maybe we can sort of break out some of the individual costs or de minimis pressures as we go through the first quarter specifically, but also the first half? Brian Dykes: Yeah. Thanks, Chris. So, yeah, in the international segment, what you saw in the third quarter is we did see export volume decline for the first quarter in 2025. That was really there was a lot of pressure both from Canada and Mexico as well as continued decline in our China to U.S. lanes and really, you know, all of our U.S. inbound lanes. That's going to roll over into the first quarter as well. Look, I think what we expect to see evolve in the international business is we are going to see extreme weakness in the first quarter that kind of gradually recovers. There are two dynamics going on. One is the first is volume. Right? So volume, we will lap the tariff impact in May, and start to see positive growth from that, and then we'll lap the de minimis impact in September. So the second dynamic is the trade lanes are shifting. Right? And that's driving a margin headwind. Look, we make double-digit margin on all of our U.S. inbound lanes. But the ones that are growing, right, are, I'll call it, mid-teens versus the high double-digit margins that we've got in, you know, 20, 30% margins that we have in the China to U.S. lane. So while we're seeing some offsetting volume growth, we are seeing margin pressure as a result of that. That also will abate as we go through the year. And what we expect to see is not only volume normalize but also margin improve as we go through the year. And look, I think the revenue quality actions that we're taking in international have helped to offset the volume declines in the third quarter and will continue to help drive revenue growth as we go through Q2, Q3, and Q4 of next year. Chris Wetherbee: Okay. But the EBIT decline, that's year over year sequential that you noted before? Year over year. Give me a moment. The way I would do it just simply is we were down 360 basis points in the fourth quarter. Yeah. Carol Tomé: It's going to be like that in the first. Yeah. Because nothing's changed until we actually anniversary, you know, Liberation Day and then the move of the de minimis exception. So just got some tough comparisons. But we'll manage through it and Kate's doing a really nice job of managing the network so that we can serve our customers because there is growth in parts of the world. Maybe you want to talk, Kate, about where you're seeing growth. Kathleen Gutmann: Yeah. Absolutely. We mentioned before, years ago, when we first saw the China lockdown, we invested heavily in Asia to burst diversification. And it has really unlocked growth. We're in Vietnam in a new air hub. And it's already 80% full for a five-year plan. So we've actually got double-digit growth going out of a lot of the Asian countries, but they're going to Europe and India. And so we shifted with the trade. So while we do that, you have to pull down the block hours, and we have shown that over the last couple of years that that is what we do. We are seeing good growth, and we're helping our customers to understand the shift well, whether it be by lane or by mode, package to forwarding. Or the reverse. So proud of the team. Last year with the tariff and de minimis, haven't seen anything like it in thirty-six years. And proud to say that we've delivered, for instance, in the fourth quarter to 18% margin. Chris Wetherbee: Thank you. Matthew: Your next question is coming from Jordan Alliger from Goldman Sachs. Your line is live. Jordan Alliger: Yeah. Hi. Good morning. Question for you. Can you maybe talk a little bit more about what underpins, I think you said, mid-single-digit type of package growth in the second half. Is it inventories in better shape so that we could see business to business grow again? Is there some expectation that the tax benefits or refunds, which are higher this year, will help the consumer and demand? And assuming that type of volume happens, I mean, talk about your confidence level in the revised network and headcount moving the goods. Thanks. Carol Tomé: Well, just from a macro perspective, the U.S. Small Package market appears to be stabilizing. The market excluding Amazon is projected to grow in the low single digits, so we should grow along with that. Fiscal and monetary policy changes should support this growth. Further, the outlook for manufacturing is better, if not robust. But it's better, which gives us confidence that we can grow into that space as well. And the one thing I would ask you to remember, candidly, growth is a reflection of year-over-year comparisons. And we are going to anniversary the decisions that we made to exit not just some of the Amazon volume, but also Chinese e-commerce volume. So you just naturally get some growth from a year-over-year comparison. Brian, what would you like to add? Brian Dykes: I think also, Jordan, the places where we have been investing, we are seeing wins. Right? Healthcare, even in the domestic small package business, and healthcare is a robust growth area for us. Automotive, so the air products. So we're seeing the quality volume that we've been shifting to show up in the network. Right? In the fourth quarter, we saw heavier weights. We saw longer zones. We saw the highest SMB penetration we've ever had. The highest B2B penetration we've had in four years. So the mix shift is happening, and we can see that. That enables us to lean in in the places where we've invested, we've got different capabilities, and we want to grow. And that helps support, as Carol said, growth in excess of the market. Carol Tomé: And on the differentiating capabilities, perhaps I'll just take a moment to talk about our RFID capability. As you know, we've been talking to you about RFID or our SmartPackage Smart facility initiative for a few years, and it's really starting to crystallize into three big pillars. The first is what we call smart facility, but it's really a smart car. We've enabled now all of our cars with RFID sensors. So we're moving from a scanning to a sensing network. And what this does, it will make us more productive on the car, but also improves the level of misloads. Then by using the RFID labeling, our packages become smarter, which reduces defects. But the more interesting development which drives commercial business, is what we call smart fulfillment. And what smart fulfillment is, is putting the RFID labeling at the point of origin, which gives better transparency order to cash. Something that customers are desperately seeking. Gives them better control. And so we launched the RFID fulfillment, if you will, in the fourth quarter by putting RFID labeling at the origin of all of our UPS stores. We have 5,500 UPS stores, as you know. They're processing now 1.3 million packages a day with RFID labeling, and this is allowing us to earn new commercial business. So it's not just the fact that the market is growing and we've got some easier comparison. It's we're investing in capabilities that are turning into wins. In fact, the win for domestic business in the fourth quarter and we sold during peak, the win during the fourth quarter was 25% higher than a year ago. Jordan Alliger: Thank you. Matthew: Thank you. Your next question is coming from Ravi Shanker from Morgan Stanley. Ravi Shanker: Carol, you gave us long-term targets for 2026 at your Investor Day in 2024. And obviously, a lot has happened since then. I'm sure you'll have Investor Day early next year. But in the meanwhile, how do you think we should think about that long-term earnings growth trajectory and where kind of normalized EPS is at this time kind of in your view? Carol Tomé: Well, I think it's such a fair question to ask us. But, clearly, things have changed a lot since 2024. Because back then, we hadn't planned the Amazon glide down. So what I'd ask Ravi, is that you let us get through this year, 2026 is the pivotal year for United Parcel Service, Inc. And once we get through this year, we'll come back out and give our view on long-range targets. Ravi Shanker: Understood. Thank you. Matthew: Thank you. Our next question comes from Bruce Chan from Stifel. Your line is live. Bruce Chan: Yes. Thank you, and good morning, everybody. I don't know if you've discussed it in the past, but I'm just curious if maybe you can talk about the selection process for which facilities were automated in 2025 versus what's ahead in 2026. I guess what I'm trying to get to is whether there's anything to read from the complexity of the operations that you attacked last year versus what you've got ahead this year? Nando Cesarone: Yeah. So, look. We've got and we have reviewed I think, a couple of calls ago where we look at each individual site. 1,100 checkpoints of things that we need to make sure that we are absolutely sure because once we close, we're not going back to those facilities. And then we take a very, very detailed exercise to make sure we're pointing that volume to the automation. And so what's happening is you're seeing a cascading effect of sites being closed at our legacy conventional facilities, a lot of labor required to run those facilities to a much more nimble, quicker automated, consolidated facility. And as we bring in all of those peripheral centers, we start to see the efficiencies of feeds, cube utilization, and, of course, any service disconnects can be rationalized right there in one facility. So that's also helping from a customer perspective. The next set of buildings, of course, we wanted to accelerate it. We went after the more complex bigger facilities in the middle of our project last year. They will be just as challenging, but we don't see any concerns whatsoever. In the complexity and closing these centers and making sure they map back to the automation so we can help ourselves financially. Carol Tomé: And while staying on service, and that's really so important just to not trade off productivity or cost out for service. And I'm proud that we have eight years in a row now of leading service. One other observation about how the team is performing in this regard because I'm super proud of them. Beginning of last year, we targeted 73 buildings to be closed as related to our Amazon glide down. We actually closed 93. This year, you've targeted 24 buildings. My guess is there'll be a few more closures than the 24 you've identified. Nando Cesarone: Yes. That's just the first half. We continually put all of those facilities through a process to make sure that we're not missing anything. We suspect in the range of 24 for sure, first half, that we've got another 60 or 70 worth assessing. Then we'll have a number that comes out of that. Carol Tomé: And we'll update you as we go. Bruce Chan: That's great. Very helpful. Thank you. Matthew: Thank you. Your next question is coming from Richa Harnane from Deutsche Bank. Your line is live. Richa Harnane: Hey. Thank you, everyone, and good morning. So just piggybacking off of that question, great stat on the cost per piece being 28% lower in these automated facilities than your conventional ones, Carol. But and you talked about the runway now you have for that to continue. But how does that play into maybe your ability to do more with less? So now how can we think about your CapEx plans? 2026 CapEx outlook is below 2025. That's despite replacement plans for fleet, which you spoke to. Maybe talk a little bit more about what's underpinning that. And as you adjust to maybe a smaller footprint or more efficient footprint, how should we think about the long-term CapEx outlook? Carol Tomé: Sure. I'll start and then Brian, you can jump in. You think about our network, Nando mentioned 1,100 points in the U.S. Some of those buildings are really old, with a lot of maintenance expense. And as we're closing those buildings, that maintenance expense goes away. So that's part of the year-over-year change. On the fleet additions, we're actually financing the aircraft through a Burnham lease structure that, Brian, you might want to describe. Brian Dykes: Yeah. Sure. Yeah. And Richa, yes. As Carol mentioned, yeah, we do have financing structures around the aircraft. But I think, importantly, look, if you think about the CapEx profile, our volumes continue to come down. Right? And as Carol mentioned, we've closed facilities. When we look at the asset categories, we really have pulled back. We're not buying as many vehicles, right, because we don't need them as we right-size the U.S. network. We continue to invest in our international network through both air hubs, aircraft, and vehicles. But it's bringing down our maintenance expense. It's bringing down our vehicle expense. And look, I think as we turn and we continue to grow, we'll be kind of around this three to three and a half percent of revenue as a normalized CapEx, but we're creating more efficiency. We're creating more flexibility so you don't have to spend CapEx on variable capacity like we used to. And that's going to allow us to run a more capital-efficient network going forward. Richa Harnane: Okay. Thank you. Matthew: Thank you. Your next question is coming from Jason Seidl from TD Cowen. Your line is live. Jason Seidl: Thank you, operator. Good morning, Carol, Brian, and team. I think you talked a little bit about the technology that's going to redirect parcels to the USPS versus sort of in-house. Can you maybe give us some more color on that? In terms of how much of your network is going to be equipped with that by the end of the year and sort of how we think about that helping margins over the longer term because I'm assuming that'll help with cost as well as productivity. Carol Tomé: Well, I'm happy to talk about the math a bit, but the technology part of it, I'll throw it back over to Nando. Nando Cesarone: Yes. So just on the saver portion, we will have that network up and running by the end of this month. And so it's really a matter of some of the conversions we did last year with our customers, making sure that the labels are readable by both United Parcel Service, Inc. and the USPS as we tender through the automation to the USPS for last-mile delivery. The magic algorithms are within our control, so we can expand those. In fact, the PCs, and I think we expanded those proximity stops up to 500 feet in some cases. Down to 100 feet, or an exact match to the address. It really depends on the mix of volume that's in our network. But as far as delivering the service, physically, we can move the packages. We need to enable the packages so they can be read through the network and then through the USPS to our end customer. Carol Tomé: And, Matt, you're responsible for this relationship. So is there any color you want to add in terms of volume going to this? Matthew Guffey: Yeah. No. I think just a couple of points. One is, look. We continue to ramp the volume up. This in the month of January, and it also gives us an opportunity that Brian highlighted earlier. It's really to differentiate our product portfolio because our customers are asking us, one, they want the reliability of the United Parcel Service, Inc. network. But we and the service that we can provide, we've demonstrated we can provide but they also want to make sure they have economical options. So this really gives us an opportunity to both Nando and Carol's point to one bring our customers online and get these dual labels so that we can have they can have visibility. But also giving them the right experience along the way with that economic option. Jason Seidl: And it's not just the economics. Carol Tomé: We're going into the DDU. Jason Seidl: Yeah. And that opportunity was not presented to us a year ago. Carol Tomé: So we're very excited to be able to use the DDUs because that will ensure our service levels stay high. Jason Seidl: Appreciate the color. Matthew: Thank you. Your next question is coming from Bascome Majors from Susquehanna. Your line is live. Bascome Majors: Thanks for taking my questions. If we go back to the 2023 deal with the Teamsters, you had to absorb a lot of inflation really quick, and then you had three years of fairly moderate labor inflation in the U.S. And then you know, that was scheduled to tick up in the fifth year of the contract. You talk a little bit about what the initial plan was to deal with that cadence of high labor inflation, low, and then some moderate increase in the back half. You know, how the Amazon glide down and the network reconfiguration has maybe changed that plan. And ultimately, you know, how you feel about dealing with that uptick in labor inflation in the U.S. in the second half of next year? Thank you. Carol Tomé: Well, at that time, we also were looking at the network of the future as you can recall, which was the rationalization of our network, the automation within our network, and the network has progressed quite nicely. We are ahead of where we thought we would be. You couple that with the Amazon Glide Down, and the number of employees in our workforce will staff considerably. As Brian pointed out, we're down over 40,000 people. That's going to impact the cost of any contractual increase on wage, of course. So we're managing through this, I think, very well. And, Brian, is there anything you want to add? Brian Dykes: Sure. And I think Carol hit on the right points, right? When we started out with the labor contract, we knew that we were going to be investing in order to create a lower labor-intensive network, right, with more flexibility that had the ability to scale, right, particularly for peak because we've seen peak being increasingly important. Without the need for so much labor. You're seeing that. Right? We saw it, with and without the Amazon drawdown in 2020 without in 2024, with and without in 2025. We've set up targets for incremental position eliminations that'll drive efficiency. In 2026. And so as we approach that point, we will be driving down total expense. At the same time, remember, we will have a different characteristic of revenue in the network so that the incremental cost will not turn customer ORs upside down. Right? And so we will have a less labor-intensive, more nimble, more profitable network that will minimize the impact of the increase. Matthew: And, Matthew, we have time for one more question. Matthew: Certainly. Our final question comes from Brandon Oglenski from Barclays. Your line is live. Brandon Oglenski: Carol, and thanks for taking the question here at the end. I guess, can we maybe summarize all this? Because it sounds like you guys are really protecting service even though the network's getting smaller here. Does that create any market share opportunities or challenges, especially with where pricing is going up for the industry as well? Appreciate it. Carol Tomé: Service is paramount to winning new business. It's almost table stakes. Without it, how do you win? It's not just service, though. It's capabilities. And the capabilities that we've been investing in and I talked a little bit about RFID, but a lot of other capabilities that we've been investing in that's allowing us to take share. I'll just focus us right on our digital access platform. When I joined the company, the revenue in that platform was $139 million. Fast forward to 2025, $4.1 billion. We continue to add more partners to the platform. We're growing it globally, not just in the United States. And that platform is something that small and medium-sized businesses enjoy using for delivery as they're selling through partners like eBay and Shopify and others. So we're going to continue to invest in capabilities that allow us to win new business that services paramount. Brandon Oglenski: Thank you. Matthew: I will now turn the floor back over to your host, Mr. PJ Guido. PJ Guido: Thank you, Matthew, and this concludes our call. Thank you for joining, and have a good day.
Operator: Good morning, and welcome to the General Motors Company Fourth Quarter and Full Year 2025 Conference Call. During the opening remarks, all participants will be in a listen-only mode. After the opening remarks, we will conduct a question and answer session. We are asking analysts to limit their questions to one and a brief follow-up. As a reminder, this conference call is being recorded Tuesday, 01/27/2026. I would now like to turn the conference over to Ashish Kohli, GM's Vice President of Investor Relations. Ashish Kohli: Thanks, Amanda, and good morning, everyone. We appreciate you joining us as we review GM's financial results for the fourth quarter and full year 2025. Conference call materials were issued this morning and are available on GM's Investor Relations website. We are also broadcasting this call via webcast. Joining us today are Mary Barra, GM's chair and CEO along with Paul Jacobson, GM's executive vice president and CFO. Susan Sheffield, president and CEO of GM Financial will also be joining us for the Q&A portion. On today's call, management will make forward-looking statements about our expectations. These statements are subject to risks and uncertainties that could cause our results to differ materially. These risks and uncertainties include the factors identified in our filings with the SEC. Please review the Safe Harbor statement on the first page of our presentation as the content of this call will be governed by this language. And with that, I'm delighted to turn the call over to Mary. Mary Barra: Thank you, Ashish, and good morning, everyone. I'm incredibly proud of our global team, including our dealers and suppliers for delivering an exceptional 2025. Together, we grew the business and adapted to significant changes in tax and trade policy to deliver full-year EBIT adjusted at the high end of our guidance range. We are pleased that we delivered a total return of 54% for our investors and I'd like to share some of the operating highlights that underscore our momentum. In the United States, we achieved our highest full-year market share in a decade. In fact, 2025 was our fourth consecutive year of market share growth and we continue to deliver with low inventory, low incentives, and strong pricing. Once again, GM led the industry in full-size pickups and full-size SUVs, and we had our best year ever in crossovers driven by vehicles like the redesigned Chevrolet Equinox and Traverse. We have also been very successful with smaller profitable crossovers like the Chevrolet Trax in Buick and Vista. Because we provide tremendous value, with great styling, technology, and a suite of safety features at some of the lowest prices in the market. We're very proud that Car and Driver named Chevrolet Trax to its 10 Best list for the third year in a row joining the Chevrolet Corvette Cadillac CT5 V Blackwing, and our full-size SUVs. Not only that, but the Cadillac Escalade IQ won Motor Trend's prestigious SUV and Technology of the Year awards. Lastly, the vehicle and technology solutions that GM Involve delivers to our commercial, government, and rental customers helped us lead the US fleet segment for the second consecutive year. We demonstrated another true core competency throughout the year, our agility and speed in adapting to change. We proactively managed our net tariff exposure reducing it well below our initial expectations. Thanks to self-help initiatives and policy actions that support companies like GM that have substantial and growing commitments to American manufacturing. We were also quick to respond to slowing EV demand by selling our share in the Altium Cells Lansing plant and pivoting or in assembly from EV to ICE production. Our compelling vehicle and technology portfolio, a resilient US market, and the steps we have taken to strengthen our position should help make 2026 an even better year for GM. The charges we took in the second half of the year to reduce EV capacity will reduce our fixed costs and resolve the majority of our commercial claims tied to lower volume. In addition, our warranty expense is moving in the right direction and our EV losses will be lower. As a result, we expect full-year EBIT adjusted margins in North America will be back in the 8% to 10% margin range. We are also operating in a US regulatory and policy environment that is increasingly aligned with customer demand. This allows us to onshore more production to help meet strong demand for our ICE vehicles. We continue to believe in EVs, and our portfolio brought almost 100,000 new customers to GM last year. We know EV drivers don't often go back to ICE, so we'll continue executing our plan to dramatically reduce costs and to be well-positioned for the future. This will require continued investment but at much lower levels, and I'm confident in our path to profitability. Our strong foundation and operating discipline are why our average annual free cash flow generation has structurally improved from $3 billion to $10 billion over the last five years. Consistently strong cash generation has allowed us to execute all phases of our capital allocation program, from investing in the business and our people to maintaining a strong balance sheet and returning capital to shareholders. We believe that formula is sustainable, which is why we are increasing our quarterly dividend rate by 20% and planning future share repurchases. The growth of OnStar services and Super Cruise further underscores our confidence. In 2025, OnStar had a record 12 million subscribers, including more than 120,000 Super Cruise subscribers, achieving nearly 80% year-over-year growth. OnStarFleet subscriptions hit 2 million, which is two times any other competitor. This year, we will continue to grow our Super Cruise business in North America and expand into South Korea, the Middle East, and Europe. We expect our deferred revenue from software and services to be approximately $7.5 billion by the end of this year up nearly 40% from 2025. We are also confident in the turnaround of our China business, and our growing new energy vehicle portfolio. They are now about 50% of sales in China and profitable across all price points. As we look further ahead, our annual production in the US is expected to rise to an industry-leading 2 million units after we begin production of the Chevrolet Equinox in Kansas, bring the Chevrolet Blazer to Tennessee, and add incremental capacity for the Cadillac Escalade and launch our next-generation full-size pickups at Orient Assembly in Michigan. We are also launching our sixth-generation small block V8 and the engineering teams are leveraging world-class virtual tools to deliver better fuel efficiency and power for our customers and faster development times. We reached our performance and emission goals at a third of the time versus the prior program by conducting thousands of combustion chamber simulations while we reduce prototyping for a 20% savings in material and tooling costs. AI machine learning and robotics are also driving safety, quality, and speed in our manufacturing plants so we can get great products and technologies into the hands of customers faster. For example, a cross-functional team developed a predictive weld quality model that has enabled us to deliver even more consistent welds and tighter control. Directly improving cost and quality. We are also deploying robotic systems alongside humans to make their jobs safer and easier to perform. For example, a robot can pick up an exhaust system and position it so a single operator can complete the installation without strain. Our robotics and AI work will converge at 2,500 robot and cobots controlled by GM Design Software. Then in 2028, we expect to launch our breakthrough LMR battery chemistry. LMR will help us reduce cell and pack costs by several thousand dollars. Also in 2028, we expect to launch our second-generation software-defined vehicle architecture for ICE vehicles and EVs. It will unite every major system from propulsion to infotainment and safety. On a single high-speed compute core. The performance upgrade includes 10 times more OTA capacity and a thousand times more bandwidth, allowing our vehicles to get better smarter, and deliver more value to our customers over time. It's also an enabler for our eyes-off, hands-off driving technology. This technology and our new software architecture will both launch on the Cadillac Escalade I in 2028. With our Super Cruise experience, the expertise we brought in-house from Cruise, and our learnings from millions of miles of fully autonomous driving, we believe we have everything we need to deliver a safe, reliable, and highly capable system that customers will embrace. Safety is key to building trust in new technologies. As we've demonstrated with Super Cruise. For our Eyes Off solution, we are building in redundancy with LIDAR, radar, and cameras and we will begin on highways. Finally, I want to mention that we are hosting our call today from our new global headquarters in Hudson's Detroit. This beautiful space is designed for the collaborative and tech-enabled way people work today while also saving us tens of millions of dollars annually. It's the latest example of our commitment to operate as efficiently and as profitably as we can. Thank you, and now I'll turn the call over to Paul. Paul Jacobson: Thank you, Mary, and welcome, everyone. Over the past several years, we've been on an incredible journey. In the face of a rapidly evolving industry and significant macro challenges, the resilience and adaptability of the GM team have been truly exceptional. These strengths have translated into consistently strong financial performance, including $12.7 billion of EBIT adjusted and $10.6 billion of adjusted automotive free cash flow in 2025. Resulting in a year-end cash balance of $21.7 billion. As Mary noted, our product portfolio keeps getting better. Driving market share gains of 60 basis points in 2025 while we maintain some of the lowest incentives in the entire industry. This disciplined approach has been a key contributor to nearly $25 billion of free cash flow generation over the past two years. This robust cash generation enables us to execute confidently across all pillars of our capital allocation framework. Over the last two years, we've invested more than $20 billion in capital projects to support growth in our core business and advance our strategic priorities. Looking ahead to 2026 and 2027, we expect to invest 10 to $12 billion annually including approximately $5 billion to expand US manufacturing capacity for some of the highest demand vehicles and further reduce our tariff exposure. We're also proactively strengthening our balance sheet by thoughtfully managing debt maturities. In 2025, we retired $1.8 billion of debt further enhancing our financial flexibility and reinforcing our long-term resilience. Returning capital to shareholders remains a cornerstone of our capital strategy. In the fourth quarter, we executed $2.5 billion in open market share repurchases, retiring another 33 million shares and bringing total buybacks for the year to $6 billion. In 2025, we also distributed more than $500 million in dividends. Since announcing our accelerated share repurchase program in November 2023, we have returned $23 billion to shareholders through share repurchases. These actions have reduced our outstanding share count by more than 465 million shares or nearly 35%. Leaving approximately 930 million diluted shares at year-end 2025. Our strong execution and consistent capital returns have delivered substantial shareholder value with our stock price appreciating more than 170% since late November 2023. This performance reinforces our conviction that repurchasing GM stock at current valuation levels, which are back to historical norms but remain well below our peers. Represents one of the most compelling opportunities to continue to generate long-term shareholder value. Yesterday, our board approved a new share repurchase authorization of $6 billion and a 20% increase in our dividend to 18¢ per share. Reflecting its confidence in our ability to generate strong future cash flows and underscoring our ongoing commitment to returning capital to shareholders. Now let's turn to our fourth-quarter results. Total company revenue was $45 billion down approximately 5% year over year, primarily due to our disciplined approach to production and dealer inventory, including aligning EV production to demand. We also face production constraints on the Chevrolet Trax and a year-over-year headwind from strategic decisions to end production of the Chevrolet Malibu and Cadillac XT4. The lower volume was partially offset by strong pricing across our 2026 model year lineup. EBIT adjusted was $2.8 billion and EPS diluted adjusted was $2.51. Both increasing year over year despite the impact of tariffs. We incurred incremental costs for alternate chip sourcing related to Nexperia totaling $100 million in Q4 and we anticipate another $100 million of pressure in Q1 2026. Hats off to our supply chain team as they did a great job finding all alternatives to ensure we had no production disruptions. Adjusted automotive free cash flow was $2.8 billion driven by higher EBIT adjusted performance and favorable cash timing. I want to take a moment to address tariff costs for the quarter and for the full year as well as the charges we have taken related to EVs. Through the third quarter, we incurred $2.4 billion in gross tariff costs. In the fourth quarter, we incurred another $700 million bringing the total for the year to $3.1 billion which was below our predicted range of 3.5 to $4.5 billion. When we provided updated guidance in October, we were tracking towards the low end of this range but took a conservative approach given the dynamic trade and tariff environment. We were able to do even better based on strong execution and favorable policy developments during the quarter, including the benefit from a lower tariff rate for Korea. For the full year, we were able to offset more than 40% of these gross tariff costs through a combination of go-to-market actions footprint adjustments, and cost reduction initiatives. Turning now to our EV charges. During the third and fourth quarters, we reassessed our EV capacity and manufacturing footprint to better align with softer than expected consumer demand particularly in light of recent US government policy changes including the termination of certain consumer tax incentives. As a result, in the third quarter, we recorded charges totaling $1.6 billion including $1.2 billion of noncash impairment charges primarily related to transitioning our Orient assembly from EV to ICE production. The remaining $400 million consisted of cash charges associated with contractual cancellations and supplier settlements. In the fourth quarter, we recorded an additional billion dollars of charges. This included $1.8 billion of noncash impairments largely driven by our decision to discontinue production of the BrightDrop electric van and to impair certain EV-related assets. The remaining $4.2 billion was primarily related to contract cancellations and supplier settlements, which will impact future cash flows. The aggregate Q3 and Q4 charges totaled $7.6 billion of which $4.6 billion is expected to be settled in cash. In 2025, we made approximately $400 million in cash payments and expect to pay the majority of the remaining balance in 2026. Moving forward, we expect material but significantly smaller cash and noncash EV-related charges as we continue commercial negotiations with our supply base and address proposed regulatory changes to greenhouse gas emission standards. Any greenhouse gas-related charges would be noncash. It is important to note that besides BrightDrop, we have not impaired our existing retail portfolio of EVs. We are working to improve the profitability of these vehicles through new battery technologies, engineering improvements, and operational efficiencies. Along with a more rational EV market. As consumer adoption of EVs increases, albeit at a slower pace than previously anticipated, we expect to achieve the necessary scale to deliver EVs profitably over time. Now let's move to the fourth-quarter regional results. North America delivered EBIT adjusted of $2.2 billion and margins 6.1%. We ended the year with forty-eight days of dealer inventory, which is slightly below our fifty to sixty-day year-end target. This positions us well for 2026, allowing us to balance production to various demand levels. We are seeing positive trends in our warranty performance with monthly cash flows continuing to be stable. GM International, excluding China equity income, delivered EBIT adjusted of $200 million driven by strong execution in South America and the Middle East. Along with China equity income of $100 million excluding the restructuring charge. We recorded a $600 million item in our auto China equity income, primarily connected to prior restructuring actions. It's important to note that these charges are not expected to require any capital from GM as the joint venture has sufficient cash to cover these costs. I want to commend our China team for executing a disciplined multiyear plan to rightsize capacity, accelerate electrification, and revitalize our operations. These collective efforts have been instrumental in achieving significant milestones including new energy vehicle sales reaching nearly 1 million units in 2025, representing more than half of the total sales in China. GM Financial also had another strong year of profitability and capital returns to GM. Fourth-quarter EBT adjusted was down slightly year over year at $600 million. Lower lease termination gains were partially offset by higher retail yields and lower provision expense. GM Financial's full-year EBT adjusted was $2.8 billion within their guidance of 2.5 to $3 billion, and they paid dividends of $1.5 billion to GM. Last week, GM Financial received approval for their industrial bank application. Once launched, this bank will enable them to accept deposits providing another source of stable and diversified funding. Over time, we also expect this to lower the cost of funds and enhance their ability to offer more competitive auto loans to customers. I want to personally thank Susan and the entire GMF team for their persistence throughout this process. Now let's turn to our 2026 guidance. Where we expect EBIT adjusted of $13 billion to $15 billion EPS diluted adjusted of $11 to $13 per share, and adjusted automotive free cash flow of 9 to $11 billion. Starting with tariffs. We anticipate gross tariff costs in the $3 billion to $4 billion range, slightly higher than 2025 due to an additional quarter of tariff exposure, partially offset by the reduced Korea tariff and expanded MSRP offset program. For Q1, we expect the gross tariff impact to be in the 750 to $1 billion range, which is well below the Quarterly impact in Q2 and Q3 at 2025 but more than Q4. The higher quarterly run rate in 2026 versus Q4 twenty-five is largely driven by the timing of tariff costs, which can be lumpy particularly as it relates to the supply chain. The team did a great job offsetting over 40% of our gross tariff costs in 2025 through go-to-market strategies, footprint changes, and cost efficiencies. As we look ahead to 2026, we expect these cost savings to be sustained and believe there are additional actions that can help mitigate our tariff impact. For the industry, we expect total US SAR to be in the low 16 million unit range for the year. We expect North America ICE wholesale volumes to be flat to up modestly. ICE volumes this year are constrained due to portfolio shifts. Including the ending of the Cadillac XT6, and some expected downtime ahead of the new Chevrolet Silverado and GMC Sierra launches. We anticipate a benefit of one to $1.5 billion related to the actions we've taken to rightsize our EV capacity. The benefits from both EV-related charges and substantially lower EV wholesale volumes will positively impact both mix and cost. We also expect that the temporary downtime at our Altium Cells joint venture will result in lower production tax credits, but this impact should be largely offset by positive inventory adjustments from lower cell inventory levels. Lower production tax credits in 2026 should then represent a tailwind in 2027 as we resume normalized production. We expect North America pricing to be flat to up 0.5% as we realize the full-year benefit of model year 2026 price increases. While this includes a placeholder for potentially higher incentives due to the competitive environment, we are confident in our ability to maintain pricing discipline. While some uncertainties remain in the regulatory environment, we are anticipating a benefit in the range of 500 to $750 million primarily related to savings from no longer having to purchase compliance credits. In addition, we are seeing positive trends in warranty costs, which are expected to deliver a $1 billion benefit versus 2025. We expect an increase of around $400 million of high-margin revenue generated from the expansion of OnStar software and services including Super Cruise. This growth is expected to help increase deferred revenue from $5.4 billion at the 2025 to approximately 7 and a half billion dollars by the '26. Further strengthening our future margin profile and long-term growth trajectory. We expect headwinds in the range of one to 1 and a half billion dollars associated with the onshoring of vehicle production to the US investments to enhance supply chain resiliency, and investments to support our software initiatives. While these initiatives create near-term pressure, they will increase the capacity of our highly profitable full-size pickups and SUVs as well as to help further mitigate tariff costs beginning in 2027. We also expect incremental headwinds in the range of 1 to 1 and a half billion dollars driven primarily by recent trends in aluminum, copper, and other key commodities as well as higher DRAM costs and unfavorable foreign exchange movements. Turning to our regions, we expect both China and our international operations outside of China to be profitable and deliver results largely consistent with 2025. GM Financial is once again expected to deliver EBT adjusted in the 2.5 to $3 billion range, reflecting a stable credit environment. Importantly, as Mary noted, we believe we have a clear and achievable path back to eight to 10% North America margins in 2026. The midpoint of our EBIT adjusted guidance supports this outcome and we are confident in our ability to deliver this goal ahead of investor expectations. We are accelerating innovation and investing in advanced mobility, manufacturing technologies, and robotics to chart the future. This includes expanding Super Cruise to bring hands-free driving to more vehicles and scaling high-value digital services through OnStar. Further strengthening our competitive advantage and enhancing the customer experience. In summary, we enter this year with strong momentum, a resilient balance sheet, and the operational flexibility to deliver on our commitments. We remain focused on investing in long-term profitable growth while retaining the agility needed to navigate a dynamic macro and regulatory landscape, positioning GM for sustained success not only in 2026, but well beyond. Thank you. And with that, we'll move to the Q&A portion of the call. Operator: Thank you. As a reminder to analysts, we are asking that you limit your questions to one in a brief follow-up so that we may get to everyone on the call. To withdraw your question, press star then 2. Our first question will come from the line of Dan Levy with Barclays. Your line is open. Dan Levy: Hi, good morning. Thanks for taking the questions. Wondering if you could first just address the assumption on pricing. And specifically, I think we know that we are in an environment where, arguably, it's a demand-constrained environment. There's one of your competitors that is keen on gaining some share. You're coming off of a let's say, tougher comp on the pricing side. I think you did just under $1 billion in positive pricing last year. So can you just unpack the assumption for pricing to be flat to up? How much of that is just the benefit of ICE or some other dynamics in play? Paul Jacobson: Hey. Good morning, Dan. Thanks for the question. What I would say is going into this year, we're not modeling any increase this is really just the annualization of what we did in twenty-five. Coming through, primarily for model year '26. So, you know, we're obviously gonna take it one day, one week, one month at a time as we go through and watch where we are. But, we're not putting projections out there as if we've got a lot of price increases to go through. We're cognizant of what the environment is out there, but we're also confident with our vehicles and with the new truck launches later this year. Feel like, we can continue to drive the momentum commercially that we have in the past with no significant change. Dan Levy: Great. Thank you. As a second question, I wanted to just ask about the dynamics of your product portfolio. And within that, first, maybe you could just address the fixed cost base that you have. You still have all of your EV programs intact. You still have much of the battery capacity intact. This was set for a higher volume outlook you know, to what extent does this portfolio align with what's gonna likely be higher near-term ICE mix? And then maybe you could just address the potential to add hybrids into the portfolio. Just how much more do we have to see the portfolio and the fixed cost base shift to adjust to this new reality that we have. Mary Barra: Well, you know, I'll start, and then I'll turn it over to Paul for some of the financial piece of it. But we think we have the right portfolio. We have an incredibly strong internal combustion engine portfolio, as Paul mentioned, the new trucks coming out. And unlike many others, we did we invested in having a dedicated EV platform that gives us a foundation for the portfolio we have. As we've said, the investments we're making now in EVs will be very much focused on cost reduction like LMR. We also have teams on each of our EVs continue to take cost out beyond the battery. And then, know we have announced in the past that we will have some hybrids in key segments. So I think we're gonna have the right portfolio. And we also are focused on the endgame. You know, we know once, somebody drives an EV, they rarely go back to internal combustion engine. And we also you know, a big enabler of EV adoption is gonna be charging. And last year, the charger, level two chargers increased by 25%. So EV adoption is gonna grow over time. We think we're well-positioned there. So we were very, I think, thoughtful about the way that we adjusted capacity in light of a very dramatic change in the regulatory environment as well as the, eliminating the consumer tax credit. Paul Jacobson: Yeah. Just to add to that, Dan, I think, you know, as we went through the restructuring, we were mindful of, you know, where is the excess capacity that we know we're not gonna need, for a long time. Because we had built up for a very different regulatory environment Mary had said. But we're also cognizant of making sure that we preserve capacity to be able to pivot and rotate where we need to to get the cost savings. So particularly as it relates to battery capacity, you know, we've got enough to be able to transition to LMR and to LFP as those projects get underway over the next couple of years. So it really was trying to look at, you know, what is the right short-term decision, but also how do we balance that against long-term and where we know it's gonna go or we believe it's gonna go in the future. And as far as, you know, vehicle programs, remember, with the product cycle that the industry has, some of these decisions were made years ago. And we have to do our best to be able to pivot to where demand is gonna be. And I think if you look at this management team, and what it's accomplished over the last several years in the midst of a lot of uncertainty, I think, I think we've got what it takes to be able to respond and meet the consumer where they are as they continue to evolve. Dan Levy: Great. Thank you. Thank you. Operator: Our next question comes from Michael Ward with Citigroup. Your line is open. Michael Ward: Thanks very much. Good morning, everyone. Two things. First, on the inventory. You see the impact on the pricing. Is that inventory discipline is that going to continue? And are the implications for cash flow? Is that one of the ingredients that's adding up to the stronger than expected cash generation? Paul Jacobson: Hey, good morning, Mike. Thanks for the question. So on the inventory side, I think the commercial team and the production team have both done a really good job of coordinating the last few years to keep us within that targeted range of 50 to 60. We had a really strong December, month, which is why we ended the year at forty-eight days of inventory. So, you know, I think we're gonna continue to balance that where it is. I don't think there's a big buildup contemplated. In fact, you know, with the transition to the new truck we'll lose some production as well. But overall, I think it's that discipline that has really helped us to drive much much more consistency in our cash generation going forward. So we're not banking on any significant inventory builds, although it is an opportunity, to get back into that fifty to sixty-day range. Michael Ward: And then on the this announcement by the industrial bank, and I think FDIC approval the other day, that seems like a bigger deal than it just on the outset as it relates to the cost of capital for GM Financial. How much can you save from just a cost standpoint of capital? Paul Jacobson: Yeah. I'll start, and then I'll let Susan chime in as well. But you know, this is really a great achievement and one that, you know, candidly probably should have been approved, a few years ago as we went through that. But, you know, the perseverance of the team to get that through provides yet another opportunity to drive capital in an efficient way for us. It'll take some time, but, Susan, I'll let you comment on anything you wanna add. Susan Sheffield: Yeah. Thanks, Paul, and thanks for the question. I'm very excited to have the conditional approval and get the industrial bank up and running. And as Paul said, this is going to be complementary to our funding platform, and it will allow us to offer depository products and another source of funding to help us bring down the cost of funds somewhat. They are high-yield savings accounts and broker deposits. So as it gets up and running, again, complementary to our footprint, not gonna replace how we fund the business but we'll be complementary to it and allow us to bring down the cost of funds in the basis points over time and on our debt complex, you know, that's a meaningful move. Michael Ward: Meaningful. Like, 100 basis points? Is that the type of meaningful move you're talking about? Susan Sheffield: Probably not that much. It just depends on the rate environment. But it's gonna help us be more competitive. Michael Ward: Thank you very much. Operator: Thank you. Our next question comes from Joe Spak with UBS. Your line is open. Joe Spak: Thank you. Good morning, everyone. First, just, I guess, bigger picture, Mary, I wanted to go back to some of your comments on portfolio and you mentioned hybrids. I mean that's a pretty broad term nowadays with you know, traditional plug-ins and eREV. So I was wondering if you could maybe shed a little bit more light on how you're seeing that portfolio evolving. And then is that considered in the 10 to $12 billion CapEx you've guided for the next couple of years? And I guess most importantly, you know, yes, Powertrain, I think, is going to be part of the consumer decision. But you know, the features in the car seem are seemingly becoming more important than your sort of highlighting that with some of the Super Cruise and other software. So will all these vehicles be able to use that next-gen architecture showed that I think is supposed to launch in '28? Mary Barra: Sure. Joe, a lot packed into that question, but first of all, any products that I've talked about are comprehended in the 10 to $12 billion capital. So, yes. As Steve our next-generation software-defined platform and Cruise will be available across both ICE and EV platforms. And, from a hybrid perspective, again, we're looking at where are the segments that there's the most demand for hybrids that are important from our total portfolio. So I'm not going to give you any specifics other than you know, we're looking at a segment by segment for what we feel that we need to have to make sure we compete. And I'll just reiterate that we're, you know, in the last four years, even as others have brought on hybrids, we're still growing share. And, that, I think, just indicates that we have the right product portfolio. So, and lastly, I just want to comment. You're absolutely right. You know, the propulsion system of the vehicle is one distinguisher, but people are looking for their vehicle to do more. And that's why I think we also are going to be distinguishing ourselves as a full-line OEM that's been around for a while, able to have a very modern electrical architecture, that will then be the foundation for offering more services, you know, AI assistance as well as continuing to grow Super Cruise and into our eyes-off, hands-off, that we've announced for 2028. So I feel very confident that is gonna be another area where GM distinguishes itself from others. With what we have planned and what we'll be rolling out. And the team is excited and is on track. Joe Spak: Thanks. And then, Paul, I just wondered if we could unpack $1 to $1.5 billion in onshoring software expense? And is there any way we should think about split between that? Because and please correct me if I'm wrong in thinking about this, but I imagine the software expense portion of that is ongoing and may even grow over time in line with what we just talked about. The cost really in the start-up, the onshoring, would think of as more as temporary, and maybe there's some relief as we think beyond '26. Is that right? Paul Jacobson: Yeah. Thanks, Joe. I would probably put him about 50/50, as we're thinking about it going forward. Obviously, the ramp-up costs of the onshoring will be offset as they go into production into the future. So there's a little bit of an offset there. And then, you know, certainly on the software side, we're continuing to invest in those technologists and those programmers to be able to get where we need to go on SDV 2.0 and, on autonomy and ultimately Super Cruise enhancements. Going forward. So, I'd split them about fifty-fifty. It'll vary over time, but that's why we're thinking about it. Joe Spak: Thank you. Operator: Thank you. Our next question comes from Andrew Percoco with Morgan Stanley. Your line is open. Andrew Percoco: Great. Thanks so much. Good morning, everyone. Thanks for taking the question. I want to start on the tariff disclosure, the $3 to $4 billion gross tariff cost for 2026. It sounds like you're assuming the lower South Korea tariff in that assumption. Can you maybe just talk to I know it's obviously overnight some headlines that it might be going back to 25%. What would that mean for you? And then maybe just remind us what you're doing in terms of tariff mitigation for 2026. I think you talked about 35% offset for 2025. Wondering if that's a similar range for 2026 and maybe what some of the moving pieces are to get you there. Mary Barra: Well, I'll start and then turn it over to Paul for some of the specifics. But, you know, we are encouraging and hopeful that the countries will get the regulatory approvals, or, legal approvals in their country to put into place the deal that was actually, negotiated and agreed to in October. As Paul indicated in our guidance, it is we assume 15%. And if there are, you know, if there's a period of time where it's not 15%, that's gonna be something, a headwind that we'll work to offset. If you wanna get into some of the specifics. Paul Jacobson: Yeah. So, thanks for the question, Andrew. You know, the offset the self-help, provisions just as a reminder, you know, we talked about go-to-market. We talked about manufacturing foot changes, and we talked about fixed cost reductions. Obviously, you know, per Joe's question that we just, we just went through, there's some fixed cost pressure that's new, with the manufacturing, additions that we'll take on in '26, that'll obviously lead to significant offsets in 2027 as we begin to onshore production. But in '26, it's really a lot of the annualization of what we've done. So know, with the, with the go-to-market and then the fixed cost reductions, we'll get an annualization benefit in '26. So we should end up at a position where our net tariffs are actually lower in '26 than they were in 2025. So that equates to you know, slightly more than the 40% offset just from that annualization. Andrew Percoco: Got it. Okay. That's super helpful. And then maybe just coming back to Super Cruise, you mentioned expanding that into some international markets. Can you just remind us what maybe what regulatory approvals are needed to do that? And also, from a functionality standpoint, can you maybe just give us a roadmap for what improvements consumers might expect to see going forward, whether that be point to point? Just kind of wondering the progression of that looks like over the next few years before you get to full eyes-off, hands-off L3 with that next-gen NextGen platform. Thank you. Mary Barra: Andrew, we can't get you the specific. We have a roadmap that we're working to where we continue to expand and add more features that we haven't announced yet, so stay tuned on that. And as to the regulatory specifics, I think, I don't have them top of mind, but I know the team is working and the rollout is as planned. And I don't think there's any barriers for stopping the global expansion that we have of Super Cruise. Andrew Percoco: Great. Thank you. Operator: Thank you. Our next question comes from James Picariello with BNB Paribas. Your line is open. James Picariello: Hi, everybody. Just have a First, on the GM North America margin range of eight to 10%. I mean that clearly embeds a pretty sizable step up, and you have the $14 billion midpoint guide for the total company. Just want to address the moving pieces there as to how we get to that range yet still only have total company at the $14 billion I guess what my model is currently saying is if I get to eight to 10% for Geo North America, even at the low end, would imply you know, higher overall than a EBIT. So any clarity there would be great. Thank you. Paul Jacobson: Yeah. Thanks, James. Excuse me. Sorry. We're incredibly proud of the work that the North America team is doing to continue to drive back to that eight to 10% margin. Many of the tailwinds that we mentioned in the prepared remarks about improved EV profitability, improved warranty expense, regulatory costs, all benefit North America. So, you know, it's a journey that I think is ahead of where investors were. And, you know, we worked hard to make sure that we can deliver that in 2026. And I think our guidance reflects the confidence that we'll be able to do that. Know, obviously, a lot of things going on in the world internationally and, with the work that the China team has done that kinda disrupts a little bit of the balance that we've seen historically. But overall, we think it's a good start to the year, in terms of laying out these expectations, and we're set to go get them. James Picariello: Yep. Understood. And then just my follow-up is on GM's memory chip supply and just an understanding of it, you know, how much of this year's supply is already locked in? And is pricing also predominantly locked in for the year? Thank you. Mary Barra: Well, we shared that between commodities, DRAM, and FX, you know, we see a headwind of $1 to $1.5 billion. We're not breaking that out specifically. I would say the team is actively working you know, from a membership perspective. And as of now, we don't see any issues that are going to impact our ability to produce. I think you've seen us over the last couple of years, even going back to the semiconductor shortage to see how the team works and gets ahead of these. And so that's obviously ongoing work the team is doing. But as of now, we don't see anything that's gonna create an issue for us there. James Picariello: Thanks. Operator: Thank you. Our next question comes from Ittai McKelley with TD Cowen. Your line is open. Ittai McKelley: Great. Thank you. Good morning, everyone. Just first, a question on the full-size pickup launch this year. I'm curious kind of what's embedded into the guide at a high level. I know Paul, you mentioned some downtime. Don't know if you're able to clarify that or quantify that. And should we think about some of volume price mix impacts more later this year or more of a 2027 impact? Paul Jacobson: Yes. Thanks, Itay. Obviously, we're really excited about new trucks that are coming online. You know, we'll obviously have to take some downtime as we retool, for that. Some of that we'll be able to build ahead a little, to offset, but you will see that impacted in our volumes this year, overall. On the pricing, I would say it's largely gonna be a 2027 tailwind, I think, going forward. And you know, the one thing, I've shared this with a number of investors that you know, the historical norm of a giant pop in, in price, for a model year really doesn't hold in this environment where pricing has held up. On the later years of the model run going forward. So, obviously, in the low inventory, low incentive world that we've seen, we haven't seen the typical pricing heuristic where we see a lot of pricing erosion, at the end of a production run. So we're not expecting to see a giant pop in prices, but, you know, this is an opportunity to deliver more value, and we're confident that when the new, when the new trucks come out, we're gonna continue to drive the type of share momentum and pricing discipline that we've seen over the past several years. Ittai McKelley: Perfect. That's very helpful. And a quick follow-up. I was hoping you can check kind of at a high level what you're assuming the declines in EV volume this year, how much of that could translate to incremental ICE demand for GM? And kind of how does that affect your inventory and kind of wholesale volume planning throughout the year? Mary Barra: Well, it is a great question. I don't think anyone really knows what the steady-state EV demand will be in this new environment. We're still seeing, we saw a fairly pull ahead before the consumer credit went away. And so we're looking at other, geographic, geographies that had EV incentives and then took it away. It literally was six months before we really started to understand what steady state would be. Having said that, you know, we're looking across all aspects of where we can have additional volume power to answer the fact that we ended the year with a lower inventory below the fifty to sixty days. So gonna continue to look at where the opportunities to get more, with the full-size truck downtime, we're pretty tight. But, the usually does a great job of pulling out, more production when it's needed. It's as an old manufacturing person, those are the challenges that you love to have. So, again, we're gonna see where the EV market is, and then we're gonna maximize as much we can from an internal combustion engine perspective. Ittai McKelley: That's very helpful. Appreciate that. Thank you. Operator: Thank you. Our next question comes from Colin Langan with Wells Fargo. Your line is open. Colin Langan: Great. Thanks for taking my questions. If I look at the quantified puts and takes in the guidance, they kinda net out. So what is actually driving the expected increase? There's a slight increase in pricing. And then is the rest volume? Because I thought your commentary said ICE volume flat to slightly up. So what is the gap to kinda drive numbers up year over year? Paul Jacobson: Yes. So good morning, Colin. Thanks for the question. So we try to do a good job of laying out sort of the key headwinds and tailwinds. But, when we lay all of that out together, we actually see some upside coming through on that. Some of it'll be in our ability to lower our net tariff exposure. Some of it will be on the regulatory side, that we expect coming in. As well. And then some of it is, you know, gonna be continued work on driving EV profitability improvement. So we laid out what we see on some of the fixed cost relief. But as you know, we struggled this year with sort of step down after step down after step down in EV costs. That, you know, at the end of the day, result in a lot of supplier claims that we've tried to sort of all bring together in the onetime step down. So when you look at it across the board, all of those results in what we believe is gonna be a pretty strong year-over-year improvement as we've highlighted. Colin Langan: So is that a cost improvement that you're implying that outside of what's listed in the slide? Paul Jacobson: I mean, ultimately, when you look at listings in the slide and what we've highlighted, it really comes down to a margin. Improvement on the vehicles, going forward because we absorbed so much cost in, in twenty-five. Between that warranty, all the tailwinds that we highlighted. Colin Langan: Got it. Okay. And then you know, why you assume last year the guidance of pricing down one to 1.5%. Why that optimism this year? Seemed like a little bit more conservative last year. Ended up being a lot better. Paul Jacobson: Well, you know, I think last year, as we were looking through the uncertainty that we saw, across the board. We didn't want to make any statements. Then, obviously, as we saw the year progress, we took that guide up and you know, this year, what we've assumed, as per the question from Dan, at the beginning of the call, was we haven't assumed any pricing increase at all. This is just, we put in the model year '26 late in 2025. This is the annualization of that. So we were assuming that that holds, but we're not counting on any additional pricing, coming through. So I wouldn't say that it is an aggressive assumption. It just, it's more of a function of kind of where we see the landscape today. Colin Langan: Got it. Alright. Thanks for taking my question. Operator: Absolutely. Thanks. Thank you. Our next question comes from Emmanuel Rosner with Wolfe Research. Your line is open. Emmanuel Rosner: Great. Thank you. Can you talk a little bit about how you're thinking about the mixed benefits implied or assumed in this year's outlook? I know some of it is reflected in these lower EV losses that you quantified at one to one and a half. Is there another potential mix benefit from optimizing ICE mix in light of the emissions deregulation or from rebuilding inventories, which were, you know, at a very lean level at the 2025? Paul Jacobson: Yeah. Good morning, Emmanuel. The mix benefits as you highlighted, you know, we certainly are expecting, you know, EVs to probably be down for the full year given the cessation of the consumer tax credit. Going forward. You know, the volumes are somewhat hampered by the transition to the new truck platform. So I'm not sure that there's a huge volume push, that we're banking on, but, obviously, we'll take every opportunity we can. Now, you know, without, perhaps being obvious, the weather that we've seen recently has obviously impacted production likely for everybody given the width and the breadth of the storm, going forward. So you know, we've got, I think, some makeup work that we've gotta do going forward, but we're confident that the team will be able to do that. I'm glad that everybody has stayed safe through our plans. Emmanuel Rosner: And then it was hoping to ask you about the warranty cost benefit of a billion dollars for this year. You just remind us the dynamics and then drivers of this? Obviously, you had know, pretty large warranty costs in 2025. But then I think, you know, recently, there was a reopening of the investigation into some of these V8 engines. So how much of it has already been essentially provisioned for? And what drive really, the confidence in this year's benefit? Paul Jacobson: Yeah. So, all of this starts, Emmanuel, with what we see on the monthly cash and where we see the exposure. It's obviously a very complex set of calculations and analyses going forward across the vehicle universe, but it really begins with cash. And, we've seen that flattening, which is the first thing that needs to happen before you can ultimately come back down the curve on accruals because of the lagging effect, there. But when you look at the L87 and the V8 engines, we've seen really good progress with the fixes that the team has put out there with the oil change and some of the testing that we can do with dealerships. So, we believe that, that will mitigate and hopefully ultimately bring that down or so certainly not lead to any more increases going forward. So, you know, the team is hard at work across looking at every detailed cause of the warranty accrual. It's not just the big ones, but it's the small ones. We're looking at inflationary pressures that we've seen at the dealerships. And making sure that, that the dealers are charging fair prices to us for warranty, as they are for retail across the board. And, it's really an all-hands-on-deck, and we're starting to see some really early green shoots on some of that work that's been ongoing. And that's where we think it'll compound into warranty savings for us into '26 and hopefully beyond. Emmanuel Rosner: Great. Thank you. Operator: Thank you. Our next question comes from Ryan Brinkman with JPMorgan. Your line is open. Ryan Brinkman: Good morning. Thanks for taking my question, which is on the emissions regulation assumption baked into the '26 guide. The outlook for $500 to $750 million of savings there from no longer needing to purchase those compliant credits. It seems a bit less than the roughly think, $1 billion annually that you've maybe been spending. Is that because some of the purchases sit outside the US? Or because some US regulatory credit purchases maybe at the state level will need to continue in some form or is the right way to think about that? Paul Jacobson: Yeah. Ryan, obviously, the compliance requirements are pretty complicated. You've got both state, federal, local, and international as well. But as we've talked about, the credits were roughly split between CAFE and GHC. So, CAFE, we know we don't need to purchase credits as the administration has already zeroed out the CAFE penalties, across the board. We took a charge for that in the third quarter and expect that to result in some year-over-year savings in '26 versus '25. And then GHC is still pending with the administration. We're assuming that, ultimately, that gets resolved over time, but there's gonna be a lag effect as the administration works through the regulatory process to accomplish what their objectives are on GHG. So, when we purchase credits, we amortize them over the time. The remaining life of those credits. So that's where you're probably seeing a little bit of a disconnect versus the P&L and the cash. Ryan Brinkman: Okay. Very helpful. And then just lastly, on international operations. Obviously, a lot of focus on the improvement in turnaround in China. Maybe just if you could talk about consolidated IO. It looks like a lot of sequential improvement there in revenue and wholesales as well. But just curious about we're reading a lot about the incremental pressure being placed on some of these regions outside of China by Chinese automakers. Obviously, it doesn't affect you in North America. You're not in Europe. You don't have to worry about that. But maybe if you could talk to LATAM or some of the other markets where you operate and what you might be seeing there. Mary Barra: Well, I think highlighted, we are seeing improvement from an international perspective. Specifically in South America. And when you focus on Brazil as an example, even with the stiff competition coming from the Chinese OEMs that are heavily subsidized. We've seen improved performance there among other countries in South America. So I think it's that each of the different areas we've seen improvements. And I think it speaks to the strength of our vehicles and the strength of our brands. So again, it was across the board that we're seeing that improvement. And we are in Europe. We just export into Europe, with some vehicles that we have actually the Lyric and then the Vistac, won German car years, for over the last two years from an EV perspective. So luxury perspective. So we're there, in a small way as we look to see what's gonna have the European market is going to sort out. And I think that's a growth opportunity for us. And I'm proud across the international markets for the work they've done to improve their business. Ryan Brinkman: Very helpful. Thank you. Operator: Thank you. We have time for one last question. Our last question comes from Tom Narayan with RBC. Your line is open. I do apologize you disconnected. Our last question will come from Mark Delaney with Goldman Sachs. Your line is open. Mark Delaney: Yes, good morning. Thank you very much for taking my question. The company is expecting SuperCue's revenue to be $400 million in $20 up from $234 million at the 2025. You help us better understand what's driving such a big step up this year in Super Cruise revenue? And then as you think about that broader OnStar and Digital Services business momentum that you spoke about, are there other key areas you're seeing momentum beyond Super Cruise or is Super Cruise the big driver of digital services? Paul Jacobson: Yeah. Well, Mark, thanks for hanging on the whole call. I appreciate you getting your last question in. You know, the Super Cruise revenue is a couple of things. So remember when we sell a vehicle with Super Cruise, we include three years of prepaid services on that. So that balance then, amortizes over a three-year period. What you're seeing is growth in those initial rates, as we ramp up, production and sales of vehicles equipped with Super Cruise. The second aspect of it, which, you know, we're continuing to see really good penetration and attachment rates is on the renewal. So at the end of three years, customers are approached with, you know, would they like to subscribe? And we've seen attachment rates in the low 40% range with people stepping up and renewing that. So where you're seeing a lot of the growth in super cruise. In OnStar, you know, we include an OnStar basics, package with the sale of vehicles that has that amortizes over the life of that period. But it also what it does is gives us an engagement opportunity with the consumer that, you know, is really laying the foundation for number one enhanced non-star services currently, but also then second, you look at GM rewards, you look at when we get software-defined vehicles down the road. It's really a big step function. So that's where you're seeing a lot of the deferred revenue growing. And coming in at very attractive software-like margins. Mark Delaney: Thanks for that, Paul. My other question was on China. The company has obviously made a lot of improvements there. And I think expecting pretty similar China profits in 2026. There is a view though that the China market in general is becoming more difficult after a lot of stimulus in 2025 and maybe demand in the broader China market could be down this year. Maybe talk about what offsets there could be for GM specifically, perhaps just the product portfolio, but would hope to better understand what would allow GM to be more stable year on year if the market does soften? Thanks. Mary Barra: I think the number of vehicles that we launched this year, the new energy vehicles, I think, are doing very well, over 50%. As we indicated, with the right software, the right technology. And virtually across the board, we have in China, for China solutions, that I think are resonating really well in the marketplace. And, I think that discipline along with the discipline of the way the business is operating of making sure we manage inventory, which allows us to manage incentives. And it also has allowed us to have a much better relationship with the dealers because we had a dramatic improvement in their profitability. So, you know, I think it's if you wanna say what's gonna drive China's business overall, it's the right product portfolio and then the discipline in which we're managing the business. And I have to give a lot of credit to the team over there for really turning around that rather quickly in a sustainable way. And then lastly, I'll just say both of our strong brands Cadillac and the Buick brand, have a long history. The Buick brand especially but also, the strength of the Cadillac franchise as well is serving us well. So we think we can compete, obviously, not to the extent we were five, six years ago, but, we think we can have a meaningful presence there, with the right product portfolio that a premium and luxury level. Mark Delaney: Thank you. Operator: Thank you. I'd now like to turn the call over to Mary Barra for her closing comments. Mary Barra: Well, thanks, everybody for sticking with us through the call. I know we're running a little over, so I'll be brief. But I just want again, I want to start by thanking everyone, in General Motors, our suppliers, our dealers, for all of their hard work to deliver the 2025 performance. But it really goes beyond that because over the last several years, we've really built a foundation of product excellence, innovation, operating and resiliency and agility. So I we know we're gonna continue to see opportunities. I think we have the right team to be able to manage through those and, to deliver results for our shareholders. So I wanna, tell you I'm extremely excited about this year and what we can do at an even better 26. And getting North America back to the 8% to 10% margin is, something that we're looking forward to executing through the year and delivering for our shareholders. So thanks, everybody, and I hope you have a great day. Stay safe. Stay safe. Operator: Thank you. That concludes the conference for today. Thank you for joining. You may disconnect.
Neil Russell: Thank you for standing by, and welcome to American Airlines Group Fourth Quarter and Full Year 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. I would now like to hand the call over to Neil Russell, Vice President, Investor Relations. Please go ahead. Neil Russell: Thanks, Latif, and good morning, everyone. Welcome to the American Airlines Group earnings conference call. On the call with prepared remarks, we have our CEO, Robert Isom, and our CFO, Devon May. In addition, we have a number of senior executives in the room this morning for the Q&A session. After our prepared remarks, we will open the call for analyst questions followed by questions from the media. To get in as many questions as possible, please limit yourself to one question and one follow-up. Before we begin, please note that today's call contains forward-looking statements, including statements concerning future events, costs, forecasted capacity, and fleet plans. These statements represent our predictions and expectations of future events, but numerous risks and uncertainties could cause actual results to differ from those projected. Information about some of these risks and uncertainties can be found in our earnings press release that was issued earlier this morning, Form 10-Ks for the year ended 12/31/2024, and subsequent quarterly reports on Form 10-Q. Unless otherwise specified, all references to earnings per share are on an adjusted and diluted basis. Additionally, we will be discussing certain non-GAAP financial measures which exclude the impact of unusual items. A reconciliation of those numbers to the GAAP financial measures is included in the earnings press release and investor presentation, each of which can be found in the Investor Relations section of our website. A webcast of this call will also be archived on our website. The information we are giving you on the call this morning is as of today's date, and we undertake no obligation to update the information subsequently. Thank you for your interest in American and for joining us this morning. With that, I'll turn the call over to our CEO, Robert Isom. Robert Isom: Good morning, everyone. As we close out 2025, I'm extremely proud of the hard work and perseverance of the American Airlines team throughout the fourth quarter and the full year. Thank you to each of you. Your commitment to excellence is what makes American the premium global airline our customers trust. Thank you for navigating 2025 with resilience, and for taking care of our customers throughout the holiday period. And I especially want to recognize the tremendous efforts of our team this past weekend and this week as we work through winter storm Fern. Ensuring our customers and team members remain safe during this challenging weather event. The impact of the storm is as significant as we've ever seen at American. Ice and freezing rain have significantly reduced operations, especially at DFW and Charlotte, our largest hubs, for multiple days. Over the past four days, we've had to cancel more than 9,000 flights, making this the largest weather-related operational disruption in our history. We expect at least two more days of elevated cancellations before returning to normal operations later this week. While 2025 wasn't the year anyone in the industry thought it would be, and no matter the unique challenges American faced, we did the hard work to build a solid foundation for our future. Our balance sheet is the strongest it's been in years. On the labor front, over the last thirty months, we've successfully negotiated ratified agreements with our pilots, flight attendants, mechanics, fleet service agents, passenger service agents, reservations agents, and more recently, our flight crew training instructor and simulator pilot groups. Our fleet is in excellent shape, thanks to the significant investments we've made. We have low capital requirements and no required aircraft retirements for the foreseeable future. Over the next few years, we will continue to expand our international fleet and premium seating through new deliveries and retrofit programs. Additionally, we've fully restored our historical sales and distribution indirect share with our focus now on further growth in 2026 and beyond. We turn to the page to a new year. A momentous chapter in our history. As we celebrate American Centennial. I'm excited about the opportunities that lie ahead for American as we begin to see the benefits of our work in 2026. Our strategy to deliver on America's revenue potential centers on four key areas. Delivering a consistent, elevated customer experience, maximizing the power of our network and fleet, building partnerships that deepen loyalty and lifetime value, and continuing to advance our sales, distribution, and revenue management efforts. While this has been a multiyear effort, 2026 will be the year these efforts start to bear fruit. We're off to a fast start based on the booking trends we've observed in January. All-time records for the first three weeks of the year. Starting with our first focus area, delivering a consistent elevated customer experience. Proud to deliver. We strive to create an experience that customers value and that our team members are. In 2025, our Net Promoter Score for on-time customers was the highest in our company's history and is expected to see even more improvement in 2026. We continue to invest in the customer experience and premium products and services that differentiate America. American. Our new flagship suite products the industry standard of luxury for long-haul travel, and has delivered leading customer satisfaction scores since its inauguration. We're expanding this product across our international capable fleet, including on the new Boeing 787-9s, the new Airbus 321 XLRs, and the retrofits of our existing triple seven aircraft. We're proud to offer the industry's leading lounge network including the most premium lounges, We opened our newest flagship lounge in Philadelphia last year, and we also announced plans to bring new flagship lounges to Miami and Charlotte. We're also making significant investments to our Admirals Club lounges. Including the renovation of our Concourse D Lounge at DCA and the introduction of provisions by Admirals Club at Charlotte. A first of its kind lounge concept for travelers that are on the go. We are also enhancing the onboard experience with the introduction of mattress pads for added comfort upgraded food and beverage offerings, and other thoughtful touches throughout the journey. Rolling out this month, Advantage members will enjoy complimentary high-speed satellite Wi-Fi on our narrow-body aircraft. Dual-class regional jets, and our new premium Boeing 787-9s. Sponsored by AT&T, reinforcing connectivity as a core aspect of the customer journey and a benefit that our members value. The early feedback shows increased satisfaction, especially among younger generations. American will offer more free high-speed satellite Wi-Fi on more aircraft and on more flights than any other carrier in the world. Also know that reliability and disruption management are key drivers of customer satisfaction and revenue production, and we're taking steps to improve our reliability. First, we're transforming the way we operate a DFW to prepare for future growth at our largest and most profitable hub. Moving to a new 13 bank structure, is designed to increase customer connection opportunities reduce air traffic delays, and allow for quicker recovery during irregular operations. All while providing more on-time arrival certainty to our 100,000 customers traveling through DFW each day. Importantly, we expect this change will open the door future expansion in a market with significant economic and population growth. In the coming years, we'll see the completion of a new terminal f along with further enhancements and gate expansion at two other terminals. Once completed, American will operate the largest single carrier hub in the world at DFW. We're also investing in our schedules and in technology to ensure more on-time arrivals. Fewer missed connections, and a smoother travel experience. We're bolstering our ability to get customers in their bags to where they're going on time and we expect these changes will have a meaningful impact on customer satisfaction scores. Our second focus area is maximizing the power of our network and fleet. We're a premium global airline with the strongest network in The US. The most important a v s aviation market in the world, Eight of our hubs are located in the 10 largest metropolitan areas in The US. We're maximizing the power of our network, global reach of our partners, to connect more people to more places than any other airline. Our current domestic growth plans for 2026 are focused on scaling hubs where we can grow our local share and fully utilize existing infrastructure. Particularly in Philadelphia, Miami, and Phoenix. We'll also be rounding out our schedule in Chicago. Improved schedules combined with product enhancements are helping us win local high-value customers. Our fleet order book has a diverse mix of aircraft size and operational. This provides the opportunity to grow our hubs. Invest in our local markets, and expand servers globally. Our international offerings in 2026 will include new routes to premier destinations like Budapest and Prague and growth with our international joint business and One World partners. We remain on track to increase our international capable fleet from 139 today to 200 aircraft by the end of the decade. We expect continued improvement in premium unit revenue. Supported by growing demand and increased premium product availability. With our current order book, and the announced reconfigurations, there are triple seven two hundred, triple seven three hundred, a three nineteen, and a three twenty fleets. Will deliver significant premium seat growth over the coming years, nearly twice the rate of main cabin seats. Our lie-flat seats are expected to increase by over 50% by 2030. Building partnerships that unlock loyalty and life lifetime value is the third area of our focus. American invented airline loyalty, and the Advantage program continues to lead the industry. We offer more value per mile, countless ways to earn and redeem miles, and more ways to engage with Advantage members, including complimentary Wi-Fi that started this month. Advantage enrollments increased 7% year over year, marking our greatest number of annual enrollments with Chicago leading the way. Up nearly 20% year over year. 2025 marked a record year for cobranded credit card program. With spending on our cards up 8% year over year. This momentum sets the stage for our exclusive ten-year cobranded credit card partnership with Citi which went into effect on January 1. In the fourth quarter, we successfully transitioned transitioned in-flight and airport acquisition channels from Barclays to Citi, and our focus in 2026 now shifts to card conversions. The Citi partnership gives our customers the most straightforward and seamless path to status in the industry. With a Citi cobranded credit card, members earn loyalty points for every dollar spent. Creating more benefits for customers to engage with American. Our partnership with Citi is designed to drive long-term growth credit card acquisitions and spend, and the upside is significant. These efforts, combined with the strength of our advantage program, will deepen engagement enhance customer loyalty, and deliver meaningful long-term value to American. Lastly, we remain focused on the continued advancement of sales, distribution, and revenue management efforts. As we closed the year, we had restored our indirect channel share an important milestone but not the end of our initiative. As we move into 2026, we will continue to deepen the relationships that we've built with our corporate and agency partners. And capture greater share among high-value corporate travelers and premium leisure customers. Across the commercial organization, we see significant opportunities by sharpening our fair product architecture and continuing to improve our revenue management processes and technology. In the fourth quarter, we made changes to our basic economy product to drive clear segmentation. While still offering a better basic product than any of our competitors. Throughout the year, we will continue evaluating our premium offerings. Particularly our extra legroom product. Is a compelling option for corporate customers. And finally, we will continue innovating our commercial systems through the deployment of best-in-class technology solutions. And lastly, wanna acknowledge that this week marks the one-year anniversary of the tragic accident of flight fifty-three forty-two. We remain committed to supporting everyone affected by that tragedy through our Office of Continued Care and Outreach. And I wanna commend our team for handling this difficult situation in an exemplary way. Devin will now share more about our financial results in the 2026 outlook. Thank you, Robert. Devon May: Excluding net special items, American reported fourth quarter adjusted earnings per share of $0.06 and full year adjusted earnings per share of $0.36. These results came in below our guidance, primarily due to prolonged government shutdown, which impacted revenue by approximately $325 million. The impact of the government shutdown was largely concentrated in the domestic entity, where American has the largest exposure. Especially our hub at DCA and its relative weighting towards government-related traffic. This disruption was temporary, but it impacted revenue in November and December. Following softer than expected bookings late in the fourth quarter, bookings strengthened meaningfully in January. System-wide revenue intakes for the first three weeks of 2026 are up double digits year over year. Premium continued to outperform main cabin throughout the quarter. A trend that has remained consistent all year underscoring the strength of the premium customer and demand for the premium products we offer. Our fourth quarter year over year premium unit revenue outpaced Main Cabin by seven points. We continue to see strength in our indirect channels with managed corporate revenue up 12% year over year. Which has strengthened further so far in 2026. Looking ahead, we expect premium unit revenue momentum to remain strong in 2026, also expect main cabin to deliver strong year over year improvement assuming a stable macroeconomic backdrop. Year over year unit revenue for the domestic entity had inflected positive in September and remained positive before the impact of the government shutdown. Excluding the government shutdown, year over year domestic unit revenue would have been positive for the quarter. Our international entities performed in line with the guidance we provided in October. Atlantic unit revenue was up 4% year over year, and it was our most profitable region during the quarter as seasonal demand trends and demand for our premium offering continued to strengthen in the fourth quarter. Once again, unit revenues in Latin America remained under pressure during the quarter. We expect this to be a continued headwind for the 2026. As we have said in the past, American's presence in the region, the premium services we offer, and the scale we have in Miami and our other southern hubs allow for profitable results in this environment and a continued long-term competitive advantage. And finally, Pacific unit revenue was slightly down year over year, but showed sequential improvement from the third quarter supported by strength in the premium cabins. Looking to Q1, we expect domestic unit revenue to get back on trend and be nicely positive for the quarter, driven by both strength in premium and main cabin demand. We expect international unit revenue performance will be mixed, with continued strong transatlantic performance and flattish unit revenue in the Latin America and Pacific entities. As Robert mentioned earlier, American is continuing to invest in expanding our premium offerings across the customer journey. We are already recognized among The US network carriers for having the highest rated and most consistent products across our long-haul fleet. We expect to expand that product further in 2026 with 10 additional a three twenty one XLR deliveries and the full utilization of our 11 premium Boeing 787-9s. Additionally, our Boeing triple seven three hundred retrofit has started, and customers will enjoy a 20% increase in premium seats. The retrofitted aircraft roll out this year and next. These efforts will continue in future years with retrofits on the Boeing seven seventy seven dash 200, the a three nineteen, and the a three twenty fleets. With these investments in our existing fleet, along with our new deliveries, we expect our premium seat growth will outpace our nonpremium offerings each year for the remainder of the decade. Now on to our earnings outlook for 2026. Our guidance today reflects our preliminary estimate of winter storm fern. Our guidance always includes a completion factor assumption for winter weather. But as Robert mentioned earlier, the impact of this storm is unlike anything we have ever experienced. For the first quarter, capacity is projected to be up 3% to 5% year over year as we maximize the value of our network through stronger schedules in many of our hub cities. This is inclusive of approximately a point and a half impact from winter storm Fern. Our 2026 capacity plan includes significant growth in Philadelphia, Miami, and Phoenix as we take advantage of near-term opportunities and utilize existing facilities. Our growth for the year is expected to be evenly balanced across domestic and international entities. We expect first quarter revenue to be up between 7-10% year over year, driven by improvements in the domestic entity, from expected growth in corporate passenger volumes and as demand continues to recover as we lap the challenges experienced in the 2025. This includes an estimated revenue impact of between $150 million to $200 million from the ongoing winter storm firm. First quarter CASM ex fuel ex profit sharing and net special items is anticipated to be up between 3-5% we absorb the flight attendant boarding pay an additional benefit that went into effect in the 2025. And as we staff ahead of the summer to support peak growth. The CASM ex impact from winter storm Fern is approximately one and a half points. We remain confident in our ability to deliver the most efficient capacity in the industry as we continue our multiyear effort to reengineer the business. This transformation leverages technology, and streamlines processes to enable an improved customer and team member experience while driving a more efficient business. These efficiencies enable our mainline work groups to operate at their highest productivity levels partially mitigating the impact of contractual labor rate increases and other inflationary pressures. In 2026, expect an additional $250 million of savings from these efforts versus 2025. Bringing our cumulative operating savings to nearly a billion dollars since 2023 and total working capital improvements of nearly $900 million. Meeting the expectations set at the start of the program. With this first quarter guidance, inclusive of the impact of winter storm Fern, we expect to deliver an adjusted loss per diluted share of between $0.1.50. The guidance range for the quarter is slightly wider than what we traditionally use as we continue to evaluate the impact of this extraordinary weather event. For the full year, we expect adjusted earnings per diluted share of approximately $1.70 to $2.70. Lastly, turning to CapEx and the balance sheet. 2026, we expect to take delivery of 55 new aircraft. Based on our current expectations, our 2026 total capital expenditures are expected to be between 4 and 4 and a half billion dollars. Consistent with our prior guidance. Based on these earnings and capital projections, we anticipate free cash flow generation of more than $2 billion for the full year. We continue to make significant progress in strengthening our balance sheet. At the start of 2025, we committed to reducing total debt by approximately $4 billion to less than $35 billion by the end of twenty twenty seven. During 2025, we reduced total debt by $2.1 billion bringing our total debt to $36.5 billion. At the midpoint of our EPS and CapEx guidance, we would hit our 2027 goal to have total debt below $35 billion a year ahead of schedule in 2026. And with over $2 billion of free cash flow this year, we expect that by year end, will have our lowest level of net debt since the 2014. I'll now hand the call back to Robert for closing remarks. Robert Isom: Thanks, Devin. This year marks our one hundredth anniversary. A remarkable milestone that reflects a legacy of innovation, resilience, and caring for people on life's journey. We've been innovators since the beginning. We invented the first reservation system and the first revenue management system. The first airport lounge, and the first airline loyalty program, which continues to lead the industry today. From our humble beginnings as a mail carrier between Chicago and St. Louis, today, American Airlines is a premium global airline that connects more of The US to the world powered by a proud team of over 130,000 aviation professionals unmatched in talent and spirit, with a proven ability to adapt, innovate, and always strive for better. I've been in this business for a long time. I'm incredibly excited about what lies ahead for American. The foundation we built in 2025 combined with our go forward strategy, positions us to deliver sustainable growth and create long-term value for our customers, team members, and shareholders. American's tagline for our centennial year is Forever Forward. It embodies all the things that we've accomplished over the past one hundred years, and all the opportunities in front of us. From elevating the travel experience and strengthening our network to unlocking loyalty and driving efficiency, We're executing on a strategy and initiatives that will drive value and shape our next one hundred years as a premium global airline. Thank you for your interest in American Airlines. And operator, you may now open the line for questions. Operator: Question, you will need to press 11 on your telephone. To remove yourself from the queue, you may press 11 again. To allow everyone the opportunity to participate You will be limited to one question and one follow-up. Please standby while we compile the Q and A roster. Our first question comes from the line of Connor Cunningham, Amelius Research. Please go ahead, Connor. Connor Cunningham: Hi, everyone. Thank you. I was hoping we could talk about the hub structure a little bit. You have a bunch of fresh eyes looking at it right and clearly, there's a lot of questions about what's happening in Chicago. So was hoping you could talk about how you view profitability by hub and then where you see the most upside from from your hub standpoint in in 2026 and beyond? Thank you. Robert Isom: Thanks, Connor. And I'll just you know, dive right into to Chicago. We've been flying to Chicago for a hundred years, and it was where our first flight took place, in fact. And it's gonna be part of our system know, for the next hundred years. When when we look at Chicago, it's strategically important It is something that we're gonna grow back to where we were prior prior to pandemic to to 500 flights. We feel that's rounding it out. That gets us to where we think that that that we need to be. And I'm really pleased with, what I see from the results so far. Book customer, mix up 20%, loyalty acquisitions up 20%, credit, co branded credit card acquisitions up 20%, So we're, making sure that we're doing best for our customers. And when it comes to Chicago, we would expect that it returns to the average profitability of of of our hub hub network. It's going to be our our third largest hub, and we're gonna get keep keep at work taking care of our customers and making sure that it it it performs as as, best as it possibly can. Connor Cunningham: Awesome. And then maybe we could talk a little bit about just the the the cost trajectory in 2026. I think I mean, you quantified what you expect from 1Q just from the storms in and that's helpful. But just it seems like 1Q is going to be your high watermark. So just how you think about the the the shape of the cost curve in '26 would be helpful. Thank you. Devon May: Hey. Thanks for the question. The construct we've given in the past is that at around mid single digit capacity for this year, we would expect our unit cost to be low single digit growth. And that's what we would have experienced here in the first quarter. We expect the unit cost growth in that 2% to 3% range prior to winter storm Fern. So that's where we'll be for the year. I I think, you know, quarter to quarter, it might move a little bit up or down to on what's happening with the timing of certain maintenance events. But if we end up at mid single digit capacity, I would expect low single digit CASM. As always, though, we'll be flexible with capacity depending on, the demand and competitive environment we find ourselves. Operator: Thank you. Our next question comes from the line of Katie O'Brien of Goldman Sachs. Your line is open, Katie. Katie O'Brien: Hey. Good morning, everyone. Thanks for the time. So maybe just on the premium growth rate, I know you've shared that premium seat growth rate will be double main cabin seats at end of the decade. And I think you've previously noted, you know, that's driven by 20% premium seat growth and 50% lie flat growth through 2030. Just wondering, what does that look like in 2026? You know, how much fee growth is driven by premium? How quickly are you growing those lie flat seeds? And how does this factor into your full year revenue outlook? Is there a mix shift benefit included? And how should we think about that? Robert Isom: Thanks, Katie. I'm going to hand that off to Nat Pieper, our Chief Commercial Officer. Nat Pieper: Katie, good morning. On the premium side, our premium performance in 'twenty five, premium RASM was superior to nonpremium by seven points. Both domestically and internationally very strong. And and as we look forward into into '26, by entity, you'll continue to see our premium mix improve. We're taking delivery of of a three twenty one XLRs. Our more seven eight seven dash nine p configuration, p standing for premium, and we'll continue to deploy more premium seats into international markets. By entity, just quickly, if you think on the Transatlantic side, demand there continues to be really strong. Across both products, all parts of our business, Heathrow, Rest Of Europe, etcetera, and our joint business partners seeing similar things. Premium holding up well in in The Pacific. As well as in our Deep South Latin market too. So you're going to continue to see richness. We see a lot of depth in the premium market, and we're really excited about American's product evolving, the customer experience investments we're making, all tuned to that that premium traveler. Katie O'Brien: Great. Matt, great to hear from you at your new at your new gig. Maybe just one for Devin. You pulled forward your debt reduction target by by a year once again, now expected to be less than 35,000,000,000 by the end of this year. Instead of 27. I think when I asked you at my conference last December, you said you'd contemplate what the right medium term or longer term leverage target would be once you got to under 35,000,000,000? I know we're not there quite yet, but with the target approaching, how are you thinking about the balance sheet and and when the potential buybacks are to figure out the calculus again? Thanks for all the time. Devon May: Hey, Katie. Listen. We are really pleased with the progress we've made on the balance sheet, not just over the last year, but really over the past three or four years. And, you know, we talk about the priorities. They remain the same. We we've focus first on taking care of our customers and making the right investments there, taking care of our team members. Any investments we need to make back in the business. And then beyond that, any free cash flow that we're producing, we are putting into the balance sheet, and that's what allowed us to, achieve this goal and achieve this goal a year early. But we still have lot of work to do before we shift our focus to any sort of shareholder remuneration. We need to get inside of 3x net debt to That was our longer term stated goal. We wanna get to a double b flat credit rating. So some work to do still on the ratings and metrics side, but really happy with the progress we've made so far. Operator: Thank you. Our next question comes from the line of John Gaudin of Citi. Your line is open, John. John Gaudin: I wanted to ask a little bit about full year guidance. I think the narrative that we've heard from other airlines so far is that the year is started out very strong, and we've seen what what people have interpreted as a bit you know, conservative guidance in light of that. It it sounds like you guys see similar trends. Based on how things have started the year. I just was hoping to kinda dialogue about how you would characterize your full year guidance and areas where you think, you know, that there may be some conservatism if that's how you see it. At all. Devon May: John, Maybe I'll just start with the first quarter, which I think is really a a 50 50 forecast at this point. You know, we've attempted to capture the impact of winter storm Fern, but we'll know more about that impact, over the next I'd say for the full year, though, probably similar comments to what we've heard from others. Week or so, which is why we provided a little bit wider range here in Q1. I think if bookings continue at their current pace, this guide could prove to be conservative, but we'll see how the year plays out. You know, right now, we're a month in, and we're comfortable with this range. John Gaudin: Got it. And and if I could just follow-up on a little bit of the Chicago commentary earlier. You know, completely appreciate your perspective on Chicago. One of the data points that was put out there by one of your competitors was fact that you guys are, potentially losing significant amounts of money in Chicago. I know you typically don't talk about hub level profitability, but I just wanted to give you a chance to kind of address that if if there's anything to address there. Robert Isom: Thanks, John. Look, we're growing back Chicago. Pleased with what we see so far, as I said. Customer action has been great. And we fully expect that Chicago will return to the profitability levels that that that had been at prior to the pandemic. I just I just say this. We're do we're doing all the right things, you know, from that perspective, but we're now look. We're we're we're mindful of of how we're we're we're positioned. And, you know, quite frankly, I wouldn't be out there bragging about profitability in a hub when, you know, 80% of your team members make, you know, a lot less than the the the market rate. So you know, we're doing right by our team members. We're doing right by our customers. And we're certainly doing right by the community of Chicago too. They welcome know, this kind of service. And the customers in Chicago, I can tell you, you know, benefit. You know, from competition. So, we're pleased with what we're doing, and we're playing our game. And we're gonna make sure that we we deliver for our customers. Operator: Thank you. Our next question comes from the line of Jamie Baker of JPMorgan Securities. Please go ahead, Jamie. Jamie Baker: Hey. Yeah. Good morning, everybody. So question another question on the full year guide. Last year, American contributed about 4% of the total big three pretax profit pool. Based on your disclosures today. And if we just kinda use consensus for Delta and United, that 4% goes to about 12%. In 2026. So I I I get that you may not necessarily think in these relative terms, but when we think of that improvement, how much do you, you know, attribute to the macro? And how much is idiosyncratic to American? And, you know, so, obviously, the Citi deal is a contributor. Is there any way you could parse that implied percentage of big three improvement? That would be helpful. Robert Isom: Thanks, Jamie. Well, I just I'd I'd say this that you know, obviously, of it is due to, you know, a macro environment that is positive. Clearly, we see supply and demand, especially for domestic coming back, you know, more into sync. And that that definitely Mhmm. Benefits American. But all the things that we're doing as as Nat mentioned, in terms of of premium traffic, our strategy, I think, is paying off too. So I don't know if it's $50.50 or or $70.30, but, you know, it's it's a a combination of of of both. And again, I'm pleased with the strategy we have. We're gonna be a really efficient producer of ASMs going forward. And from a profitability perspective, the only other thing I'd I'd just add is, yeah, we expect to be a greater proportion of of total industry profitability. And, again, we have, you know, labor cost certainty You know, that's built into our numbers. Jamie Baker: Yep. Okay. And then very quickly on the FERN calculus, that 150 to $200,000,000 revenue, impact, can I confirm that that is net of recapture? Or or well, actually, let me ask it differently. Of the lost revenue in the past week, how much do you forecast you recaptured later in the quarter Or are you just assuming that the totality of that revenue is gone for the foreseeable future? Robert Isom: Jamie, I'll I'll start. Devin can help me out on this too. Like, we we're still in the midst of of assessing where things stand. You know, we're at 9,000 cancels. It's it's gonna probably be, you know, more than that. So you know, that's a couple of days of operation. You know, for the the entire quarter. And so the impact is been certainly that people didn't want to travel to some of the places that are iced in. And, you know, we don't see a lot of that coming back. And the other thing is, you know, there's there's been a a, you know, a a freeze on on some level of bookings during this period as well. So as we take a look at it, I like what I see in February and March. In terms of the bookings that we've seen as we really round out January. I just I think a lot of that is probably, you know, foregone revenue and, you know, the the fact that we've got a perishable product in terms of, you know, some people want to fly to some places on certain days. Operator: Thank you. Our next question comes from the line of Michael Linenberg of Deutsche Bank. Please go ahead, Michael. Michael Linenberg: Yeah. Hey. Good morning. I wanna just get back to Dallas and as you think about building that into the largest airline hub, actually, single airline hub in the world, When I when I look at this last year and I and I look at your ops stats, it's it's been a tough year, but it does seem like that Dallas has had more than its fair share of bad weather. And you know, I'm not here to sort of predict what I think weather's gonna be like Texas over the next few years. But you know, you do have knock on effects as that hub builds out. As you think about building that out, does that does that at all factor in in in your calculus you know, and how it can impact the entire system, maybe whether they're it just being so much of your system, being driven by by the Dallas operation. Robert Isom: Thanks for that question. I'd just say this, that winter storm fern, it is something that is relatively unprecedented. I don't I won't say that it's never happened before. But we get that this kind of storm, you know, once every five to ten years in in DFW. And having been here you know, for for over ten years, that been my experience. We recover as quickly as we can. But over the long term, you know, DFW is the fastest growing one of the fastest growing metro regions in the country, and the product that we're putting out is fantastic. As we think about growing, though, reliability is key. So one of the things that we're doing this coming year is reassessing how we bank our operation. And pulling down the peaks quite a bit. So you'll see us convert to a a 13 bank operation yet still have a presence in local markets that equal to the biggest banks anybody else flies. At the same time, we're making sure that our facilities can keep up with that. You've heard about the new DFW Terminal F Which Is Just Progressing At, You Know, A Great Rate. But We'll Be Opening Up A New Satellite On Terminal C later this year and also on on Terminal A. So we're gonna make sure that we have the facilities the the schedule that that works for it. And then the final piece is we're working on on airspace as well. So we're always gonna have to take care of you know, irregular operations events, and we'll thaw out here. Don't worry about that and mother nature has a way of hitting everybody equally over time. But I really like what we're doing in terms of making sure that we're as reliable as possible and then also we're gonna continue to invest in making sure that our irregular operate our operations recovery is is is the best in the business. Michael Linenberg: Okay. And then just to follow-up on the Dallas. As build that out, sort of where and maybe this is for Nat, as well, just where you know, the connect versus local split is today And as you add, you know, you build that up, where does that what does that evolve to? How does that shift, if if at all? Thanks for taking my question. Nat Pieper: Thanks, Mike. I think the mix actually stays pretty similar. We're going to be more create more utility for local customers with different alternatives But I think I think the way we manage Dallas you know, as it goes to a thousand departures eventually is is the cornerstone of of our network. And and you hit the nail on the head in asking the question. I look at it as trying to maximize revenue for American across our entire system. And having an operationally reliable DFW, the engine behind everything we have, in the domestic US, it it it really becomes a no brainer. So we're we're really excited about the potential and the enhanced utility for for local DFW customers. Operator: Our next question comes from the line of Scott Group of Wolfe Research. Please go ahead, Scott. Scott Group: Hey. Thanks. Good morning. So can you just help us think about overall capacity growth for the year? And then I guess with what I think you'll say is something north of GDP, what's the confidence in sustaining strong RASM throughout the year with more elevated capacity? And don't know. Maybe just help us think about, like, how much the credit card new credit card helps on RASM this year. Devon May: Hey, Scott. For capacity for the year, we didn't give a guide to, but I would expect for the first quarter, as we said, it's going to be up in the 3% to percent range. Ideally, we would have been a little higher than that. I would expect a similar level of capacity growth right through the summer peak. And then as we always do, coming out of that summer peak, we'll adjust capacity depending on the competitive and demand environment that we're seeing. But if it holds and if kind of our expectations hold, we'll probably have capacity for the full year around mid single digits. We like the opportunities we have. We we've talked a lot about growth opportunities in Philadelphia, Miami, Phoenix, along with rounding out our schedules in Chicago. And we do think even with this level of growth, we'll have a supportive environment for positive unit revenue throughout the year. Nat Pieper: Scott, I'll take Just just I'll take yeah. Just one quick note on the loyalty side too, part of your question. You know, as the ADDvantage program continues to grow, enrollments are growing extremely rapidly for us. And advantage members are the lion's share of our premium revenue, the lion's share of our flown revenue. And as we continue to grow that program, it just then generates loyalty to American and and that's gonna translate into into higher unit revenue as well. Scott Group: Just a quick follow-up. So, like, when you guys announced the new card and gave us, like, a multiyear, like, earnings contribution from that, is there a reason to think '26 is you know, is that a linear growth in '26? Or is there any front end motive in any way? Devon May: No. I'd say it's all pretty linear. It's never gonna be perfectly linear, both in terms of remuneration that we get. Sometimes it'll come in a little chunky depending on different bonuses that might be there. And, also, just in the impact of the p and l. It won't be perfectly linear, but it will be you know, fairly linear over the next five years. Operator: Thank you. Our next question comes from the line of Christopher Stathropoulos. Of Susquehanna Financial Group. Please go ahead, Christopher. Your line is open. Christopher Stathropoulos: Good morning, everyone. Thanks for taking my questions. On ORD, I heard a target of I think it was 500 flights. So where does that sit And assuming that's I'm not sure if that's for this year or next, but but how should we think about that within the context of the midpoint of of the guide? And then at 500, does that put you back at profitability for that hub? Robert Isom: I'll just comment again. We anticipate getting back between five hundred and five fifty flights. That'll happen this summer. And we are on track. And and meeting the the goals that we had established for ourselves. And, again, Chicago is strategically important. And at the end of the day, it's going to help system overall system profitability, but we fully expect that Chicago will return to its its position as, one of our, you know, mid level, profitability hubs. Christopher Stathropoulos: Okay. And then on the $1,000,000,000 in savings realized, if you could talk about opportunities going forward. I think in the past, you've spoken about technology and, or AI in benefiting areas such as MRO and procurement? Maybe if you could expand on that in other potential areas. Thank you. Devon May: Yeah. Know, this is something we've been at for over three years now, just really trying to reengineer our business for efficiency and making investments that drive, productivity and a better customer experience. I'll say no major change. Obviously, we'll lean into the latest technologies like AI and the opportunities it brings both areas like tech ops and reservations. A lot of the work, though, just continues to be streamlining processes and making, you know, regular way technology investments that drive improvements across our labor line with productivity improvements that are improvements for our customers. We also focus heavily on procurement where we think we build the best procurement team in the world. It's driving really significant savings as well as working capital improvements. So, this is a continuation of a years long effort. It's a mindset for the company. It's an area that Robert and I get to meet on with leaders across the company every month. We think we're best in class, and and we'll continue to focus there. Thank you. Operator: Our next question comes from the line of Savi Syth of Raymond James. Your line is open, Savi. Savi Syth: Hey. Good morning. I wonder if you can talk a little bit about operations. You know, clearly, Fern is is just not a liar here, but some of the investments that you're making in DFW, you know, when do you expect to see that And in Chicago, not necessarily you know, there seems to be a lot of flight being added just industry wide in Chicago and just any thoughts on kinda how that operation might impact, but really looking at it at high level but also wondering if, you know, the level of flying in Chicago is a concern. Robert Isom: So I'll just I'll just start with DFW again. We have this facilities project that is is going on that been in the works for for some time now right now, new terminal f. Which is going to be American's terminal. New satellites on on Terminals A And And C, those are progressing really well. I think that they're going to be really spectacular from a customer experience perspective and enable DFW to get to to over a a thousand departures. And we're really pleased with that work. And regarding Chicago, again, I'll just say that we're flying to the places that our customers want to go. And it warrants rounding the schedule back out to between five hundred and five hundred and fifty flights, and really look forward to to, you know, putting forth a a great product this summer. We've done it before. We'll we'll we'll do it again. And know, that's that's what I have to say on that front. I can't really speak to what others are doing. Savi Syth: I guess, Robert, my question is coming from operations. I have no doubt that there's appetite in Chicago for American to kinda kinda come back there in a big way. I'm just kinda curious about, one, like, the changes you're making at DFW, you know, how you expect that to improve operations throughout the year, like, when we would see the biggest benefit. And two is kind of the level of operations that are gonna happen in Chicago this summer, not just American, if there's a concern in terms of the airport can handle that. Robert Isom: Well, Savi, in terms of what we're doing in in DFW, it's not only the the facilities work, but it's technology we're bringing to bear. So whether that's making sure that we have the appropriate solutions to disrupt disruptions during during the summer with smart gating and connect assist We have new you know, block time targets, which means we've we've assessed how we're building things out all into this this 13 bank schedule. We really think that that's going to show performance throughout the entire year. But I would expect a notable benefit during the summer. And for Chicago, you know, look. This is a lot of growth for us. Again, but it's only getting back to where we were. So we're putting a tremendous amount of time and effort to making sure that we're ready and that all of our partners are ready to go, as well. So we've we've got all all eyes on it, and you know, ready for the growth that we have planned for Chicago this summer. Operator: Thank you. Our next question comes from the line of Atul Maswari of UBS. Please go ahead, Atul. Atul Maswari: Good morning. Thanks a lot for taking my question. I also have a question on the full year guidance. It sounds like to get to the midpoint of the range, you're not necessarily assuming current booking trends to persist. A, could you confirm that? And then b, which is the high end of the range, would you need the current demand to, you know, continue at these levels? Or would that drive even more upside over and above the high end of the range? Thank you. Devon May: Yeah. I think you're interpreting our our comments correctly that we've seen really strong bookings in the first part of the year. If bookings continue at this level, we would probably be a lot closer to the high end of the guide. We haven't built that in for the entire year. In order to come in, you know, above the high end, it would probably require some acceleration of what we're seeing right now. Atul Maswari: Got it. That's helpful. And, there is me follow-up. As you look out, you know, over the next few years, what do you think is sustainable long term margin rate for American Eagle with respect to EBITDAR margin or the pretax margin, whatever you want to pick? And relative to where you land, in FY '26, what are the key drivers that get you to that long term sustainable margin rate? Robert Isom: Well, what we're working on is is this. We're going to continue to be, the most efficient producer of of capacity in the business. And I feel great about what we're doing, and Devin highlighted you know, some of the things that we've embarked on with reengineering the business. But our focus right now is delivering on our revenue potential. And that's gonna push margins, we believe, the most. So it starts with, like, delivering a customer a elevated customer experience. You've heard us talk about a lot of things we're doing, whether it's from a facilities perspective, reconfigurations of our fleet, the new flagship suites and and flagship lounges, Everything that we do for our customers is being looked at in a way to enhance that. On top of that, we have a network that is getting back to scale and size. And I feel that where we're flying is where people want to go. We're gonna make sure that we maximize the power of that network and it's powered by the the youngest fleet that's out there. You know about the work that we're doing with with Citi with the relaunch of our cobranded credit card relationship. Feel great about the advantage loyalty program and that being the best in the business. And then ultimately, we're gonna sell and market our product and and make sure that we stay on top of, you know, our our share and, you know, our ability to to really drive performance through sales, marketing, and and revenue management. All that combines, to put us in a position where we anticipate margin growth. I think that that then, you know, fuels free cash flow production stronger balance sheet. And getting, really, American back on track with where we had hoped we'd we'd be a couple years back. So that's what I expect, and appreciate the opportunity to expand on. Operator: Thank you. Our next question comes from the line of Duane Pfennigwerth of Evercore ISI. Line is open, Duane. Duane Pfennigwerth: Hey. Good morning. I just wanted to ask you about your window into government travel. Obviously, there was a fair bit of noise in the fourth quarter, and we have some noise, at least in the last week, from Mother Nature. But are you seeing signs of stabilization or growth in the government segment as we begin to comp really severe dose impacts last year. Robert Isom: Okay. I'll I'll handle that. Look. What I can I can tell you is that, you know, we our government traffic in the fourth quarter was down about 50%? And that's largely driven by the government shutdown. As we move into the first quarter, it's just too soon to see how that's gonna back. But we've built into our forecast, you know, assumption that we'll have to be out there and working hard to to win back government business. But over time, you know, I would anticipate that the government traffic returns You know, Washington is always gonna be really important, and I do believe that, our Washington National Hub, you know, does something for customers that no other you know, airport can really do. And when the government travel comes back, we're gonna be the best position to to take advantage of it. So I look over the long run as that being upside to us. Duane Pfennigwerth: Thanks thanks, Robert. And then just just on premium, I don't know if there's any way to frame it. On a relative basis. You know, premium as a percent of total seats, you know, where you are today versus your network peers, And as you look at, like, the growth you're lining up over the next few years, where does that you know, go to? Nat Pieper: I think, Duane, it's Nat. I I think from a a network peer perspective, not deep into that. I can speak, though, on the American side, not only taking delivery of aircraft but mod programs that we've got going on with our A319s, our A320s, 100 plus airplanes in those buckets. And then longer term, triple seven modifications, both the two hundreds and the 300 fleet. So clearly enhancing the premium product and the offering that we have out there. Premium economy continues to be very successful for us too. Robert Isom: Yeah. It did. Right. In terms of just real numbers, 30% growth as we take a look in premium seating out towards the end of the decade. And 50%, growth from a a lie flat international, you know, perspective as we move out towards the the the end of the decade. And, you know, in terms of overall premium revenues, I don't think we're a lot different than our competitors. We see about 50% of our revenue you know, being being driven, by premium offerings. And that's something that, again, we've got a a product lineup and a strategy that is really directed at at meeting those customers' needs. Devon May: And the other the other piece to it as well is just a recovery on the sales and distribution side, which which drives premium revenue as as well. Getting back to our indirect share, which we mentioned in the script, and then just having a more reliable better customer experience, more reliable operation, you know, suited to to that specific segment. We expect to continue to participate actively and grow that share. Operator: Thank you. Ladies and gentlemen, at this time, the floor is open for media questions. Please press 11 on your telephone. We ask that you please allow to allow everyone the opportunity to participate. You limit yourself to one question. Our first question comes from the line of Niraj Chokshi of New York Times. Your line is open, Niraj. Niraj Chokshi: Hey. Thank you. I was just wondering if on the topic of of FERN, can you guys help us understand, you know, why why does American so disproportionately affected? You know, just looking today, like, United Delta Southwest have very few cancellations, and American has about 750 so far. Robert Isom: Oh, thanks thanks for the question. I can tell you from having spent the night on campus here that the DFW area is a little bit different. And and it let's face it. DFW is big in our operation. Almost a third of our team members reside in the area. Conditions here are still a skating rink. And I'm super proud of what our team has done in terms of getting the operation back. We're trying our best to make sure that we cancel in front and do that in a way that gives customers the most advanced notice. But there's no mistaken. DFW is still in, the sick of it, and we've gotta, saw out a little bit today. I I do think that the sun's gonna come out, and, you know, roads will improve quite a bit so our team members can give get back in place. But this fern, it hit not just DFW, but it hit Charlotte and then went up the coast. So it hit our system five out of our nine largest op operations you know, all at the same time. I believe that we've got a couple more days of of digging out. Wanna apologize to our customers Certainly doing everything we can to make sure that they are taken care of. And then the last thing is, you know, our team. They're the ones who are fighting the elements trying to make it in, and there's no hiding it. The the Again, it's a it's an ice rink out there in in DFW. And it's safety, safety, safety. So, from the perspective of canceling flights, it's done for the purposes of making sure that we don't put anybody in in harm's way. We'll work out of this the best in the business at this, and we'll be back on track as we get towards the end of the week. Operator: Thank you. Ladies and gentlemen, this concludes the Q and A portion of the call. I would now like to turn the conference back to Robert Isom for closing remarks. Sir? Robert Isom: Thanks, Latif. And I'd just like to say thanks for dialing in. We know who we are. We're a premium global airline. We're out there every day even in these ridiculous weather conditions. Caring for people on life's journey. We have a focused plan this coming year to deliver on our revenue potential. And it starts with making sure we have a fantastic customer experience. We're gonna maximize the power of our network and just, you know, love the areas we're gonna be growing this year. We have a loyalty, proposition that's second to none, and relationship with Citi is really gonna kick start value production this year. And we're gonna keep up the momentum in terms of deliver in terms of selling our product effectively, making sure that we regain and hold our share with our most all of our customers. And at the end of the day, we have a fantastic team We do a great job of producing an efficient level of of capacity. And and making sure that we're taking care of our customers. So, appreciate the the interest and look forward to delivering for our customers and our shareholders. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Central Bancompany Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Ross, President and CEO. Please go ahead. John Ross: Good morning, and thank you for joining our inaugural earnings call. With me in the room today is our Chief Financial Officer, Jim Ciroli; Chief Customer Officer, Dan Westhues; and Chief Credit Officer, Eric Hallgren. Before we begin, I'd like to point out that today's discussion is subject to the same forward-looking considerations outlined on Page 4 of our press release. While the format of our calls may vary over time, today, we plan to be very brief in our discussion of fourth quarter highlights before opening the line for Q&A. Before doing that, however, please allow me to thank our team for their tireless contributions. In 2025, they delivered for their communities with over 28,000 hours of community service. They also delivered for their customers with our Net Promoter Score improving 2 points to 73 on a consolidated basis across our business lines. And finally, to our shareholders, with significant progress made in our technology modernization program and our financial results, which I will turn to now. For the fourth quarter, Central Bank posted net income of $107.6 million or $0.47 per fully diluted share. Return on average assets of 2.17%, net interest margin on an FTE basis of 4.41% and an efficiency ratio on an FTE basis of 47%. Our asset quality remained in line with 10 basis points of net charge-offs and our allowance covered 131 basis points of total loans. While too early to call it a trend, we are also encouraged by the resumption of balance sheet growth with ending loans up 1% quarter-over-quarter and nonpublic deposits up 1.7% quarter-over-quarter. Lastly, capital levels at the holding company remained well above target with approximately $1.8 billion of excess or $7.50 a share. We look forward to the challenge of repeating our historical earnings growth in 2026, including the critical objective of prudently deploying our ample excess capital. With that, I'd like to open the line for questions. Operator? Operator: [Operator Instructions] And our first question comes from Manan Gosalia with Morgan Stanley. Manan Gosalia: First off, congratulations on your inaugural earnings release as a public company. And JR, maybe to start with, M&A has always been in the DNA of Central, and you guys have been pretty clear that M&A is a core part of your strategy here as you look to deploy some of this excess capital. I guess my question is, can you give us an update on the opportunity set that you're seeing as it relates to M&A right now? John Ross: Yes. I'll try to answer your question in a second. But for the broader group, let me just kind of level set for a few things that I know that you know. But over the last 50 years, we've done 47 acquisitions. So we do consider this a competency of the company. We have laid out in the context of our IPO very clearly what we're hoping to do, and we're looking to both grow in our existing markets, but also potentially expand into Texas as well. We're hoping to do that with deals of size, which we've roughly equated to $2 billion in assets. And we're looking for high-quality targets, both in terms of their deposit franchise and their credit franchise with cultures compatible to ours. And we outlined a list of about 30 names on that list that we think meet our criteria, and we are in a process and have been for a few years now of making introductions and having good conversations with at least half of the folks on that list. We do -- we are broadly encouraged by the environment. There is a lot of activity and conversations going on, which does on the margin help Boards think about their opportunity set more than they do, generally speaking. And we do have a currency now, which makes those conversations a lot more interesting to those who are more inclined to participate in the upside of the company that we've enjoyed for so long. Having said that, we're not going to go into this call or any other call in a lot of detail other than to tell you, we continue to diligently prosecute against that opportunity set, and we will likely have no specific update or detail for you until we're actually announcing a deal, which we look forward to do and hopefully in the not-too-distant future. But as we've said before, we're much more focused on doing the right deal than doing a timely deal. So no real estimate or guidance on when that might be. James Ciroli: Yes. And we're just going to -- we're going to be that way, Manan. And I think you guys can appreciate, we just don't want to leave any breadcrumbs or any signals when something might be or might not be happening. So we prefer to just continue to talk about what our target set is, but not really make any other comments. Manan Gosalia: Fair enough. And maybe as it relates to fourth quarter earnings, you spoke about the resumption of balance sheet growth. And I think in the slide deck, you noted less payoff activity as a tailwind to loan growth in the fourth quarter. How should we think about the pace of balance sheet growth from here? And where do you see the most opportunity? James Ciroli: So we're also not going to provide forward-looking guidance. What I will say is when you look at the detail of where our loan growth came from, it was pretty broad-based. And one of the things I'll point out to you that wasn't growing was our installment loan portfolio. And if you take out installment loans, and you look at loan growth, when you annualize those numbers for just the third quarter, you see a number that's kind of mid -- maybe even a bit over mid-single digits growth. But we -- look, we serve our markets and our customers are really going to dictate where that is. The one thing I would point out that is when we're in a risk-on environment, I think we're going to probably grow a little bit slower than average when we're in a risk-off environment because we don't really change our credit underwriting standards through the cycle. We've tried to be as consistent as possible. In a risk-off environment, we'll see more opportunities come to us, and we like that. We like sticking to our knitting and doing our things. So we're happy to see the loan growth. We think it's going to continue, but we're not going to provide any guidance as to how much and where it comes from is as much up to our customers as it is up to us. Manan Gosalia: Got it. Very helpful. I guess just without providing forward guidance, if you can just talk about the environment in the fourth quarter? And was that any different from the environment that you saw in the second and third quarter of 2025? James Ciroli: I would not say. So what we saw was there was just an abatement of some of the higher refi activity. We were pretty clear when we did the IPO roadshow that we thought that origination volume kind of year-to-date in 2025 was pretty robust and pretty strong, but it was muted by a higher level of payoffs that we saw earlier in the year. We think the payoff -- we think the pipelines continue to be strong and the payoffs have muted, and that's what's translated, especially when you look at the commercial numbers, that's what's translated into like the commercial and C&D growth that you're seeing at the period end balance sheet. Eric, is there anything that I'm leaving out there? Eric Hallgren: No, I don't think so. I appreciate the question, Manan. Operator: Our next question comes from Nathan Race with Piper Sandler. Nathan Race: Congrats on a nice quarter out of the gates here. Curious if you can just provide some color just in terms of how you're seeing spreads hold up on new loan production in the quarter and just maybe what kind of the weighted average rate on new loan production was in the quarter relative to the 630 portfolio yield, give or take? James Ciroli: Yes. So there's a lot there. So keep track of how much I answer here. So we're not seeing spread compression. We keep in mind that in general -- I'll make two comments about our portfolio. In general, it's more granular. So i.e., look the median ticket size is probably lower than comparable $20 billion oversized banks. And we probably over-index on the fixed side. But we continue to see if you're comparing with the treasury curve, we're seeing spreads of around 300 basis points, and we've seen that for a long, long time. And we don't, especially in our markets, expect that really to change much. So whether that's variable or whether that's the fixed rate product typically with a kind of a 2- to 5-year tenor, we're seeing about 300-ish bps in spread over comparable treasuries. Nathan Race: Okay. Great. That's helpful. And then just maybe turning to the right side of the balance sheet. Your deposit growth in the quarter was quite strong. Curious if you can just remind us how much of that may be somewhat seasonal in nature versus just kind of blocking and tackling and taking market share or just growing balances across the existing client base? James Ciroli: Very good, Nate. I appreciate you remembering the seasonality. We've got a very large public funds-oriented deposit gathering business. It's about 17% of our deposit portfolio. And in the state of Missouri, property taxes are collected at the end of the year. So really, I'd say, focused in the December time frame, and I'm learning this myself being somewhat new to the company, deposit balances grow. So if we try to normalize for that, we'd say nonpublic deposits grew about 1.7% in the quarter. When you look at a year-over-year basis, we also saw some pretty nice growth. We saw about 6% growth on a comparison to prior year-end. That does include some of the seasonality, but it also shows you that even with that seasonality, we're growing deposits in the kind of mid- to upper single digits. I want to go back one comment, I forgot to give you on loan yields. When you look at the loan yield, it came down like a bp. So amazingly stable in light of the 75 basis points of rate cuts that we had at the end of the year there. And that kind of underscores what we continue to say in terms of our sensitivity to the front end of the curve is relatively neutral. Nathan Race: Okay. That's very helpful. Jim, if I could just sneak one more in for you. Just any update in terms of how you've contemplated or redeployed some of the capital or liquidity raised in the IPO? James Ciroli: It's early days, right? So we just raised that less than a quarter ago. I will still say our primary focus is looking at M&A opportunities. We think that's probably our greatest opportunity to add shareholder wealth. JR mentioned $7.5 a share represents excess capital, and we think we can deploy that in M&A transactions and earn something significantly above that $7.5. But look, everything remains on the table that in terms of deploying that capital, and our Board is very aware of its obligation as being good stewards of capital as to how best to deploy that. So we would look at every tool on the table from dividends and buybacks. When the time comes and when it's appropriate, we'll continue to evaluate what the best way to deploy that capital is. Nathan Race: I apologize, Jim. I was actually asking in terms of how you're managing the liquidity that you raised in terms of just keeping in cash or maybe investing in some short-term treasuries. James Ciroli: I'm sorry, I'm mishovered. That's my bad, Nate. Yes. So we look at some of the seasonality in the deposits. And we would expect that the seasonality we see picking up in December kind of runs out kind of -- it stays on the balance sheet through the second, maybe a little bit into the third quarter. And we'll keep the appropriate powder dry from a cash perspective and look to invest the rest. Now down to a certain level. Given the shape of the curve right now that -- and with that cash current earning, whatever the Fed is willing to pay us, there's not a real imperative to putting that out to use a little bit longer. But in terms of where the curve goes, if the forward curve is to be believed, and that's what we look at, we're not expecting to see a rate cut in the overnight rate until the second half of the year. So we're going to deploy that excess cash patiently in a disciplined way, the way we always have into safe risk -- relatively risk-free opportunities. Nathan Race: Got it. That's, again, very helpful. I appreciate all the color, guys. Congrats on all the accomplishments over the last 90 days or so. Operator: Our next question comes from Terry McEvoy with Stephens. Terence McEvoy: Maybe first question, could you just provide an update on the wealth and treasury management initiatives? And I'm not sure you'll answer this question, but when you think about growth in those two business lines in '26, do you see similar growth within the brokerage and fiduciary services and payment services has been a little flat. When would you expect some of those initiatives to translate into organic growth? James Ciroli: Great question, Terry. I appreciate that. From a wealth perspective, I would point out to you that at the end of the quarter, our assets under advice grew to $16 billion, which was a nice pickup. That was the product of both investment performance, and I'd say investment outperformance because our guys are beating their relative benchmarks as well as we saw strong net new money coming into AUM all throughout the year, especially in the fourth quarter. And I continue to say our wealth business can compete with anyone out there. And I truly mean anyone. And so some of the other providers that are simply doing something that's simpler, but maybe even charging more, I think we win against every day. So wealth continues to be a great opportunity for us. From a treasury management side, I'm going to point out there's a couple of things that you're probably looking at. So from a payments perspective as well as a service charge perspective, we generally see a little bit of falloff going from Q3 to Q4, so there's some seasonality in those numbers. Not as much on the commercial side from a service charge perspective, but certainly, payments volume falls off in the fourth quarter. We continue to make investments in that business that we think are going to lead to us continuing the growth rate you've historically seen in our company. Terence McEvoy: And maybe just a follow-up, stepping out of the model. Could you discuss branch expansion plans in 2026? James Ciroli: We think there's tremendous opportunities, and we've got a number of things in the pipeline. I'm going to give Dan Westhues, a chance to speak because he's eager to and talk about where we're looking at putting those branches. Daniel Westhues: For 2026, we have two major locations where we know we are having branches come online at St. Louis and Colorado or Denver, Colorado. The first branch comes online here in the next couple of months in St. Louis with at least two more for sure in 2026 in St. Louis, and then we are negotiating some other spaces still looking. So branch expansion in St. Louis, we are finally trying to kind of rightsize that -- our footprint up there. We have one coming on in Colorado, and that should be on by the second quarter of this year as well. So two for sure, two more coming after that and the negotiations for the rest. Terence McEvoy: Congrats on your first company as a public company -- first quarter. Operator: [Operator Instructions] Our next question comes from Chris McGratty with KBW. Christopher McGratty: Jim, maybe a question on Slide 5, if you could. The lower right part of Slide 5 gives you kind of the net interest income outlook with a static balance sheet and also kind of alternative rate scenarios. I'm interested in how we should interpret this given the conversation this morning. Obviously, loan growth little bit better, forward curve maybe having a cut or two. The base case would seem kind of where you'd want us to kind of land, but any kind of inside baseball on the nuances would be great. James Ciroli: Yes. I don't know that there's much in the way of nuances there. We show the steepener curve because, look, rates never -- we show the parallel moves, right, but rates never move in parallel. When we look at the forward curve, we think we're looking at more of a steepener scenario with two rate cuts. This is -- wasn't the modeling, two rate cuts later in this year, and that's just not in the steepener model. It's more of an instantaneous shock. But we see the forward curve having two rate cuts later this year. So we are looking at the steepener where we dropped the front end of the curve. And from about the 2-year point on out, we gradually increased that so that we've got a full 50 basis points baked in on the longer part of that curve, but 45 of that 50 is already baked in by the 5-year mark in the steepener scenario. So as we look at that, what we wanted to show is really that we're not really -- we don't think there's much impact to us. We go from a -- we go from 6% up in net interest income next year with that steepener scenario to a 3% up, which is very similar to what we were showing at the time of the IPO. And again, we don't have much sensitivity to the front end of the curve. Our exposure is really more in the intermediate part of the curve. And to the extent that rates are up, they're up this morning, they continue to rise a little bit in that part of the curve, we're going to see a net interest income benefit. Christopher McGratty: Okay. It feels like the base case is a fair place to start and then you make my assumptions on the balance sheet growth. James Ciroli: Balance sheet too, it doesn't include growth. Christopher McGratty: That's right. Yes. And on, I guess, credit, anything on the margin incrementally that you're hearing from customers, you're keeping your eye on? I mean you guys are a good barometer of credit. So I'm interested in your thoughts if anything has changed in the last 90 days. James Ciroli: Yes. I think those are fairly pristine numbers, Chris, especially with our net charge-off rate coming down. But I'll turn to Eric and see if there's any additional color he can add. Eric Hallgren: Yes. Thanks, Jim. So we haven't really seen anything specific that I would say points to weakness or pockets of weakness in the portfolio. On the watch list side, we've seen some evolution or composition shift from criticized into classified categories. But again, as we think about loss content, we don't see anything significant or moving in the portfolio. We are traditionally patient with our relationships and our loan relationships, but we're not holding or harvesting, delaying any potential resolutions. Markets are really diligent and focused on managing outcomes to the best possible extent for both the bank as well as the client. I think that's all I've got, Jim, did I miss anything that you want to add? James Ciroli: No. Christopher McGratty: Okay. And then what have you -- Jim, why the tax rate this quarter fair for going forward? James Ciroli: So you said the tax rate? Christopher McGratty: Yes. James Ciroli: So we did call out that there was about 40 bps of unusual items in the effective tax rate. So of that, I'd guess that 30 of that 40 is out of period and 10 of that is native to the period. That should be helpful to you. Operator: I'm showing no further questions at this time. I would now like to turn it back to John Ross for closing remarks. John Ross: Thank you, operator. Just over 20 minutes that might be a record short earnings call, and I'm going to attribute that to solid numbers and a really good job that Jim did on his first call for us, having been here less than a year. So well done, Jim. I'd also like to thank the participants on the call for their time and interest and our investors more broadly for their support. We look forward to any opportunity to serve you better as we mature as a public company. Thank you again. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, and welcome to the NextEra Energy, Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Mark Eidelman, Director of Investor Relations. Please go ahead, sir. Mark Eidelman: Good morning, everyone, and thank you for joining our fourth quarter and full year 2025 financial results conference call for NextEra Energy. With me this morning are John Ketchum, Chairman, President and Chief Executive Officer of NextEra Energy; Mike Dunne, Executive Vice President and Chief Financial Officer of NextEra Energy; Armando Pimentel, Chief Executive Officer of Florida Power and Light Company; Scott Borys, President of Florida Power and Light Company; Brian Bolster, President and Chief Executive Officer of NextEra Energy Resources; and Mark Hickson, Executive Vice President of NextEra Energy. John will start with opening remarks, then Mike will provide an overview of our results. Our executive team will then be available to answer your questions. We will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements, including if any of our key assumptions are incorrect because of other factors discussed in today's earnings release, the comments made during this conference call, and the Risk Factors section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our website, www.nexteraenergy.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP measures to the closest GAAP financial measure. With that, I'll turn the call over to John. John Ketchum: Thanks, Mark, and good morning, everyone. NextEra Energy had strong operational and financial performance in 2025, delivering full-year adjusted earnings per share of $3.71, up over 8% from 2024 and slightly better than what we communicated as the top end of our range at our investor conference in December. Our expectations are to grow adjusted earnings per share at a compound annual growth rate of 8% plus through 2032, and we are targeting the same from 2032 through 2035, all off the 2025 base. As we enter a new year, we're focused on the opportunity in front of us. America needs more electrons on the grid, and America needs a proven energy infrastructure builder to get the job done. That's who we are, and that's what we do. NextEra Energy develops, builds, and operates energy infrastructure across the energy value chain, whether it's power generation, storage, or linear electric and gas infrastructure. It's why I believe we are well-positioned for the future as we execute against our strategic plan with the over 12 ways to grow that we presented in December. Importantly, our forecasted growth is visible and balanced between our regulated and long-term contracted businesses. Last year was about laying the groundwork for the future of our business. This year is about execution, which is our strong suit. Let's start with FPL, which begins the year with a new four-year rate agreement that runs through the remainder of the decade. The Florida Public Service Commission unanimously approved the agreement in November and issued its final order last week. The agreement allows us to make smart, long-term infrastructure investments on behalf of our customers while keeping bills well below the national average. FPL expects to invest between $90 billion and $100 billion through 2032, primarily to support Florida's growth while continuing its track record of keeping customer bills low and reliability high. While customer affordability is a major concern throughout many parts of the U.S., FPL's typical retail bill today is more than 30% lower than the national average. And FPL expects typical residential customer bills to increase only about 2% annually between 2025 and 2029, which is lower than the current inflation rate of about 3%. Keeping customer bills low is our number one priority, and we do that by continuously investing in and executing against the best-in-class operating model. That discipline delivers real results. FPL's non-fuel O&M is more than 71% lower than the industry average, reinforcing our position as the lowest-cost electric utility operator in the country. The four-year rate agreement also provides an allowed midpoint regulatory return on equity of 10.95%, with a range of 9.95% to 11.95%. FPL's equity ratio remains at 59%, and the agreement includes a rate stabilization mechanism. FPL's agreement also includes a large load tariff. We believe the tariff strikes the right balance by providing hyperscalers with speed to market at a competitive price while just as importantly protecting our existing customers from bearing infrastructure build-out costs needed to support hyperscalers. FPL's speed to market advantages combined with its best-in-class service is creating significant large load interest to the tune of over 20 gigawatts to date. Of that, we are in advanced discussions on about nine gigawatts, a portion of which we now believe we could begin serving as soon as 2028. For context, every gigawatt is equivalent to roughly $2 billion of CapEx and earns the same return on equity as other FPL investments. Florida's growth requires continued investment in energy infrastructure. The state is expected to surpass 26 million by 2040. But it's more than just people moving into the state. Today, Florida is a $1.8 trillion economy, the fifteenth largest economy in the world if the state were a standalone country. Florida leads the nation in key economic indicators like income migration, manufacturing job growth, and corporate headquarter relocations. And that's what makes Florida's growth different than in the past. A diverse set of high-growth industries is bringing new businesses to the state from the Space Coast to Miami and all across Florida. It's why Florida expects to add 1.5 million new jobs by 2034. This is high-quality economic development with high-wage jobs and innovative industries. FPL's continued infrastructure investments help make this economic transformation possible. Energy Resources also continues to grow its regulated portfolio, electric and gas transmission. NextEra Energy Transmission is one of America's leading independent electric transmission companies with total regulated and secured capital of $8 billion. In fact, it's almost twice the rate base size of Gulf Power when we bought the company in 2019. Our scale and experience position us well as we execute on new transmission opportunities across America. NextEra Energy Transmission has secured roughly $5 billion in new projects since 2023. This includes PJM's recommendation in December that NextEra Energy Transmission and Exelon be selected to develop a new $1.7 billion high-voltage transmission line, which is expected to enhance the flow of more than seven gigawatts of power across the region. We expect PJM to make a decision on this project next month. We also continue to execute against our plan to grow our gas transmission business. Energy Resources has ownership interests in more than 1,000 miles of FERC-regulated pipelines, a portfolio with organic expansion opportunities. For example, Mountain Valley Pipeline has multiple ways to grow and is ideally positioned to bring gas from the Marcellus shale even further into the Southeast, where gas demand is already high. It's why we acquired a portion of ConEd's interest in MVP earlier this month. We'll continue to look for opportunities to optimize and expand our regulated gas pipeline portfolio as we provide energy infrastructure solutions to enable large loads across the country. Putting it all together, we expect our combined electric and gas transmission business at Energy Resources to grow to $20 billion of total regulated and invested capital by 2032, a 20% compounded annual growth rate off a 2025 base. Energy Resources had another record year originating new long-term contracted generation and storage projects. We added approximately 13.5 gigawatts to our backlog, which includes a record quarter of origination of 3.6 gigawatts since our last call. We have now originated approximately 35 gigawatts over the last three years. To put that into context, 35 gigawatts of power generation would rank as the fourth largest public utility in the U.S. What's also important is adding electrons to the grid. Again, that's what America needs right now. And that's what Energy Resources did, putting 7.2 gigawatts of projects into commercial operations since last year, an Energy Resources record for a single year. Together, FPL and Energy Resources placed into service approximately 8.7 gigawatts of new generation and storage projects in 2025. We continue to be well-positioned to build more renewables, which remain the lowest-cost and fastest solution to meet our customers' immediate needs. We've secured solar panels to meet our development expectations through 2029, and we've begun construction on those projects too. We've also secured 1.5 times our project inventory against our forecast, providing us permitting protection. Few companies in our industry are positioned like us. We've taken the same approach for battery storage, securing a domestic battery supply through 2029. That's important because battery storage now represents almost one-third of our 30-gigawatt backlog, with nearly five gigawatts originated over the past twelve months. We don't see this demand slowing. Nearly every region in the country needs electrons, and battery storage is the only new capacity resource available at scale. With a national footprint and large land position, we can work with customers across the country on standalone storage. But that's just the beginning. We can also take advantage of our existing footprint by co-locating storage where we already have connections to the grid, effectively doubling down or doubling capacity at a site. While it's the early innings, we're looking at long-duration opportunities too. In all, if you just look at standalone and co-located battery storage assets, we have a 95-gigawatt pipeline. If you assume we can ultimately expand each of these sites, we could potentially double our total backlog. It's a huge competitive advantage and positions us well in a market that's showing strong demand. We also continue to advance our potential gas-fired generation build with a pipeline that's now topped 20 gigawatts. To get us started, we've secured gas turbine slots with GE Vernova to support four gigawatts of gas-fired generation projects. We have a lot of experience building gas-fired generation, as no one has built more in the last twenty years than NextEra Energy. Energy Resources remains focused on both optimizing and adding generating capacity to its nuclear fleet. We continue to advance the recommissioning of our Duane Arnold nuclear plant in Iowa, made possible by the twenty-five-year power purchase agreement with Google we announced last year. Our nuclear fleet outside Florida is also ripe for advanced nuclear development. That's why we are spending time closely evaluating the capabilities of various SMR OEMs. All told, we have six gigawatts of SMR co-location opportunities at our nuclear sites and are working to develop new greenfield sites. Of course, any nuclear newbuild would have to include the right commercial terms and conditions with appropriate risk-sharing mechanisms that limit our ultimate exposure. In addition to Duane Arnold, we have capacity available at our nuclear plant in New Hampshire and Wisconsin. Last year, Point Beach received a subsequent license renewal to operate for another twenty years in Wisconsin and then signed a PPA extension for 14% of the plant's capacity. That deal alone contributes $0.03 of annual adjusted earnings per share. Extrapolate that to the rest of the plant, and you would get $0.21 of annual earnings per share, which is a meaningful increase to the annual earnings per contribution from the current contract. We are also seeing similar interest at our Seabrook nuclear plant in New Hampshire. Between the two of them, we have 1.7 gigawatts of capacity we're offering to the market. Our ability to build all these forms of energy infrastructure is why Energy Resources continues to be a partner of choice for hyperscalers. Remember, companies investing tens of billions of dollars in technology infrastructure don't have time and can't afford to take a chance on a failed project. We come to the table with a national footprint, decades of development experience, unmatched energy infrastructure capabilities, and a strong balance sheet to support their needs. Our breadth and depth allow us to have a multi-year, multi-gigawatt, multi-technology discussion with hyperscalers. These data center hub opportunities, as we call them, represent a powerful channel to originate large generation projects with expansion opportunities where we can grow alongside our hyperscaler partner rather than building on a project-by-project basis. As we discussed in December, our data center hub strategy is all part of our new 15 by 35 origination channel and goal for Energy Resources to place in service 15 gigawatts of new generation for data center hubs by 2035. This dedicated work stream to power data center hubs is expected to help us achieve our existing development expectations through a mix of new renewables, battery storage, and gas generation. And it gives us one potential path to achieve the six gigawatts, the midpoint of our development expectations, of new gas-fired generation build through 2032. We currently have 20 potential hubs we are discussing with the market. We expect that number to rise to 40 by year-end. We won't convert every single hub, but I'll be disappointed if we don't double our goal and deliver at least 30 gigawatts through this channel by 2035. To get there, Energy Resources is laser-focused on positioning the company to where we see the large load market going, and that's to bring your own generation or BYOG. And it makes sense given affordability concerns across the U.S. Hyperscalers can solve that problem by bringing and paying for their own power generation infrastructure. In fact, this issue took center stage earlier this month when the White House and a bipartisan group of Mid-Atlantic governors came forward with the framework of a potential solution to address the mounting affordability challenges in the PJM market. We believe we are uniquely positioned to deliver for the BYOG market across America. That's because, at our core, Energy Resources is a builder. We also have a strong balance sheet, and we have decades of experience and the team required to get the job done. Here's what also separates us. We can work with hyperscalers and the local service provider, whether it's an investor-owned utility, a municipal utility, a cooperative, or a retail electric provider in a competitive market. We have deep, long-standing relationships across the board. That matters. On top of that, our renewables and storage portfolio provides us with a speed-to-market solution to get the initial phase of the data center off the ground and built. Think of it as a hook, so to speak. That's important for two reasons. First, it means the hyperscaler doesn't have to wait. Second, it allows us to then grow with our data center customers over time by providing additional capacity through other power generation solutions like new gas-fired generation or SMRs. Importantly, we've done the work to make sure we are ready to build what our customers need when and where they need it. We're not just building new infrastructure; we are also working to maximize the value of our existing assets. I talked about our recontracting opportunity at our nuclear sites. It's the same story across our renewables fleet, where we have up to six gigawatts of recontracting opportunities through 2032. The PPAs for these projects were signed more than a decade ago during much different market conditions. As the PPAs begin to expire over the next several years, we believe recontracting will command a higher price. Energy Resources' customer supply business also creates a key competitive advantage, providing significant market insight. And that portfolio and knowledge base is growing. On January 9, we successfully closed on our acquisition of Symmetry Energy Solutions, which is one of the leading suppliers of natural gas in the U.S. and an ideal addition to our footprint. Symmetry operates in 34 states and provides us access to additional physical assets, enabling us to deliver a broad range of solutions for our customers. We expect more gas-fired generation to be built across America, including by NextEra Energy, so having the ability to move molecules around the country is a critical skill set. We are also spending a considerable amount of time accelerating our use of artificial intelligence. In fact, I expect our team to leverage AI better than anyone in America. As we announced at our investor conference last month, NextEra Energy and Google Cloud have entered into a landmark strategic technology partnership to redefine the future of the electric industry. Google Cloud is helping us drive and accelerate our own enterprise-wide AI transformation called Rewire. And Rewire will also help us identify and ultimately build AI-first products leveraging Google Cloud's platform. The plan is for our first products to help enable dynamic AI-enhanced field operations and a more reliable and resilient grid. In fact, we expect to launch our first product at an industry event in early February as our partnership with Google is off and running. As I said at our investor conference last month, past performance doesn't guarantee future results, but I believe it's a strong indicator when the road ahead looks a lot like the road NextEra Energy has already traveled. Across economic cycles, NextEra Energy's financial performance has remained consistent. The difference today is that we have more ways to grow and an opportunity like never before to build new energy infrastructure to meet growing power demand across our country. As we move forward, we will remain focused on what has long defined us: being America's leading utility company and leading energy infrastructure developer and builder of all forms of energy. I couldn't be more excited about our future. With that, I'll turn it over to Mike. Mike Dunne: Thanks, John. Let's begin with FPL's detailed results. For the full year 2025, FPL's earnings per share increased $0.21 versus 2024. The principal driver of FPL's 2025 full-year performance was regulatory capital employed growth of approximately 8.1%. FPL's capital expenditures were approximately $2.1 billion in the fourth quarter, bringing its full-year capital investments to a total of roughly $8.9 billion. FPL's reported return on equity for regulatory purposes is expected to be approximately 11.7% for the twelve months ending December 31, 2025. During the fourth quarter, FPL utilized approximately $170 million of reserve amortization, resulting in a remaining pretax balance of approximately $300 million at year-end 2025. Consistent with prior rate agreements, the Florida Public Service Commission approved a rate stabilization mechanism that allows us flexible amortization over the four-year period. Under FPL's new rate agreement, this $300 million will be available for future amortization through the approved rate stabilization mechanism. When combined with the other components of the rate stabilization mechanism, which are maintained on an after-tax basis, FPL will have an aggregate after-tax balance of approximately $1.5 billion available over the term of the agreement. This compares to the pretax balance of $1.45 billion that was approved in our prior four-year settlement in 2021. Key indicators show that the Florida economy remains strong, and Florida's population continues to be one of the fastest-growing in the country. Its annual gross domestic product is now roughly $1.8 trillion, or the fifteenth largest economy in the world if Florida were its own country. For 2025, FPL's retail sales increased 1.7% from the prior year on a weather-normalized basis, driven primarily by continued strong customer growth. In 2025, we added over 90,000 customers as compared to the prior year comparable quarter. For the full year 2025, FPL's retail sales increased 1.7% from the prior year on a weather-normalized basis, also driven primarily by the strong customer growth in our service territory. Now let's turn to Energy Resources, which reported full-year adjusted earnings growth of approximately 13% year over year. For the full year, contributions from new investments increased by $0.47 per share, reflecting continued demand growth for our generation and storage portfolio. Contributions from our existing clean energy assets decreased $0.04 per share. Increased contributions from our nuclear fleet were more than offset by the absence of earnings due to the minority sale of certain pipeline assets in 2024 and other headwinds, including wind resource. Our customer supply and trading business increased results by $0.04 per share, driven by increased origination activity and higher margins. Other impacts decreased results by $0.30 per share year over year. This decline reflects higher financing costs of $0.17 per share, mostly related to borrowing costs to support our new investments, as well as increased development activity to support business growth and higher state taxes. For the fourth year in a row, Energy Resources again delivered our best year ever for origination, adding nearly 13.5 gigawatts of new generation and battery storage projects to our backlog. This includes approximately 3.6 gigawatts since our last call. 1.7 gigawatts, almost 50% of our fourth-quarter additions, were solar projects. Our 2025 origination performance reflects growing demand, including from hyperscalers that are looking for speed-to-market power solutions. Our backlog now stands at approximately 30 gigawatts, after taking into account roughly 3.6 gigawatts of new projects placed into service since our third-quarter call. In 2025, we placed over two gigawatts of battery storage into service, increasing our annual battery storage build from 2024 by roughly 220%. We believe our 30-gigawatt backlog provides terrific visibility into Energy Resources' ability to deliver attractive growth in the years ahead. Turning now to the consolidated results for NextEra Energy. For the full year, adjusted earnings per share from our Corporate and Other segment decreased by $0.12 per share year over year, primarily driven by higher interest costs. NextEra Energy delivered three- and five-year compound annual growth rates in operating cash flow of over 14% and over 9%, respectively. Our 2026 adjusted earnings per share ranges of $3.92 to $4.02 per share remain unchanged, and as we said in December, we are targeting the high end of that range. NextEra Energy has met or exceeded its annual financial expectations since 2010, which is a record we are proud of. This provides us confidence in our ten years of financial visibility that we shared with you at last month's investor conference. We expect to grow adjusted earnings per share at a compound annual growth rate of 8% plus through 2032, and are targeting the same from 2032 through 2035, all off a 2025 base of $3.71 of adjusted earnings per share. From 2025 to 2032, we expect that our average growth in operating cash flow will be at or above our adjusted earnings per share compound annual growth rate range. And we also continue to expect to grow our dividends per share at roughly 10% per year through 2026, off a 2024 base, and 6% per year from year-end 2026 through 2028. As always, our expectations assume our caveats. That concludes our prepared remarks. And with that, we will open the line for questions. Operator: We will now begin the question and answer session. If you're using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed, The first question comes from Steven Fleishman with Wolfe Research. Please go ahead. Steven Fleishman: Great. Thank you. Hi, John and Mike. So subsequent to your Investor Day, I think Google announced the acquisition of Intersect, the renewables developer. So I'm curious kind of how does that fit in with how you're thinking about your partnership with Google, and if we do see other hyperscalers acquire developers, kind of how do you think about that as a competitive risk? Or how are you just thinking about that if that becomes a thematic? John Ketchum: Yes, Steve, it's John. Thank you for the question. And first of all, the short answer is it has no impact on our partnership. You know, Google called us, you know, in advance of the announcement and said as much, you know, to us. And here's why. I mean, we have a lot of respect for Intersect, but you know, they're a smaller developer. They're really concentrated in two states, you know, California and ERCOT. And when you buy into a smaller developer, you're buying into their existing position, and you really gotta think through what that existing position comes with. Where are they on safe harbor? Right? Those deadlines have already passed for tax credits. So you're stuck with whatever safe harbor position that they have. A smaller developer is always going to have a small safe harbor position just given the obvious limitations. FIAK, right, is another safe harbor where the deadline has passed as well. We are in an outstanding position in both of those areas, you know, and have a ton of flexibility to add a lot of generation. You're also kind of stuck with their inventory. You know, where are their permitted sites? We have permitted sites across the United States. We have 1.5 times coverage on those sites. You're also kind of stuck with their supply chain position and their relationship. Have they remembered long lead time equipment that has to be secured? So if you weren't planning on an acquisition, you probably didn't have a lot of inventory to start with to go engage in a large build. And so I think that's certainly a limiting factor. We've been very vocal. I mean, we've been out buying equipment for, you know, across the energy value chain. Secured our solar and storage inventory through 2029. I don't think many small developers can say that. And then experience across technologies, you know, you gotta really find somebody that knows all 50 states, that can do business in 50 states, understands the ISOs in and out, working with FERC, working with Washington. And experience across wind and solar and storage and transmission, whether it's electric or gas, all of those things are nuclear and gas-fired generation. Very rare and unusual and unique, the position that NextEra is in. And so I think when you put all those factors together, addressing your other question, the competitive risk, I just don't see it. You know, we are in a period of significant power demand, needing to put electrons on the grid. We have great sites, have 20 data center hubs, you know, that we're developing currently trying to expand that to 40. Small developers just don't have that. And so we're in a great spot, and I couldn't be less concerned. Steven Fleishman: Understood. One other question just on we've seen a little more noise just on kind of data center fighting opposition or concerns about causing rates to go up and including some, I think, in Florida. Just could you maybe just talk to how you're feeling about that overall, but maybe specific in your Florida plant? John Ketchum: Sure. I'll turn that over to Scott Borys to address the Florida question, and I'll come back and talk about what we're seeing on the national level. Scott Borys: Hey, Steve. It's Scott. In Florida right now, we are in legislative session. There are two pieces of legislation out there. One by the house, one by the senate. The senate is the one that's advanced through already through a committee. I will say it's the more constructive legislation. What that is really pushing for is, I'll say, a lot of what our tariff already does, providing protections to the general body of customers. And so we are gonna continue to support that legislation as it advances, and I think ultimately, that is gonna allow us to continue to move our tariff forward and hopefully, continue to get some customers signed up and move that forward, but nothing we're concerned about in Florida. John Ketchum: Yeah. And when I look at things nationally, that's what's so beneficial about what NextEra Energy brings to the table, right? One, we have a national footprint. Two, we have the ability to really help our customers design affordable and reliable solutions given what we can bring to the table across the energy value chain. We really can help them actually come up with a solution that really threads the needle, you know, around affordability. But also bringing the necessary electrons that are required to create that job creation, create that property tax base. And, you know, like I said in my prepared remarks, I mean, we really see this heading more towards bring your own generation. And I think that's how we've set up our entire pipeline and our developed effort. And, you know, we are one of the very few companies that are out there. And, you know, and if investors are looking for a way to get exposure to a builder, I think we're the perfect answer for that. And I think that's where Washington is heading. I think that's where the various ISOs are heading because it's gonna be really important that the hyperscaler shoulder, you know, the cost associated with the incremental generation that has to be built, the power the data center. And I think we're the perfect partner to do that given the relationships that we have. Given our ability to do things at a much lower cost than our competition. And so feel good about where things stand outside of Florida as well for those reasons. Steven Fleishman: Okay. Thank you very much. Operator: The next question comes from Julien Dumoulin-Smith with Jefferies. Please go ahead. Julien Dumoulin-Smith: Hey. Good morning, team. Thank you guys very much for the time. I appreciate it. Maybe pick it up where Steve left off. I mean, look. I'd love to hear a little bit about how you think and what's the expectations on the cadence of announcements to hit these targets, whether the 15 or 30 gigawatts? And specifically, what does success in 2026 look like in order to ensure you're tracking against those, you know, 15 plus or what have you? And then within that, John, how do you think about the kinds of resource mix? Like, is 15 what's the composition of gas versus renewables, etcetera, etcetera, if you can? And then maybe a sub part of that to tie back what Steve said. How would you set milestones or expectations in FPL specifically? I know you guys talked about the 2028 starting time on a data center. Is that coming sooner or later relative to the near efforts on the hubs? John Ketchum: Yeah. Let me go ahead and take those in order, Julien. Yeah. So first of all, let's just talk about the development expectations that we laid out at the investor conference. As I've said before, they're not heroic. Right? I mean, they're basically as long as we can do, you know, through 2032 what we've done over the last ten or twenty years, we're gonna be in great shape. Right? I mean, we're counting on, you know, market share that is very consistent with what we've been able to achieve over the last one to two decades. In renewables, it's about 15% to 20%. In storage, about 20% to 30%, and in gas, through 2032, it's only 5% to 10%, you know, market share. You know? So we feel very good, first of all, with the base forecast. Second, when you mentioned the 15 by 35, one of the things that I wanna make really clear is that 15 by 35 is just an origination channel. Right? That's a program that we have on the origination side to hit those very reasonable, very realistic development expectations. It's one of many ways to get there. And when you unpack that 15 to 35 gigawatts, the composition of it is roughly six gigawatts of gas-fired generation by 2035, and it's going COD by 2035, you know, to hit that. And it's a mix of renewables and storage for the balance. So we feel good about where we stand. We hope to be able to do, you know, a little bit better than that. Actually, let me make one clarification. That's six gigawatts of gas by 2032. I said 2035. By 2032. Julien Dumoulin-Smith: And second, let me talk about the milestones for Florida real quick, and then we'll turn things over to Armando to add some points on Florida. For FPL, we feel really good about where things stand. Right now, we have, you know, 20 gigawatts of interest in Florida. And we have advanced discussions with, you know, customers on roughly nine gigawatts for all the reasons that I had in my prepared remarks. Florida is a terrific data center opportunity for the right partner. I think folks see that. And they realize the benefits and the growth that we're gonna be seeing in Florida, the fiber latency issues, the need to be close to where business is developing in South Florida, all the development that we're seeing across the state. But second, what's really attractive and what's really appealing, I think, for hyperscalers is, look. We have a really, you know, we have a low bill. We know how to get things done. We have a long track record of being able to work with the state, you know, at all levels. And but most importantly, from a customer standpoint, we have a large load tariff that makes sure that the hyperscaler is paying the cost of the additional build, not the customers in Florida. Armando, do you have anything you'd like to add? Armando Pimentel: Yeah. Just real quick, Julian. So John has in the prepared remarks a sentence that said 2025 was about laying the groundwork and 2026 is about execution. That applies to both companies and certainly to FPL. To answer your question as specific as I can, my expectations is that in 2026 that there will be announcements regarding large load in our service territory. That's certainly what we are shooting for and working for. And that's what 2026 for us is all about. Julien Dumoulin-Smith: And Julian, just on the question around what does 2026 look like for us for success, I'd just go back to 'thirteen. Comment about '13 is our expectations. This is our kind of road map. That we're gonna track against from the standpoint of where do we think we'll be developing. And so this is the channel feeds into this as John mentioned. So we're looking at the expectations that we're laying out here on page 13 and continue to track against those. Julien Dumoulin-Smith: Awesome. And just as a quick follow-up in terms of disclosures maybe. And not to put you down too much on twenty-sixth, how do you think about, say, chunkier announcements, you know, say, Google here making specific announcements around that versus, you know, their typical quarterly announcement cadence of singles and doubles to kind of, quote unquote, chip away against that 15 plus gigawatt target on the near side. Should we expect bigger announcements here or is this going to be more of a regular quarterly cadence of tipping away? John Ketchum: Yeah. I mean, I'll say two things about that, Julien. I mean, first of all, we have a lot going on as a company, a lot of opportunities, a lot of discussions that we're having with customers that are in various stages. You should not expect us to wait for quarterly calls to announce those things. So as they happen, you know, we will, you know, come forward with them on those chunkier deals as you call them. Julien Dumoulin-Smith: Actually, guys, leave it there. All the best. Good luck. John Ketchum: Thanks, Julien. Take care. Operator: The next question comes from Shahriar Pourreza with Wells Fargo. Please go ahead. Shahriar Pourreza: Hey guys, good morning. Good morning, Shahriar. Good morning. John, just in terms of the nuclear recontracting, maybe just an update in Wisconsin since the existing counterparties need to make a resource decision kind of soon. I guess where do we stand on marketing the open capacity? And just given the amount of acreage that's around the site, could we see sort of a behind-the-meter deal structure there or should we continue to assume a virtual deal just given the BOIG initiatives etcetera? John Ketchum: Yeah. I mean, you know, first of all, on Wisconsin and Point Beach, I'd say this about all of our nuclear plants. We saw how much interest there was around Duane Arnold. There's a lot of interest, you know, around Point Beach. Wisconsin's in a great spot for data center, you know, build-out. You know, it's no secret, you know, how much interest there's been there, Foxconn and Cloverleaf and, you know, some of the other, you know, expansion opportunities around the state. Very conducive to data center build-out. And so with that, comes a lot of interest, you know, around power generation solutions. And given the relationships that we have with utilities in the Midwest region and with cooperatives in the area. You saw the Whippy deal that, you know, we announced with 14% of the generation already having been secured is one example of that. We feel very good about how that asset is positioned. We're going to be careful and methodical about our approach and, you know, make sure that, you know, we're doing the right thing by our shareholders in terms of what we ultimately do with that asset. Shahriar Pourreza: Got it. Okay. Appreciate that. And then just on PJM, specifically, a lot of different data points there. But would you participate in the backstop auction there just either on the renewable or gas side? Is it sort of becoming a little bit more constructive as a solution? Thanks. John Ketchum: Yeah. I think Shahriar, the way I would answer that is still a lot to play out. Right? And you got to have regulatory certainty before you allocate capital against any investment. And so we would have to have real regulatory certainty around outcomes here in order to drive new investment. And I think that is exactly what the administration is trying to do, and I think that's what the 13 governors that signed on to the recent framework agreement or framework proposal that was announced. But PJM has more work to do in terms of coming up with what exactly they plan for the future of that market. But certainly, under the right construct, it could be attractive for new generation, but you have to have, you know, long-term certainty around what capacity prices are going to be. They have to be at the right level in order to support, you know, new investment in that area. And as I look at it, with how we're positioned around BYOG, we have so many opportunities in the United States right now that we are pursuing. But certainly, we have a close keen eye on PJM as well and are watching to see how things play out. Shahriar Pourreza: Got it. Perfect. That's all the questions I had. Thanks. John Ketchum: Thank you, Shahriar. Operator: The next question comes from Nicholas Campanella with Barclays. Please go ahead. Nicholas Campanella: Hey, good morning. Thanks for taking my questions. Just wanted to come back to the FPL large load discussion. Just I wanted to just understand, you have the tariff framework in place. What is the kind of gating item more on the customer side? Like, what are your customers telling you they're still trying to get done before being able to kind of move forward with an agreement? Is it, like, water, land permitting, zoning? I guess just what needs to kind of fall into place to see some announcements here in '26? Appreciate it. John Ketchum: Thanks. So look. Customers want to make sure that when they're plopping down the $10 billion or so for all the capital that's needed for one of these that they're in a place that they feel comfortable long-term. And while we have a tariff, there is current legislation being discussed up in Tallahassee that may make a difference in terms of water usage, may make a difference in terms of items that hyperscalers or large load company entities can get from local municipalities or from the state. And waiting to see how that shakes itself out. Scott answered a question before, what's going on in Tallahassee. We feel quite comfortable that we are going to get to a very constructive outcome in terms of what data centers have to look at in order to do business in Florida. But my expectation is, as I answered the question before, is that in 2026, based on what we are seeing, the interest that we are seeing on the ground here in Florida and particularly in the FPL service territory, that there will be some announcements in 2026. So again, I expect there to be a constructive outcome to the legislation that's being discussed up in Tallahassee. And I also think it's very likely that we will have announcements in 2026 regarding large load in our service territory. Nicholas Campanella: Great. Thanks. Sorry to make you repeat yourself. And then maybe just a quick update on supply chain. I know you have the four to eight gigawatt gas target, and you talked about having secured supply for four gigs. Just when would you kind of secure the additional four? And where do you see pricing right now through 2032? And availability? Thank you. John Ketchum: Yes, Nicholas. So first of all, we have the four-gig position on gas, which we would put against the opportunity set, mainly those data center hub opportunities that we see and are continuing to advance. I've talked a lot about on this call. From a, you know, when will we, you know, secure more, you know, as our discussions, you know, continue to advance. And we continue to have very good discussions kind of across the board on those 20 gigawatts of data center hubs that we hope to grow to 40 by the end of this year. And, you know, we always make prudent decisions around how we manage our supply chain position. I don't worry too much about it in terms of gas turbine though. I mean, given the relationship and partnership that we have with GE Vernova, our hands on gas turbines at an economic and competitive price is not the top of my list of things to be concerned about. And so I think that probably also addresses the pricing point. I can't give you specific pricing terms and conditions that we would get or that we would see. But I would say they just remain consistent with what we told you, you know, back in December. Operator: Thank you. The next question comes from Jeremy Tonet with JPMorgan. Please go ahead. Jeremy Tonet: Hi, good morning. John Ketchum: Good morning. Jeremy Tonet: Just want to start off with wind additions if I could. It looked like a little uptick there. Just wondering if you could frame a bit more what you're seeing. Are there some green shoots that could be developing there? John Ketchum: Sure. We had some wind additions that you saw in '28 and '29 if you're looking at the backlog page. And, listen, I we continue to see balance across our business from the standpoint of opportunities for people who are looking for electrons. And so I don't know, from a green shoots perspective, I do think we'll continue to see more solar, more storage, and then ultimately gas relative to wind. I think that's a trend that continues to move forward. But, you know, we still see interest across the various products. We got a, you know, national footprint and national customer base and the need for electrons kind of varies. So, you know, we're glad to add them, but I think the trend is still gonna be more towards solar and batteries as we think about those various products. Jeremy Tonet: Got it. Understood. And, if I could just pivot towards SMRs, I think we started to see hyperscalers and other, I guess, end users start to adopt, I guess, one technology to run with. And so, you know, granted it's ways off at this point, but just wondering your thoughts on this and whether you might look to partner with one technology here to go for it as everyone tries to go from a full to NOAC? And just wondering, rough timing and around design approval and then construction timelines, if you were to go in that direction? John Ketchum: Yeah. Good question. And, you know, we've done a lot of work, you know, around the OEMs. I think we said back in December, you know, we kind of took the 96 or so folks that call them SMR OEMs and called that down to about 12 and then did deep dives on technology commercial assessment around the balance. And, you know, we have a very good feel, you know, as to who may make sense to advance discussions with there. But, you know, whether or not we partner with one, you know, partnering is not something that, you know, we've historically done. We like to create competition, you know, amongst our suppliers unless one particular supplier has concentration in a specific area or has a unique technology offering, and we can enter into an attractive, you know, long-term, you know, pricing arrangement that creates win-wins. But, you know, we're always careful about locking ourselves in with just one counterparty. But obviously, for us to advance on SMRs, is something we are we have an SMR team, first of all, I should say. You know, we are taking this very seriously. We have a development a part of our development organization that is focused 100% on SMRs. So we're not only looking at development around our existing nuclear sites, but we're also looking at greenfield opportunities as well and how an SMR could fit into a long-term solution around a data center hub. As we look to the future. But, you know, any movement up from us on SMRs, I go back to what I said in prepared remarks, has to be under the right commercial terms and conditions where there's appropriate risk sharing, capping on financial exposure, because we're gonna be very prudent and careful how we approach that market. But excited about, you know, the potential. You also asked about some of these announcements where you see hyperscalers, you know, teaming up with one specific OEM. Not sure how much I would read into that. I, you know, I think, really, you know, folks are just trying to learn more and see, you know, who has viable solutions out there. We'll see which ones actually advance over time. But, you know, that's what we are keenly focused on. And in any discussion, it's not around SMRs. It's not only with the OEM. It's with the hyperscaler as well. It's with the government. Right? I mean, it's gonna take four parties coming together to come up with the right structure that makes sense, but it's something we're very focused on. Mike Dunne: Yeah. And then the only thing I'd add, which I know we've said before, is while we are spending a lot of time, it's not in our expected. That would be upside to our plan if we were able to put something together. We are spending all that time that John talked about, and it would be upside to our plan. But our base plan doesn't have SMRs in it. And so we but we do think it could be good upside. We're spending real time on it because I think there's an opportunity that we're excited about. Jeremy Tonet: Got it. Makes sense. One quick last one if I could. It does seem like the federal government is putting in very significant billions of dollars to support SMR, in nuclear development here. Just curious, think, if there's anything missing or what more could be put in there to get the market going in this direction? John Ketchum: Yeah. I think, first of all, I think the administration is doing all the right things. Like you said, I mean, they are really trying to enable American energy dominance across the board. And excited about many of the programs that are coming forward with around nuclear in particular and around SMRs advanced nuclear. I think that just those programs that they've already established create the opportunity for that four-way discussion, you know, that I just mentioned in a very constructive way that, you know, I think it, hopefully, get one of these projects off and off and running. Under the appropriate commercial, you know, structure. But more work to do there. Right? I mean, you know, you've I think we've made some very good progress, you know, in that area, and I think the government is doing the right things. And so, you know, up to developers and OEMs and customers to come together to work with the government on the right framework. Jeremy Tonet: Got it. Thank you. I'll leave it there. Operator: The next question comes from Carly Davenport with Goldman Sachs. Please go ahead. Carly Davenport: Hey, good morning. Thanks for fitting my question in. You had mentioned earlier the PJM recommendation for the transmission project with Exelon. I guess there's been some degree of pushback in Pennsylvania on that project given the cost and some of the shifts on the PJM load forecast. Can you just talk a little bit about that and your confidence in that project moving forward? Mike Dunne: Sure. Listen, I think our confidence continues to be high. PJM management continues to recommend we expect them to continue to recommend for the board and the ultimate board meeting up. We're listening to everyone, all the stakeholders, the OCA as they continue to think about this project. But we think this is important for reliability. It's the lowest cost to answer in the region to achieve that reliability, and then it continues to be supported by PJM. So we feel good and continue to feel good and we'll continue to listen to all the stakeholders throughout the process. Carly Davenport: Great. Thank you. And then just on the adjusted EBITDA outlook for '20 at near, if we look at the year-over-year guidance for both gas pipes and gas infrastructure, that looks down year over year. So just curious, given the asset purchases in that area this year, kind of what drives that decline? And if you see any potential upside, obviously recognizing that's a smaller piece of the pie today? John Ketchum: Yeah. I think as we've mentioned on the natural gas pipelines, it's going to be an area that we continue to grow over the course of the next decade. If you look at what occurred between 2025 and what we look at for 2026, simply as you looked at our proportionate ownership share in Explorer, they had a pipeline of mean that they divested at Explorer, and that brought down that EBITDA. But as we look on a go-forward basis, pipelines will be, you know, a critical piece of our growth trajectory for 2026 and beyond. And listen, as you look at gas infrastructure, I think the reduction in EBITDA is relatively small. $50 million or so. So as you look at that piece, we'll continue to see that have a place in our overall structure, but I wouldn't necessarily expect that to be a key piece of our growth trajectory. Carly Davenport: Got it. Thanks so much for the color. Operator: At this time, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to PACCAR's Fourth Quarter 2025 Earnings Conference Call. All lines will be in listen-only mode until the question and answer session. Today's call is being recorded. If anyone has an objection, they should disconnect at this time. I would now like to introduce Mr. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead. Ken Hastings: Good morning, and welcome, everyone. My name is Ken Hastings, PACCAR's Director of Investor Relations. Joining me this morning are Preston Feight, Chief Executive Officer, Kevin D. Baney, President, and Brice J. Poplawski, Senior Vice President and Chief Financial Officer. Preston Feight: As with prior conference calls, we ask that any members of the media on the line participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties that may affect expected results. For additional information, please see our SEC filings and the Investor Relations page of paccar.com. I would now like to introduce Preston Feight. Preston Feight: Good morning. Kevin D. Baney, Brice J. Poplawski, Ken Hastings, and I will update you on our very good fourth quarter and full year 2025 results, as well as other business highlights. PACCAR's fourth quarter revenues were $6.8 billion, and net income was $557 million. In 2025, PACCAR achieved annual revenues of $28.4 billion and adjusted net income of $2.64 billion, which is the fourth highest profit year in company history and the eighty-seventh consecutive year of profits. Adjusted after-tax return on revenue was 9.3%. I am proud of PACCAR's outstanding employees who delivered these results by providing our customers with the highest quality trucks and transportation solutions in the industry. PACCAR Parts and PACCAR Financial Services each achieved quarterly and annual revenue records. PACCAR Parts and Financial Services represent an increasing percentage of the overall business and contribute to PACCAR's structurally stronger performance. 2025 was a dynamic year in the North American truck industry, with soft freight markets, tariffs, and emissions policy uncertainties. In this environment, Kenworth and Peterbilt made strong contributions to PACCAR's results. Importantly, we ended last year with tariff and emissions clarity. The Section 232 truck tariff policy that became effective on November 1 provides advantages to PACCAR, which produces trucks in the United States, Canada, and Mexico for each local market. I am proud of PACCAR's excellent team that has created this cost-effective, flexible, and robust manufacturing strategy. In late 2025, it was confirmed that the 35-milligram EPA 27 NOx limit will go into effect in January. This brings clarity to the market and helps customers make their buying decisions. PACCAR is wonderfully positioned for these changes with the newest lineup of trucks and engines that are the most efficient and highest quality in the industry. Last year, US and Canadian Class 8 truck retail sales were 233,000 units, and Kenworth and Peterbilt delivered a market share of 30%. The US economy is projected to expand this year. The less-than-truckload and vocational truck sectors, where Peterbilt and Kenworth are the market leaders, are steady. The truckload segment is beginning to accelerate, with industry customer demand and spot rates picking up in December. The 2026 US and Canadian Class 8 truck market is forecast to be in a range of 230,000 to 270,000 vehicles as economic growth, regulatory, and tariff clarity and improving freight conditions are poised to improve customer demand. In Europe, DAF trucks have a competitive advantage in the market with their innovative aerodynamic design that features the largest, most luxurious cab interior and the best powertrain choices. In recognition of this, the DAF team earned the prestigious International Truck of the Year award for the DAF XF and XD electric trucks. It is noteworthy that this is the third time in five years that DAF has won this award. In 2025, the European above 16-ton truck market was 298,000 units. This year, the European economy is forecast to grow modestly, and we expect the above 16-ton truck market to be in the range of 280,000 to 320,000 registrations. In addition to the excellent businesses in Europe and Brazil, DAF is also expanding in the Andean region of South America. Ken Hastings: Last year, the South American above 16-ton market was 115,000 vehicles and is expected to be in the range of 100,000 to 110,000 trucks this year. Other 2025 business highlights included PACCAR earning the elite A rating from the Climate Disclosure Project for its environmental performance, DAF being honored as the Fleet Truck of the Year in the UK, DAF, Kenworth, and Peterbilt introducing the next generation of battery electric trucks, PACCAR completing a new engine remanufacturing facility in Mississippi, and Kenworth completing a new chassis paint facility in Ohio. PACCAR delivered 32,900 trucks in the fourth quarter, and deliveries are forecast to be at a comparable level in 2026. Fourth quarter truck parts and other gross margins were 12%, and we estimate that first quarter gross margins will increase to 12.5% to 13%. We look forward to 2026 being a year of accelerated growth for our customers, dealers, and PACCAR. Kevin D. Baney will now provide an update on PACCAR Parts, Financial Services, and other business highlights. Kevin D. Baney: Thank you, Preston. In 2025, PACCAR declared dividends of $2.72 per share, including a year-end dividend of $1.40 per share. This resulted in a dividend yield of nearly 3%. PACCAR has paid a dividend for a significant eighty-four consecutive years. Last year, PACCAR Parts' annual revenues increased by 3% to a record $6.9 billion, and pretax profits were a strong $1.67 billion. Fourth quarter revenues increased 4% to a record $1.7 billion, with pretax profits of $415 million. PACCAR Parts' performance reflects the benefits of investments in connectivity and agentic AI that increase vehicle uptime and enhance the success of our customers. PACCAR Parts is continuing to expand and now has 21 distribution centers worldwide, including a new distribution center in Calgary. This new PDC enhances parts availability and delivery times to Canadian dealers and customers. The aftermarket parts business provides strong profitability through all phases of the business cycle. We estimate parts sales to grow by 4% to 8% this year, with growth accelerating as the year progresses. Last year, PACCAR Financial Services achieved record annual revenues of $2.2 billion, and annual pretax income grew 11% to $485 million. Fourth quarter revenues were a record $569 million, and quarterly pretax income grew 10% to $115 million. PACCAR Financial provides the highest quality service in the market and makes it easy for customers to do business with PACCAR through the use of technology in the credit application and loan servicing process. PACCAR Financial increased market share to 27%, a growth of two percentage points when compared to 2024. Capital project investments last year were $728 million, while research and development investments were $446 million. This year, we are planning capital investments in the range of $725 to $775 million and R&D expenses in the range of $450 million to $500 million. This year's investments in key technology and innovation projects include the creation of next-generation clean diesel, hybrid and alternative powertrains, battery cells, integrated connected vehicle services, flexible manufacturing capabilities, PACCAR's autonomous vehicle platform, and advanced driver assistance systems. PACCAR's independent Kenworth, Peterbilt, and DAF dealers consistently invest in their businesses, enhancing our industry-leading distribution network, and they make a significant contribution to PACCAR's long-term success. PACCAR is looking forward to a great year in 2026. Ken Hastings: Thank you. We would be pleased to answer your questions. Operator: Thank you. When preparing to ask a question, please ensure your device is unmuted locally. The first question comes from David Raso with Evercore ISI. Your line is open. Please go ahead. David Raso: Hi. Thank you for the time. I was just curious, can you walk us through the margin improvement you expect from 4Q to 1Q despite the flat deliveries? Preston Feight: The thinking is, David, there is a lot to unpack there. But one thing you should look at in the fourth quarter is we had the Section 232 go into effect. Obviously, that went into effect on November 1, so for a month, we had higher tariffs. So that happened in there. The other thing that was significant is our manufacturing teams in the fourth quarter did a really great job of being able to convert the factories over to build trucks local for local. For example, Chillicothe and Denton are now building the medium-duty trucks, and in Canada, we are able to build all of the product lines principally for Canada. So that was a lot of adjustment in schedules during the fourth quarter, which had some impact on margins. As we look forward, we get a full quarter in Q1 of margins that are benefiting from the Section 232 tariff. There is the clarity of NOx 27, which happens. So I think that is starting to have some improvement. Order intake has been very good, very strong in December and through January, so we are seeing some uptick in terms of customer demand, which is good for our business as well. And that is what is driving up the margin to 12.5% to 13% in Q1 compared to the 12% in Q4. David Raso: And that last point about orders, would have thought maybe the build sequentially could be up. What is the translation from those orders into when you expect to produce those trucks? Preston Feight: Yeah. I mean, you know the cadence of it is a lot of orders at the end of the year come in as fleets that are spread delivery throughout the year. So that is a little bit of what I think everybody saw in the fourth quarter. And then what we are seeing now is a little bit more close in terms of order intake, which is allowing us to build up our backlog a little bit, increase visibility a little bit, and then that is what is going to translate into higher build in the outer quarters. David Raso: And lastly, to quantify a little bit, 4Q to 1Q, can you give us some sense of the price-cost dynamic in truck in the fourth quarter and how to frame it with the Section 232 benefits for 1Q? Preston Feight: Yeah. I think you can see favorability coming in Q1 compared to Q4 in price-cost. Most significantly is cost reductions that we would expect to see again, doing that comparison of the work our factories did, that has some cost impact in the fourth quarter in terms of getting the right trucks in the right places. And then, again, we get the benefit of Section 232 in Q1, so it gets a lot more stable in that for a net positive price-cost on truck. Brice J. Poplawski: Yeah. We also had a higher level of overtime in the fourth quarter because of the events that Preston spoke to and getting all the trucks out at the end of the year. So our employees did a fantastic job getting all the trucks out that our customers desperately want to have. So we felt really good about that. That should not be recurring in the first quarter either. David Raso: Alright. Thank you for the time. Preston Feight: Yeah. Thanks, David. Have a good day. Operator: We now turn to Jerry Revich with Wells Fargo. Your line is open. Please go ahead. Jerry Revich: Hi, good morning and good afternoon, everyone. Kevin, congratulations. Kevin D. Baney: Thank you, Jerry. I am wondering if you could just talk about what you are seeing in the performance of your aftermarket business in January by region? Feels like there is an uptick in Europe in particular that is playing out. I am wondering if you could just provide the context you just provided on orders for aftermarket Europe and U.S., please. Kevin D. Baney: Yes, sure, Jerry. So the forecast for Q1 is 3% growth year over year. The team did a great job, let us say, in a soft parts market with record sales growth for last year and definitely for the fourth quarter. And what we are seeing is, you know, in a soft parts market, customers really are focused on required maintenance, and so we saw a mix shift towards that. We have great AI agentic tools to help identify that and how long we get that mix shift in our distribution centers, but also out with the dealers. And so, you know, we have got a forecast of 4% to 8% growth for this year. And, you know, we will see that, you know, definitely as we see the truck side accelerate through the year, we will see that on the parts side as well. Jerry Revich: Super. And then in Europe specifically split in... Kevin D. Baney: Yeah. That is what I was about to say. And then just the split in region is, I think, well, it will be consistent in North America as well as Europe. Jerry Revich: Very interesting. Thank you for the color. And then can we just double on Europe a little bit? So production was really high in the quarter versus normal seasonality, and you took up your outlook for Europe. Can you just expand on what you are seeing in terms of is it a particular set of countries that are driving the demand acceleration for you folks in Europe? Or how broad is the activity improvement? Kevin D. Baney: Yeah. The market finished at, I will focus on heavy-duty, at 297,000. And so a relatively strong market for Europe. No specific focus on any given region. Obviously, you know, it did depend on where you are in Europe, some markets are stronger than others. You know, we continue to focus on premium trucks. You know, Preston said we have been recognized as Fleet Truck of the Year in the UK. International Truck of the Year for the DAF XF and XD. And so we just, you know, we took the market up because we see, you know, a similar strong market this year as well. Jerry Revich: Yep. Good story. And lastly, can I ask on Section 232 as that starts to impact your competitors, how are you thinking about market share versus unit profitability from a PACCAR standpoint? As we look back historically, you folks have targeted improving unit profitability cycle over cycle. And so as we are thinking about the benefits from the rebate program as well as, you know, chatter out there for $9,000 type price increases, can you just provide a PACCAR perspective on where you see unit profitability going and how you folks are thinking about market share versus profitability given Section 232 evens the playing field for you folks? Kevin D. Baney: Yeah. I think, you know, the last statement you made is really instructive because throughout 2025, there was a bit of a disadvantage. And now I think we anticipate that to be an advantage. It does not come through quickly. Right? It is a competitive world out there. So in the first quarter, many of our competitors have not taken that to the market yet, those tariff costs to the market yet, which keeps things in a bit of a very competitive state. Maintains that dynamic nature we were talking about in our commentary. But through the year, we feel good about our opportunity to gain in terms of margin and market share. As the year progresses and things stabilize out. Because it does seem stable now, and because our teams have done such a good job getting the local for local manufacturing, it really should be an opportunity for us in both categories. Jerry Revich: Thank you. Kevin D. Baney: You bet. Operator: We now turn to Robert Wertheimer with Melius Research. Your line is open. Please go ahead. Robert, your line is open. Robert Wertheimer: I am so sorry. Just following up on Jerry, the cycle margins and where your kind of competitive and production position sits in North America now versus in the past. Is there any reason to think as things normalize over the next year or two or three that your truck margin should be, you know, anything different from average, you know, whether higher or lower? And I have one follow-up. Thank you. Preston Feight: You know, I would say, Rob, that predicting out one, two, three years in the operating environment we are in is a little bit challenging in terms of what things are going to look like. There is a USMCA negotiation that is going to take place probably later this year, so it will be instructive to look at that. So I think that could have an impact on how margins feel. What I think we are focused on is making sure that the trucks we are providing have the greatest value to our customers. And to that end, as you know, right, we have the newest lineup of trucks out there. And one of the things that we are now focusing on is how we are going to be able to help our customers be more profitable through the use of the AgenTic AI that Kevin mentioned but also maybe more generally in connected truck data. So our ability to have every truck be connected and gather, like, pentabytes of data from our trucks and then use that data to provide customer value is significant in the coming years. So that is what we can control, and that is where our focus is. It is high-quality trucks, lowest cost of ownership, highest reliability, and new transportation solutions for our customers to help them be more successful. Robert Wertheimer: Interesting. I look forward to hearing more about that. And then just a quick one. Did you mention your European market share for the year? Brice J. Poplawski: Yep. I had not yet, Rob, but it was 13.5% on the heavy-duty side. Robert Wertheimer: Perfect. I have a bunch of questions for you shortly, and thank you very much. Preston Feight: Thank you. Look forward to sharing more with you. Operator: We now turn to Steven Fisher with UBS. Your line is open. Please go ahead. Steven Fisher: Great. Thanks. Good morning. Just wanted to confirm some of the production dynamics in the quarter. The 15,000 in U.S. and Canada. I thought I heard you say that maybe that was affected by sort of shifting local for local. How much of, well, I guess, was the 15,000 less than what you expected? How did that compare? How much of that, if you could break it out, was tied to sort of shifting that production plans around? Or was there anything else going on in the quarter? Preston Feight: Yeah. I think it is not what we expected. It is kind of... Steven Fisher: Can you hear me? Preston Feight: Yeah. We can. Can you hear us? Steven Fisher: Okay. Preston Feight: Yep. Sure. Thank you. Yeah. So that 15,000 is kind of right where we thought it would be. Right in the range of where we thought it would be. Europe probably delivered a few more, maybe North America a little less. But what we really saw is a cadence change through the quarter. A cadence change continuing through the first quarter. Of stronger order intake, the ability for the truck plans, as we mentioned, keep mentioning because I am so proud of them. For them to be able to keep the build going while they were doing this transition to build was really impressive. If there was anything, a few hundred units might have been buried in there where they were working through bringing in trucks out of Mexico, bringing in trucks out of Canada. And bringing that flexibility, and then the team in Canada flexing into a wide variety of model mixes built in Sainte-Thérèse. There are some inefficiencies to that. But their ability to manage that was significant. And really impressive. So I do not think we are too surprised at all by it. What we feel good about is the stability we have going forward and how it is going to be helpful to the build cadence through the 2026 calendar year. Steven Fisher: Okay. That is helpful. And then I guess translating that into then the first quarter flat, can you just give us sort of the regional color there directionally? For US and US, Canada versus Europe? Preston Feight: Yeah. We see US Canada up some and then Europe down a little bit as it had higher deliveries in the fourth quarter at year-end in Europe. Steven Fisher: Okay. Preston Feight: You bet. Operator: We now turn to Angel Castillo with Morgan Stanley. Your line is open. Please go ahead. Angel Castillo: Hi, thanks for taking my question. Just wanted to unpack a little bit more on the order uptick. You noted continuation of maybe some of that into January. We saw strong December order data. Just expand maybe the shape of the strength in January and just maybe any details on what percentage of the order book or order slots are now filled for kind of 1Q and 2Q. And then maybe just related to that, like, you could expand on just the areas where you are seeing the uptick in orders, is there any kind of particular pockets, whether it is vocational or is it related to EPA pre-buy? Like, what are you hearing in terms of the strength in those orders? Preston Feight: Yeah. I think as you articulated the numbers for December, you know those order intakes. I would say January continued in that same level of cadence. Of significant overbuild rate order intake. Some spread delivery in there as you about fleets that are kind of putting in their buying decisions, but also some things that are closer in, as you mentioned, vocational. We are seeing some significant orders from bodybuilders coming into our mix now so they can replenish their inventory for 2026. And then a steadiness in the LTL market. So it is kind of a mixture. You articulated that well. And that is what we see. So strong order intake kind of across the board, which is helping us grow those backlogs, which is going to be positive for the year. And then I would say a big point to add is in Q1, we are mostly full. Then as you know, we will look at Q2 as we get to the next earnings call. Angel Castillo: That is very helpful. Thank you. And then maybe just along those lines on the North America truck outlook for the year, I guess, US and Canada, just expand on the rest? So you raised Europe and South America, but it sounds like the level of orders here is pretty robust, but you kept the North America unit outlook unchanged. How should we read that? Is there any nuances to, you know, what you are seeing maybe whether it is market share shifts or that dispositions you maybe better for or the industry better for the top end of the range of your provided? How should we kind of take that into context given the unchanged guide for the industry? Preston Feight: Well, I think that the truth is our unchanged is higher than maybe like ACT was previously. So we feel we felt good about 2026. We still feel good about 2026. And so there is really no change from our positive sense of what is going to come through the year and the fact that it is going to be a year of acceleration for us. And acceleration sequentially is what we would expect to see through the year. Angel Castillo: Very helpful. Thank you. Preston Feight: You bet. Operator: Our next question comes from Scott Group with Wolfe Research. Your line is open. Please go ahead. Scott Group: Hey. Thanks. So when truck rates start moving higher, we tend to see more truck orders. It feels like some of the reason why truck rates are going higher right now is that there are fewer drivers and the government is focused on non-domicile and things like that. If this is more of a supply-driven cycle with fewer drivers, how do you think about what that means for truck orders and this cycle going forward? Preston Feight: You know, I think it is a great point, Scott. I mean, obviously, you are dialed in on what is going on there. But if there are fewer drivers that maybe are not meeting the legal requirements, those drivers probably are working on the lower side of the contract rates and the spot rate businesses. And then what you see is those more established carriers tend to have probably somewhat higher rates. The fact that there are fewer of those low-side drivers enables them to probably command a better rate positioning. I think there is some of that going on right now. Obviously, as they get better rate positioning, their profitability will hopefully improve. Then that will drive their ability to have better cash flow and purchase more trucks. Scott Group: And then similar question. When you see this order pickup, do you have a sense is this more replacement, or is there any growth? And if it is sort of more replacement, I know, just thoughts on how you see the used truck market evolving over the course of the year? Preston Feight: Yeah. I think in the used truck space, it is kind of interesting. The kind of read-through to me is we think that as the year goes on, used trucks could become more valuable. Simply because of how things are shaping out in the marketplace. Even in the next year. So it should be positive. Right now, there has been a little bit of a downtick in used trucks because some of those buyers might be the people that are being affected by the CDL enforcement rules. Those might have been the buyers for the used trucks. So there is a temporary moment there. And, also, I think we have still seen the finishing up of rationalization of fleets that are going to be in the business and make it through this cycle versus those that are leaving the business. So all of that kind of put in, you would expect to see the number of delinquencies diminish as the year progresses as fleet profitabilities come up. And then used truck pricing follows that. Scott Group: And just so I understand, your point about used being more valuable, is that a sort of comment around EPA '27 and big increases in new truck prices coming next year? Preston Feight: Exactly. Yeah. That is part of it. Yeah. We saw a 4% increase in used truck values year over year. And we expect that to continue to increase for that reason. Scott Group: Thank you, guys. Appreciate it. Preston Feight: You bet. Operator: We now turn to Chad Dillard with Bernstein. Your line is open. Please go ahead. Chad Dillard: Hey, good morning, guys. Want to spend some time on parts gross margin. So first of all, fourth quarter, what was it? And then how do you think about that scaling in 2026 as that business reaccelerates? Kevin D. Baney: Yes, Chad, this is Kevin. So fourth quarter was 29.5%. And as I mentioned, on a soft parts market, I would say, you know, that is pretty good results. And, again, the team is doing a great job providing excellent customer service, getting the right parts to the right place, right time. And so, you know, in a soft parts market, customers are really focused on required maintenance. And so we were able to address that shift. And what we are forecasting going forward is, you know, a rebalancing of that mix as the market improves a higher take on proprietary parts. Chad Dillard: Got it. That is helpful. And then just really quickly, inventories. Can you just give us an update on where PACCAR is versus the market? And then just in terms of truck pricing, how are you thinking about that evolving as we go through '26? Kevin D. Baney: Sure. When you look at the industry inventory, I think the industry inventory for Class 8 is 3.2 months, and PACCAR is at 2.2 months. So we feel like we are in an optimal spot on our inventory positioning. And that at least for us, we would expect build registrations to be fairly aligned this year. So that gives us a good opportunity as well, and we are starting to see, like, we are starting to see dealers come in with stock orders. And as we mentioned previously, bodybuilders want to have their spots put in. So that is the way we see inventory and its relationship to our build. Chad Dillard: Got it. Thank you. Kevin D. Baney: You bet. Operator: Our next question comes from Jamie Cook with Truist. Your line is open. Please go ahead. Jamie Cook: Hi. Good morning, nice quarter. I guess my first question, understanding your retail sales forecast for North America and now that we have more clarity on EPA 2027, obviously, markets appear better versus where we were. But, Preston, to what degree are you concerned, you know, the supply chain cannot ramp if things really do improve and where would those bottlenecks be, and how are you handling that? And then my second question, which is my guess is you will not answer, but I am going to try. You know, the revenues were better. Deliveries were better. Your gross margins were in line with your forecast, but you said it was hurt by, you know, your shift in manufacturing local for local. Is there any way you will quantify, you know, what that impact was in the fourth quarter? Thank you. Preston Feight: Yeah. So your second question, you are right. You understand it was significant. I am not going to give you a number because there is a lot of gray in that number, so I would be taking a number that has multiple inputs to it. Say that it was a significant impact to us, and it is one that we do not expect to carry forward. As we look into the future quarters. From a bottlenecks of supplier standpoint, does that have an impact on the year? I feel like that is something that our customers are going to need to think about. We have great relationships with our suppliers. We have given them our forecast. We have given them that cadence of sequential growth and acceleration through the year and our expectations of our build. So they are aware of it. That helps them. Right? So having a good plan helps them. But it does mean that if we get into a third, fourth quarter where build is significantly higher, then it puts stress on their systems as well. And we have been through this cycle. You just articulated it. There comes a point where the ramp is too significant. It becomes bounded. Do not see that yet. But we do not rule out that that could happen in the second half of the year as well. And if that is what happens, then that is typically when price accelerates. Jamie Cook: Okay. Great. Thank you. Look forward to seeing you in February. Preston Feight: Yeah. I look forward to seeing you too. Operator: Our next question comes from Stephen Volkmann with Jefferies. Your line is open. Please go ahead. Stephen Volkmann: Hi. Thanks for taking the question. I wanted to stick with the 2027 NOx thing. Have you guys communicated to your customers and maybe even if you are willing to us what the price increase associated with that will be? Preston Feight: You know, we have talked in general, and the reason we speak to generalities is because I think the EPA has done a very good job of trying to let people know there would be 35 milligrams. But they also have stated that they are looking at useful life and warranty and what those impacts would be on cost. So those could still be subject to change. In general, I think the best number is to use, like, a plus or minus on $10,000. That is what we have been talking to customers about. It gives them a range to think about. They can kind of plan in with a new technology and a $10,000 increase. Does it mean they want to shift their buying pattern around? Stephen Volkmann: Great. That is helpful. And then this is, I am coming back to Jamie's question. But so presumably, there will be some sort of a pre-buy as we get toward the end of the year. I think you guys have been in that camp for a while now. But if the demand were stronger, would you be willing to flex up to meet it, or does the fact that '27 probably sort of comes back down fairly quickly post the change mean that it is sort of your appetite for building a lot in the second half is more limited? Preston Feight: You know, we serve our customers. And so if our customers are asking us for trucks, we do everything in our power to get them trucks. Stephen Volkmann: Okay. Great. Thank you. Preston Feight: Yeah. You bet. Operator: We now turn to Kyle Menges with Citi. Your line is open. Please go ahead. Kyle Menges: Thank you. I wanted to follow up on the last question. I guess more not as much on the customer side, but just from the standpoint of the potential of dealers stocking up. You may be willing to carry a little bit more inventory in 2027. You made a comment that you are seeing dealers ordering stock trucks right now. So, yeah, it would be helpful to just hear about how you are thinking of the potential for dealer stocking and I guess, risk of an inventory overhang exiting 2026? Preston Feight: Well, I mean, I think the statement of an inventory overhang has a negative connotation to it to me, and I am not sure that if they had inventory going in 2027, that would be necessarily too big of a problem. I think that it is a little early to predict what the fourth quarter is going to look like because, as I said, we have to see what the rules end up being from the EPA. Do think there will be an acceleration through the year. That seems obviously starting to happen to me. How big that is and how significant it is at the year-end, I think that is a lot of speculation that we cannot really get to yet. Kyle Menges: Got it. And then just on the parts guidance, the 4% to 8% and starting the first quarter at plus 3%. Just how much visibility do you have to that ramp going from three to, I guess, plus seven or 8% as we move throughout 2026? And just what are the key drivers of that acceleration in growth? Kevin D. Baney: Hey, Kyle. The key drivers are just the anticipated demand as we go through the year with the market. We have had, if you look at last year, it was a relatively soft market throughout the year. And so just with customers accelerating, putting trucks back into service, we are just anticipating kind of a steady growth as we go through the year. The other thing you can maybe think of is tariffs should be a favorability on the parts side, just like the truck side as you look at the year. Kyle Menges: That is helpful. Thank you, guys. Kevin D. Baney: You bet. Operator: Now turn to Tami Zakaria with JPMorgan. Your line is open. Please go ahead. Tami Zakaria: Hey. Good morning. Thank you so much. First question is on the tariff-related surcharges or price increases you talked about last year, are you rolling back some of those price increases or surcharges given that Section 232 eases some of the tariff cost burdens for you now? Preston Feight: Yes, Tami. We are. We have got rid of tariff surcharges for '26. So they sit in there in terms of what our actuals are because remember, IEPA is still sitting out. There is a tariff cost for everyone. That needs to be clarified still. But we are seeing some price slide in Q1 expectation. But more than offset by cost. So that gives us a positive in price-cost. Tami Zakaria: Understood. That is super helpful. And as a follow-up, I wanted to understand the first quarter gross margin guide a little better. Did you see at any point in the fourth quarter the gross margin rate being in that, you know, 12.5% to 13% range, meaning is it fair to assume that you exited 4Q at a 12.5% to 13% range, and what you are expecting for the full quarter in the first quarter. Given deliveries would be similar. Preston Feight: Yeah. I think what you are insinuating is are we seeing sequential improvement in margin by month, and we do not break it out that way, but in general, yes, we are seeing improvement in margin. As we go sequentially. Even within quarters. Tami Zakaria: Understood. Thank you. Operator: Our next question comes from Jeff Kauffman with Vertical Research Partners. Your line is open. Please go ahead. Jeff Kauffman: Thank you very much, and congratulations. I just wanted to think a little bit about margin opportunity or market share opportunity in 2026. Yeah. We have been speaking with some trucking companies that have said even now they still cannot really put in orders for Freightliners or Internationals because post the February tariffs, they are not really certain what those prices are. So you talked about the shift post-February and how that is an advantage for you. What are your customers telling you about their ability to those that have, say, more than one nameplate, more than just Kenworth and Peterbilt on their fleet, because we have seen the uptick in truck purchasing and to your point, that could be a combination of, okay. We got EPA clarity. We got February clarity on our domestic produced trucks. But our understanding is your customers are still having trouble putting in orders for their non-US built trucks post-February. So could there be a bigger opportunity for market share for you? And then when will you get some more certainty on that? Preston Feight: Jeff, I think you must be talking to the same people we are talking to. I think they would like to have that clarity as well in terms of what pricing is going to be from some of our competitors, and that will certainly find its way into the market in the coming months. We have been able to give them clarity from our standpoint. I think it is helpful. And so we feel like we should be able to meet their demand when they are ready to make those decisions, which should be good for us through the year, both, I think, from a market share standpoint and a margin standpoint. Jeff Kauffman: So just to follow up on that, the increased confidence you are seeing with their customers, and I know ACT Research just put the pre-buy back into their numbers. How much of this do you feel is increased confidence in the environment versus maybe just increased clarity on what is going on with EPA? Preston Feight: Yeah. I think it is both. I think that the clarity is helpful, but without the confidence in the freight market, without the rate increases, and without increased profitability for the carriers, the 40% of the truckload carriers being in the market, they need those things in order to be more than just tariff and regulatory clarity. So I do think it is a both thing, and I think that is where at the point where we have tariff clarity. We have regulatory clarity happening. I think we are just in the beginning parts of having the truckload carrier profitability return. So that has to continue to evolve, which will be positive for the year when that happens. Jeff Kauffman: Okay. Thank you very much. Preston Feight: Yeah. You bet. See you soon. Operator: And our final question comes from Michael Feniger with Bank of America. Your line is open. Please go ahead. Michael Feniger: Yep. Hey, guys. Thanks for squeezing me in. I appreciate it. Preston Feight: Yeah. You bet. Got called. Appreciate it. You guys touched on the price versus cost trending more favorably in Q1 versus Q4. It is mostly on the cost side. You commented on pricing is a little soft in Q1. You pointed out how competitors have not fully taken care of cost to market. We are hearing commentary out there on discounts. How do you see pricing in Q1 but beyond Q1 kind of playing out through the year, you know, as we start to get closer to that pre-buy? Preston Feight: Well, I think that is what is going to be telling us. Once price clarity from everybody in the market and the tariffs are affected into things, it is going to be there will be some costs that come along, and I think that is where price will start to become a favorable factor through the year. Michael Feniger: Alright. And when we think is there a rule of thumb we should think about your cost of goods sold? How much is raw materials? What we should be watching, what the lag is there. Brice J. Poplawski: Yeah. This is Bryce. The material in our product is the vast majority. It is 80, 85%. So labor and overhead are the remainder. So materials mean a lot in our pricing. Michael Feniger: Fair enough. And, look, you guys have an analyst day in a few weeks. I remember at the 2022 investor day, there was just a lot of focus from investors if PACCAR can drive higher margins cycle over cycle, and you clearly delivered in 2023 with strong profitability. Now as we are coming up this Investor Day in a few weeks, early innings of this, we are hoping a new truck cycle. Do you think we can see higher cycle over cycle profitability that continues? What are some of the factors we should be thinking about as we are assessing the profitability as we are moving to this next, you know, recovering truck cycle? Thanks, everyone. Preston Feight: Yeah. Thanks for the commentary, first of all, and then the question because the commentary is great. I think it is absolutely objectively true. Cycle over cycle performance that teams have delivered is really significant and outstanding. We will share more of that in the investor day. And then as we look to the future, we feel great about the opportunities in front of us. It is not just trucks, and it is not just parts, and it is not just financial services. But we think there are other new opportunities coming towards us in terms of how we support our customers with advanced transportation solutions, data, connectivity, and the interplay of all of those. So those are all positive for the business looking forward. So we feel great about not just this year, but the future. And look forward to seeing many of you in Denton. Operator: There are no other questions in the queue at this time. Are there any additional remarks from the company? Ken Hastings: We would like to thank everyone for joining the call, and we look forward to the upcoming Analyst Day on February 10. Please keep an eye on the PACCAR Investor Relations page for a link to the webcast. Thanks again. Operator: Ladies and gentlemen, this concludes PACCAR's earnings call. Thank you for participating. You may now disconnect.