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Operator: Hello, ladies and gentlemen, thank you for standing by for Viomi Technology Co., Limited's Earnings Conference Call for the second half and full year of 2025. [Operator Instructions] Today's conference call is being recorded. I will now turn the call over to your host, Ms. Claire Ji, the IR Director of the company. Please go ahead, Claire. Claire Ji: Hello, everyone, and welcome to Viomi Technology Company Limited's Earnings Conference Call for the second half and full year of 2025. As a reminder, this conference is being recorded. The company's financial and operating results [indiscernible] posted online. You can download the earnings press release and sign up for the company's e-mail distribution led by visits IR section of the company's website at ir.viomi.com. Participating in today's call are Mr. Xiaoping Chen, the Founder, Chairman of the Board of Directors and Chief Executive Officer; and Sam Yang, the Head of our Capital and Investment Department. The company's management will begin with prepared remarks, and the call will conclude with a Q&A session. Before we continue, please note that the company's discussion will contain forward-looking statements. made uncertain safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding statements and other risks and uncertainties is included in the company's annual report on Form 20-F and undergoing a sale with U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required by law. Let's also note that Viomi's earnings press release and this conference call include discussions of noted GAAP financial information as well as unaudited non-GAAP financial measures. In addition, Viomi's press release contains the recognition of not unaudited non-GAAP measures to unaudited most directly comparable GAAP measures. I'll now turn the call over to our founder, Mr. Xiaoping Chen. Mr. Chen will deliver his remarks in Chinese followed immediately by English translation. Mr. Chen, please go ahead. Xiaoping Chen: [Foreign Language]. Claire Ji: Thank you, Mr. Chen, and I'll quickly translate our founder's remarks before discussing our financial performance. Hello, everyone. Thank you for joining us today on our earnings conference call for the second half and full year of 2025. In the second half of 2025, amid the phasedown of the national subsidy gain for home appliance trading and the company's strategic investments in overseas market dimensions, new product development and brand building, we delivered total revenue of RMB 951 million and the net income attributable to ordinary shareholders of the company of RMB 21.2 million. For the full year, our core business remained solid, achieving total revenue of RMB 2.4 billion, representing the year-over-year increase in 14.6%. Net income attributable to ordinary shareholders of the company stood at RMB 141.6 million with a net profit margin of 5.8%. Over the past year, our global water strategy has continued to achieve milestones, highlighted by the establishment of a multinational professional team covering North America, Southeast Asia and Europe, empowered by a global perspective across R&D and market expansion. We have constantly achieved technological breakthroughs addressing users diverse drinking water demand. By leveraging AI technology to enhance user experience, we are establishing Viomi as the world-leading water technology company. In the North American market, our Amazon channel delivered an outstanding performance in the second half, achieving triple-digit growth in sales on a sequential basis. During the back Friday promotional season our products ranked 19th in the water purifier category and fourth in under zinc RO segment. Our premium flagship product, the master 1 mine water purifier further enrich our product portfolio. In the Southeast Asia market, we continue to deepen our strategic cooperation with off-line channels in Malaysia through the launch of the compact in mineral water dispenser tailored for the local market and figuring both mineralization and cooling functions. On the brand building front, we are engaged [indiscernible] from different countries to serve as brand ambassadors. The participants in offline launch event and with our facilities, strengthening our brands, technology and health image. In April 2026, we will rebuild our new brand series at WA convention in Mimi showcasing our latest AI technologies and innovation as one of the most influential professional events in the global water treatment industry and presenting our redefined vision of better water to partners in North America and around the world. In manufacturing and R&D, we kept boosting our competitive edge. We achieved a key milestone in the global expansion of Viomi's water purifier Gigafactory, commencing full operations of our overseas premium production line. This production line integrates module functions such as instant heating and cooling and ice making, providing agile supply chain support to meet differentiated needs and the markets in North America, Europe and Southeast Asia. As of the end of 2025, our global patent application has surpassed 1,950, spanning 14 countries and regions. We have built highly competitive technology capabilities in areas such as AI-driven water quality, algorithms, precession mineral control and intelligent self-cleaning made on a solid foundation for the continued expansion of our global business. In terms of shareholder returns, we declared a special dividend of USD 0.088 per ADS in July 2025, in August of the same year. or core authorized a new share repurchase program of USD 20 million by the end of 2025. We had repurchased a total of 1.03 million amounting to approximately USD 2.5 million. In our recently purchased and published earnings release, we declared another special dividend of USD 0.066 per share with an aggregated amount of RMB 31 million for shareholder return as the gesture of gratitude for the long-standing trust and support of our shareholders. We deeply value the journey we take with our shareholders and remain committed to creating long-term value for them. In 2026, we will pursue our global water vision with greater determination, targeting breakthroughs in 4 key areas. First, for overseas markets, we'll deepen our process in core strategic markets, such as North America and Southeast Asia. We are actively expanding into more countries and regions, leveraging the activity of our water purifier giga factory. We will continue to launch new localized production, extending our brand influence into broader markets. Second, to advance our differentiation in the domestic market, we will further strengthen the health-centric positioning of the quant series with its alkaline mineral concept. Third, on the technology front, we will deepen the integration of AI across water purification scenarios, making technological innovation the core engine that enables Viomi to navigate market cycles and achieve sustained growth. Fourth, we will continue to strengthen collaboration with global strategic partners fully leveraged the scale effect of water purifier gigafactory to elevate both scale and efficiency through this committed long-term approach, Viomi will continue to create value for global users and deliver sustainable returns to you, our shareholders. Thank you. And that concludes our founder's remarks. I'll now turn the call over to our Head of Capital and Investment Department, Mr. Sam Yang, to discuss our financial performance. Thank you. Sam Yang: Thank you, Mr. Chen, and Claire. Thank you to everyone for joining us today. Let's take a look at our other financial results for the second half of 2025. We recorded net revenue of RMB 950.6 million, a decrease of 25.9% from RMB 1,282.4 million for the same period of 2024, primarily due to the decrease in the home water systems. Now let's look at the performance across 3 categories. Revenues from home water system were RMB 628.2 million a decrease of 32.1% of RMB 925.7 million for the same period of 2024, primarily due to the decline elution of the for water pure price. Revenues from consumables were RMB 112.2 million, a decrease of 17.9% from RMB 133.7 million (sic) [ RMB 136.7 million ] for the same period of 2024, and primarily due to the decreased sales of water purifiers to Xia. Revenues from teaching appliances and others were RMB 210.2 million a decrease of 4.5% from RMB 220 million for the same period of 2024, primarily due to the reduction in orders from Viomi as well as induction of Viamibrin product in this category. Gross profit were RMB 223.8 million compared to RMB 289.5 million for the same period of 2024. Gross margin was 23.5% compared to 22.6% for the same period of 2024. The slight increase in gross margin was mainly due to the elimination of the impact of one-off costs incurred during the diversement of certain IoT and home business and our assets. Total operating expenses were RMB 248 million revenue, an increase of 12% from RMB 221.5 million for the same period of 2024 due to increased selling and marketing expenses and partially offset by a decrease in G&A expenses. In greater detail, R&D expenses were RMB 76.3 million, an increase of 12.7% from RMB 67.7 million for the same period of mainly attributable to an increase of investment in new product development. Selling and marketing expenses were RMB 148.6 million, an increase of 29.8% from RMB 114.6 million for the same period of 2024, mainly due to an increase in brand promotion investment as well as higher personnel costs resulting from channel expansion. G&A expenses were RMB 23.1 million, a decrease of 41.2% from RMB 39.3 million for the same period of 2024, primarily due to a decrease of employee compensation costs allowances for having those loss. Net income was RMB 21.2 million and the non-GAAP net income was RMB 28.2 million. Additionally, our balance sheet remained healthy. As of December 31st, 2025, the company had cash and cash equivalent of CNY 806.6 million restricted cash of RMB 164.4 million, short-term deposits of RMB 258 million and short-term investment of RMB 82.6 million. Next, let's briefly discuss key financial results and audit for the full year 2025. Net revenues were RMB 2,428.2 million, an increase of 14.6% from RMB 2,119 million for 2024. Revenues from home water systems were RMB 1,686.6 million, an increase of 12.6% from RMB 1,298.4 million for Q4. Revenues from consumables were RMB 235.4 million, a decrease of 14.2% (sic) [ 15.2%] from RMB 277.7 million from 2024. Revenues from kitchen appliances and our orders were RMB 506.2 million, an increase of 47.6% from RMB 342.9 million for 2024. Gross profit was RMB 615 million compared to RMB 548.7 million for 2024. Gross margin was 25% -- 25.3% compared to 25.9% for 2024. Total expense -- total operating expenses were RMB 529.4 million an increase of 24.6% from RMB 424.9 million for 2024. In greater detail, R&D expenses were RMB 165.6 million, an increase of 15.9% in from RMB 142.9 million for 2024. Savings and marketing expenses were RMB 277.7 million, an increase of 31.5% from RMB 211.2 million for 2024. G&A expenses were RMB 86.1 million, an increase of 21.6% from RMB 70.8 million for 2024. Net income attributable to ordinary shareholders of the company was RMB 141.6 million revenue and non-GAAP net income attributable to ordinary shareholders of the company was RMB 155.7 million. Thank you. Claire Ji: Yes. This concludes our prepared remarks. We will now open the call for Q&A. Mr. Chen, our Founder; and Mr. Sam Yang will join this session and answer questions. Operator, please go ahead. Operator: [Operator Instructions] The first question today is from Jane Zhang from CICC. Jane Zhang: Okay. Good evening, welling from the management team, and thank you very much for hosting this earnings call and giving me the opportunity to raise questions. I have 3 questions covering brand development overseas strategy and profitability growth. So first and Poms,could you share the overall performance of the company sell owned brand Viomi in 2025? And additionally, what are the key investment priorities and initiatives for Viomi brand building this year. Thank you. Xiaoping Chen: [Foreign Language]. Claire Ji: Okay. And to answer your question, in 2025, our brand revenue was primarily from domestic online channels. And we have ranked the 10th place among annual brands listed on Jingdong and we overran 19 rate in sales on Amazon U.S., which is a great progress. And moving forward, we will adapt a differentiated strategy in North America by launching distinct brands and positioning on online and offline channels. in particularly, in April, we will participate in the world of coffee fair in San Diego, and we will debut our new brand series at WQA convention in Miami. And this marks the first step into North American off-line market and showcasing the partners across the U.S. and the world, our redefined vision of better water. Thank you. . Jane Zhang: It's very clear. So here, moving to my second question on overseas expansion. So Rami has successfully entered the U.S. and the Malaysia market. So what are the differences in your market strategies between these 2 regions? And what key challenges have you encountered? And how do you plan to mitigate them? And Also, could you outline the overseas expansion goals for 2026. Xiaoping Chen: [Foreign Language]. Claire Ji: And to answer your question, we have built local teams for both United States and Malaysia. And especially in the United States, we launched the Viomi branded under sink water purifiers on Amazon, which is the online channel. And next, we will bring new brands and products tailored for the U.S. off-line market in the second quarter. And this will cover not only the endorsing products, but also the whole health of nutrition systems. And in Malaysia, our focus is offline with countertop units of the main product format, adding features like eye and the cold water that match the local drinking habits and next will expand more offline partnerships and diversify our product lineup. But for the overseas market in total, in the future, there are still plenty of uncertainties overseas. -- and the geopolitical tensions continue to create headwinds. Still, we see strong opportunities globally, and we believe we are well positioned, that's why the global expansion will remain a key part of our long-term strategy. And for 2026, we expect a triple-digit growth in the overseas revenue. Jane Zhang: And so my last question comes to the company's profitability. Will we see the company's profitability improved notably in 2025 after focusing on the water business. So for 2026, or -- and moving forward, like next 2 to 3 years, what are the core pathways for further enhanced profitability and sustain this positive momentum. Thank you. Xiaoping Chen: [Foreign Language]. Claire Ji: Okay, to translate the answers. There are 3 main paths. The first is expand overseas market and accelerate the growth in our Viomi-branded business. Currently, our margin is still on a low level, mainly because our Viomi-branded product still makes up a relatively small part of the business. So by pushing into the international markets and growing the shares of our own branded sales, we can improve the profitability. And the second path is about consumables revenue. The consumable revenue from our own branded products will be a long-term driver of the margin improvement. As more people are using Viomi purifier globally, the consumable revenues will start to kick in about 1 to 2 years after the equipment sale, and we start to see the trend. And third, we will broaden our product lineup, which is adding more countertop options like icemakers multifunctional countertop water dispensers and a higher-margin whole home nutrition systems. These new categories will troubles reach more customers and build a stronger, more complete product portfolio and for the global expansion. Thank you. Operator: We'll now take the next question. This is from Shi Xining from CMS. Shi Xining: [Foreign Language]. Claire Ji: I'll quickly translate the question first. Can you analyze the impact of the national fast reduction on the domestic market, especially when we see in the second half of 2025, the negative impact has caused revenue decline. And can you forecast the future impacts and offer us some guidance? And also, we recently noticed the EMS and the business development. Can you offer some heads-up about the top line contribution of our cooperation with China gas, this kind of business development. Xiaoping Chen: [Foreign Language]. Claire Ji: Okay. I'll quickly translate the answer. As you can see the impact of the national subsidy on water purifier is obvious in 2025. And due to the high base last year, domestic market will face challenges in the first half of 2026. For products like water purifier, however, where penetration is still relatively low. So the customer demand is still growing. We expect the 2026 return to the category's normal growth rate -- growth pace and remain relatively resilient even of consumer spending softness. As we see more and more people are choosing to use water purifiers, and we believe that trend is unreversible and starting in 2026, water purifiers are no longer covered by national subsidies. You may -- you might see some brands still offering 15% of online commerce platforms were destined. We didn't offer that percentage of and we have stayed in our product competitiveness. And to answer your questions about the cooperations with the gas companies, we recently reached a cooperation with the China gas and the ENN Energy companies like the companies like this. And the way we see is we are exploring new partnership models with this company. And their showrooms and service centers across the country, reaching over 50 million household users, and both our products highly relied on the installed elation service support and the production scenario as perfectly with undersink water purifiers and the product categories containment each other. This gives us an efficient way to enter lower-tier markets, and 2026 will be a pilot year for the partnership. This is expected to be a great opportunity for both parties, and we expect it will bring incremental growth. Thank you. Unknown Analyst: [Foreign Language]. Xiaoping Chen: [Foreign Language]. Claire Ji: Okay. I'll quickly translate the answer to a similar question to one of the previous questions. And the first one is we will expand our overseas market scale, especially in the United States and in Malaysia, and we will use more diversified products to entering more channels. For example, for the United States, we will have broad off-line channels for Versa with new brand and new products with higher margins. And the second strategy is to increase the consumable revenues. As you can see, the consumable revenues has very promising guarantee of the improvement of profitability. And we have our own branded water pure visa has increased during the past few years and we see the trend of consumable revenues to kick in after 1 to 2 years after the equipment sales. So this will be a long-term driven factors for the margin expansion. And thirdly is to improve our own brand revenue contribution by both overseas expansion and product portfolio expansion. And lastly, we will have more diversified product lines. As of today, we still -- most of our revenue comes from the under sink water purifier product format and our profit margin is within the industry level. However, we will expand more diversified products with higher profit margins and ASPs like the whole house water nutrition systems and the countertop products equipped with diversified functions like cooling, ice making and so on. Thank you. Operator: We'll now take the next question and this is from Brian Lantier from Zacks Small-Cap Research. Brian Lantier: Most of my questions have already been covered. I just wanted to say I'm encouraged by the move to off-line distribution in the U.S. And then just sort of big picture, looking out the impact of the subsidies is significant, obviously, in your 6-month results, but I think if you look year-over-year, you have a 14% top line growth rate. If I'm looking out over the next 3 to 5 years, is that sort of what you view as the normalized growth rate for the business, 10% to 15% top line. Claire Ji: [Foreign Language]. Xiaoping Chen: [Foreign Language]. Claire Ji: Okay. I will translate the answer to your question. According to our estimation, we see the industry's normal growth rate would be at a high-single-digit level. without the impact of the national subsidy and so on. And while the Viomi brand growth rate will be higher than the industry, mainly because driven by the enhancement of our brand strength and the expansion of our international market growth. However, another major part of our business revenue is our Major clients -- key clients of business, such as Xiaomi. This will be aligned with the key accounts, their business performance. And in the current environment, the growth is precious. So overall, we anticipate that the company has the potential to enter into a nominal growth rate of low-double-digit growth in 2027. Operator: Thank you. And that concludes the question-and-answer session. I would like to turn the conference back over to management for any additional or closing comments. . Claire Ji: Okay. Thank you once again for joining us today. If you have further questions, please feel free to contact us through the contact information on our website or our Investor Relationship Consultant, PSMT Financial Communications. Thank you. Operator: Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to the Andean Precious Metals Fourth Quarter and Year-End Conference Call and Webcast. [Operator Instructions] Thank you. I would now like to turn the call over to Amanda Mallough, Director of Investor Relations. You may begin. Amanda Mallough: Thank you. Good morning, everyone, and thank you for joining Andean Precious Metals Conference Call to discuss our financial and operating results for the 3 and 12 months ended December 31, 2025. Our press release, MD&A and financial statements are available on SEDAR+ and on our corporate website at andeanpm.com. Before we begin, I would like to remind listeners that today's discussion will include forward-looking statements. Please refer to our cautionary language in our filings. Joining me on the call today are Alberto Morales, Executive Chairman and CEO; Yohann Bouchard, our President; Juan Carlos Sandoval, our Chief Financial Officer; and Dom Kizek, our Vice President of Finance and Corporate Controller. Following prepared remarks, we will open the line for questions. And with that, I'll now turn the call over to Alberto. Alberto Morales: Thank you, Amanda, and good morning, everyone. 2025 marked a step change for Andean where we delivered focused financial -- record financial results and fundamentally strengthened our balance sheet. We achieved record revenue, adjusted EBITDA and net income alongside with strong free cash flow generation and exited the year with a record $167 million in liquid assets. This level of cash flow generation fundamentally changes our positioning as a company. We entered 2026 with a strong balance sheet and the financial flexibility to fund growth initiatives and evaluate opportunities to expand our asset base. Operationally, both assets contributed to this performance. At San Bartolome, the operation delivered consistent production and strong margins, supported by efficient processing and strong silver prices. At Golden Queen, production strengthened into the fourth quarter, supporting higher consolidated gold production and contributing to our record financial results. For the year, we maintained a balanced production profile with approximately 57% of revenue coming from silver and 43% from gold. Looking ahead, we expect several important milestones in 2026, including our planned New York Stock Exchange listing and the updated technical report at Golden Queen. Overall, 2025 demonstrated the strength of our platform, a business capable of generating meaningful cash flow, maintaining strong margins and positioning itself for the next phase of growth. With that, I will turn it over to Yohann. Yohann Bouchard: Well, thank you, Alberto, and good morning, everyone. For the fourth quarter, Andean produced 27,777 gold equivalent ounces, bringing full year production slightly below 100,000 gold equivalent ounces. While production finished near the low end of guidance, both operations delivered strong cost performance and margin generation, supporting record financial results. At San Bartolome, the operation continued to perform consistently. For the year, the operation delivered 4.5 million ounces of silver, contributing to a total of gold equivalent production of 53,854 ounces. Operational performance remained strong for the full year with cash gross operating margin of $16.11 per silver ounce and gross margin ratio of 42.75%. These results reflect continued efficiency in ore sourcing, stable throughput and strong realized silver prices. At Golden Queen, the operation produced 45,311 gold equivalent ounces in 2025, comprised of 41,627 ounce of gold and 331,000 silver ounces. Production improved into the fourth quarter, supporting stronger consolidated results. For the year, cash costs were $1,698 per gold ounce and all-in sustaining cost was $2,194 per gold ounce. The operation continued to focus on optimizing stacking, blending and recoveries, which are expected to support improved performance going forward. From an operational perspective, both assets are well positioned heading into 2026 with stable production and strong margins. Production is expected to be weighted approximately 45% in the first half of the year and 55% in the second half, driven by mining sequence at Golden Queen and ore delivery timing at San Bartolome. With that, I will turn it over to J.C. Juan Sandoval: Thank you, Yohann, and good morning, everyone. From a financial perspective, 2025 was a record year across all key metrics. In the fourth quarter, we delivered strong results across the board, including revenue of $134 million and adjusted EBITDA of $47 million. For the full year, revenue reached $359 million, adjusted EBITDA was $133 million, and net income was $118 million or $0.78 per share. Free cash flow totaled $36 million in the fourth quarter and $59 million for the year, reflecting strong cash generation. Our balance sheet strengthened significantly over the year. Total assets increased to $434 million, while total liabilities declined to $170 million, reflecting debt repayment and strong cash generation. We ended the year with $167 million in liquid assets, a record for the company. This was comprised of $79 million in cash and cash equivalents, $38 million in treasuries and money markets and $49 million in strategic equity investments. During the year, we fully repaid our legacy credit facilities and established a new $40 million revolving credit facility with National Bank further enhancing our financial flexibility. This positions the company with strong liquidity and financial flexibility moving into 2026. With that, I'll turn it back to Yohann for an update on our exploration programs. Yohann Bouchard: Thank you, J.C.. Our exploration programs are focused on extending mine life and supporting long-term production across both operations. At Golden Queen, exploration remains focused on expanding known mineralization and supporting mine life extension. In 2025, we completed 47 core drill holes aiming at extending the existing mineralized zone. While the drilling program met our expectations, turnaround times at the independent assay lab were longer than anticipated. Consequently, we have decided to postpone the release of the technical report by a few months to include this new information. Looking ahead to 2026, our primary objective is to advance infill drilling to convert inferred resources into the measured and indicated categories. Our second objective is to follow up on the zone drilled in 2025 with additional infill drilling, which is intended to further extend mineral reserves along the trend of the existing mining areas. Postponing the release of the technical report by a few months ensure the market receives a clearer and more complete picture of the asset long-term value. At San Bartolome, exploration is focused on securing additional oxide resources to support long-term plant feed. We continue to advance exploration across multiple targets with the objective of increasing available resources and maximizing utilization of the plant capacity. Overall, these programs are designed to enhance production, extend mine life and support long-term value creation across both operations. With that, I will turn it back to Alberto, who will talk to the 2026 guidance. Alberto Morales: Thank you, Yohann. As we look ahead to 2026, we have already provided detailed production, cost and capital guidance to the market. We expect consolidated production to be in the range of 100,000 to 114,000 gold equivalent ounces, with production expected to be weighted approximately 45% in the first half of the year and 55% in the second half, reflecting mine sequencing and ore delivery timing. At Golden Queen, we expect cash cost between $1,500 and $1,800 per gold ounce and all-in sustaining costs between $1,850 and $2,150 per gold ounce. At San Bartolome, we expect cash gross operating margins between $20 and $35 per silver ounce and gross margin ratios between 35% and 45%. Overall, this positions the company to continue generating strong margins and cash flows across the range of a commodity price environment. Our capital program for 2026 is aligned with our strategy of driving long-term value while maintaining financial discipline. We expect sustaining capital of approximately $17 million to $24 million and growth capital of approximately $21 million to $30 million. At Golden Queen, capital will focus on leach pad expansion, development and infrastructure, equipment additions supporting mine life extensions. At San Bartolome, capital will be directed towards processing improvements, plant optimization initiatives and sustaining infrastructure. Overall, 2026 plan is designed to enhance operational flexibility, support mine life extension and positions the company for continued free cash flow generation and long-term growth. To close, 2025 marked a significant step forward for Andean. We delivered record financial results, generated meaningful free cash flow and transformed our balance sheet. As we move into 2026, we are focused on delivering against our guidance, continuing to generate strong margins and cash flow and advancing key initiatives across both of our operations. We are entering 2026 from a position of strength with a clear path to continue scaling the business and delivering long-term value for the shareholders. With a strong balance sheet, a clear operating plan and upcoming catalysts, including our planned New York Stock Exchange listing, we are well positioned to execute on the next phase of growth. Thank you, everyone, for your continued support. And operator, I would like to please open the line for questions. Operator: [Operator Instructions] And your first question comes from the line of Justin Chan with SCP Resource Finance. Justin Chan: Congrats for cash generating year. Just my first question is on the, I guess, the timing of the updated resource at Golden Queen. I guess maybe can you give a bit more color on -- will you be doing more drilling in the first -- I guess, will drilling from the first quarter of the year go into the update? Like what's the cutoff for data going into it? And then if you could give us kind of the flow of timing from cutting off drilling data and then when you expect to release it? Yohann Bouchard: Yohann here, and thanks for the question. So the main reason for postponing by, say, 3 to 4 months, the technical report is really to make sure that we include all of the information from 2025, which is pretty exciting. I mean we got 47 holes that we drilled in the extension, and we believe that everything can make its way into resource, but -- and we feel that by rushing the report, I mean, we're not giving full value to that report basically. I would say postponing the report has very little to do with drilling that we're doing in 2026. We're going to try to include some of those holes if we can, but this is not the end game here. The end game is really to include all the information that we have drilled in 2025, which is meaningful, I think, for the operation. Justin Chan: Understood. Got you. So it's not like you need to do any more infill. It's just a matter of enough time to actually model up the data you already have. Yohann Bouchard: Absolutely. We are very satisfied with the drilling of 2025. Again, I mean, this is out of our control. I mean, the lab was quite busy, and we had some delay with that. And I believe that everybody is winning by postponing a little bit and providing something that can give a clearer picture to the market. Justin Chan: Got you. And then I have a question on just the marketable securities. And I guess there was some movement overall, I'd say, especially this quarter in terms of the FX impact on your cash and also, I think, quite a bit like about $10 million worth of revaluation of the marketable securities. Could you give us a bit more color on -- it sounds like you have a mix of treasuries and also or money market, let's call it, debt instruments, but also equities. I'm just curious, I guess, how that revaluation might work in future periods. Juan Sandoval: Yes. Thank you, Justin. It's J.C. So yes, as you know, as part of our cash management strategy, we hold 3 things: cash, marketable securities, which is mostly composed of treasuries, whether it be short term or up to 3 years and then our strategic equity investments, right? Yes, as you -- as we have seen over the last few weeks, there has been more volatility, especially in mining companies. So yes, we've seen a reduction in the valuation of our equity investments. However, we believe that when we present our first quarter numbers, we will compensate some of that loss that we have seen on the market overall. Justin Chan: Got you. And just -- and the equities themselves, they're accounted for as part of the marketable securities short and long term. Is that right? Juan Sandoval: Yes, that's correct. Justin Chan: Okay. Got you. And then just the last one, and I'll free up the line. I mean I would expect less impact given where your operations are, but just, I guess, good housekeeping that I've been asking on other calls. Given the volatility in global supply chains, oil prices, et cetera, I'd imagine your locations are less impacted, but can you just flag any impacts that we should consider? Juan Sandoval: Yes. So obviously, everyone is being impacted. If oil prices remain above $100 per barrel, it will have an impact. We are working on that. But yes, as you say, at least in the U.S., it will be less of an impact compared to the international markets. But yes, I mean, right now, we don't really know where it's going to end up, but it's -- again, if oil prices continue to be where they are, yes, it will have an impact on our overall bottom line. Justin Chan: Okay. Got you. But it sounds like it's limited to more just the price of oil as opposed to like supply of any consumables or anything else? Alberto Morales: Energy-driven inflation basically. Juan Sandoval: It's mostly diesel and fuel, but some of the consumables might also be affected as well. But it's mostly fuel and diesel, Justin. Justin Chan: Yes. And it's a pricing rather than availability issue? Juan Sandoval: Correct. Yes, absolutely. Operator: Your next question comes from the line of Ben Pirie with Atrium Research. Ben Pirie: Congrats on another strong quarter and closing out 2025. Just going -- piggybacking off Justin's question there with the resource. Can you just confirm -- so now this is being pushed to the end of Q2, early Q3? Or is it 3 months further than that? Yohann Bouchard: The way I see it, I mean, there's going to be pushed towards the end of Q3. Ben Pirie: Okay. Okay. Understood. And then at the Golden Queen, can you just touch on the increase in costs between Q3 and Q4 of 2025? And then going beyond that, we're looking at the AISC guidance, $1,850 to $2,150 for 2026. Can you just touch on what's sort of going to change from Q4 '25 to bring those costs back down to that range and just sort of give investors some confidence around the cost going forward here? Dom Kizek: Ben, it's Dom here. This is the question. Q4, we had some catch-up costs, including some inventory adjustments there. But going forward, we have reiterated our guidance. So we do expect those costs to be within that guidance as of today. Juan Sandoval: And all-in sustaining costs increased as well during Q4 because if you look at the CapEx, we accelerated some CapEx in that fourth quarter. So that's why for that fourth quarter, all-in sustaining costs did increase a bit, but it was mostly related to that CapEx allocated during the fourth quarter. Ben Pirie: Okay. Understood. And then just, I guess, lastly, I don't have too much. But on San Bartolome, can you just talk to us about how the volatility in the gold price over the last couple of months might impact margins just given it is a margin business? Juan Sandoval: Yes. So bear in mind, Ben, that we have a processing facility, right? Part of our feed is coming from long-term contracts and part of it is coming from spot purchases. On the spot purchases, yes, we are paying ore at market prices, obviously, higher prices. But as we've mentioned in our guidance, we have a very profitable margin. And then on the fixed contracts, well, it's a fixed price per ton. So on those contracts, we are more exposed to commodity prices. So in this high price environment, we're -- it's becoming more profitable. But the combination of both, as I have said, still make it a very profitable business, but less risky overall because on the spot purchases, we have sort of like a natural hedge, right? Ben Pirie: Yes. And so in a sharp sort of decline like we saw with gold over the last couple of weeks bouncing back this morning, there's a little bit of a margin compression in that environment. But again, the trend has been up and to the right for the gold price has been benefiting you with this business as of late. Juan Sandoval: That is correct. Ben Pirie: Okay. Great. Well, again, congrats on a strong year and that's all I have today. Operator: There are no further questions at this time. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Eric Lakin: Good morning, everyone, and welcome to our full year results presentation for 2025. I'm Eric Lakin, CEO, and I'm joined today by our interim CFO, Richard Webb. Very happy to be with you all again for my first full year announcement at TT. 2025 has been a year of transition for TT Electronics. It was a year where we faced clear operational challenges, but also one in which we took swift action to address them. Our focus has been on restoring operational control, strengthening our balance sheet and creating a solid platform for future growth. While there is a lot of work still to do, I'm pleased that we have delivered a stable performance and we enter 2026 with a much stronger operational and financial foundation. Let's start with a look at the headlines for the year. Despite the macro headwinds we faced, we delivered results in line with expectations with momentum notably strengthened in the second half. We saw improved operating profit, margins and cash flow, driven by better execution and strict cost discipline across the group. Notably, our cash generation was very strong. We have significantly reduced our net debt and strengthened the balance sheet, which Richard will detail shortly. We have successfully restored operational control following the conclusive actions we took earlier in the year, particularly at the Plano and Cleveland sites, and I'll cover this in more detail later. Performance was mixed by region, but for clear reasons. Europe performed strongly, driven by structural growth in aerospace and defense. Meanwhile, North America materially improved, and we have ceased production at Plano, as we complete the closure of that site. Asia was impacted by softer macro driven demand in EMS, but we view the region as better positioned operationally as we enter 2026. The next slide breaks down the specific actions taken during the year to build the stronger platform. First, Plano, production is ceased and the site was closed according to plan. We saw a benefit in the second half from last time buy activity, but importantly, the closure removes a significant drag on our earnings going forward. Second, Cleveland optimization. We deployed specialist operational support to the site and results are clear. We have improved yield, productivity and customer service levels, including quality and on-time delivery. The site is now stabilized and on track to return to profitability, more on this shortly. Third, our components review. We conducted a strategic review, which concluded that the components business could potentially be worth more under different ownership. So we'll be testing that. We have separated its management to ensure more focus and oversight, and the Board is currently evaluating a value-led disposal process, but it is not a commitment to divest as it is subject to market conditions. This is a solid business. And with the changes implemented, we are confident that it will be a positive contributor to the group. And finally, balance sheet stability. Working capital discipline has materially improved, and we delivered strong cash conversion in part due to successful inventory reduction initiatives in 2025. This work culminated in a significantly reduced year-end net debt and leverage positions. Focusing specifically on our Cleveland site on the next slide. In 2025, we launched a business improvement project targeting operational performance with a focus on rework hours and productivity, and I'm pleased with the progress made. As the charts illustrate, we have seen sustained improvement with overall productivity levels now consistently above our higher target levels and rework much better than expectations. On-time delivery, yield and cost of poor quality have also all improved. Crucially, the Cleveland site is stabilized and its financial and operational performance has materially improved throughout the second half. There is still opportunity to drive further improvements and the current focus is on the sales growth from existing and new customers to utilize the capacity available and further absorb overheads. Turning now to our next phase. As we look to the year ahead, our focus shifts from stabilizing the business in 2025 to a more proactive agenda for value creation. On this slide, we have outlined the four clear priorities that will define this next phase. We have established a disciplined framework designed to drive sustainable growth and margin expansion built around four key pillars, which are: one, a realignment of the business to focus on divisions as opposed to regions. Two, a targeted cost reduction program, delivering material savings. As announced this morning, we expect to deliver approximately GBP 3 million of net benefit in 2026 and annualized savings of double this figure to deliver significant benefit in future years. Third, a sales transformation plan to upgrade our commercial capabilities. And fourth, portfolio optimization to improve synergies and margins across the group. I will take you through each of these in turn in more detail later. But for now, I will hand over to Richard who will talk you through our financial results. Richard Webb: Thank you, Eric, and good morning, everyone. I'll now take you through our 2025 financial results. Starting with our group performance. Against the backdrop of mixed market conditions, we have delivered a resilient financial performance that highlights the benefits of the operational actions Eric just outlined. Revenue and profit figures are presented on an organic basis. This reflects performance at a constant currency and with the impact of the quarter 1 2024 Project Albert divestment removed from the prior year comparative. Revenue for 2025 was GBP 481.4 million, down 2.7% organically, reflecting the strong growth in European Aerospace & Defense, which largely offsets the softer demand we saw in the EMS markets for North America and Asia. Despite the lower revenue, adjusted operating profit increased by 2.2% to GBP 37.2 million, demonstrating in large part the success of the turnaround actions undertaken in North America. Consequently, our adjusted operating margin expanded by 30 basis points to 7.7%. This margin progression was driven by the turnaround in North America gaining traction, continued progress in Europe and tighter cost controls across the group, more than offsetting the decline in Asia. Adjusted profit before tax is up 5.5% to GBP 28.7 million benefiting from the lower interest costs associated with our reduced debt levels. Adjusted EPS is 6.9p, down 37.3% year-on-year, reflecting the impacts of the higher effective tax rate of 57% as we cannot currently recognize a deferred tax asset for the U.S. On a normalized basis, if we had been able to recognize deferred tax assets, the adjusted effective tax rate would have been 25.4%, and the adjusted EPS would have been 12p. Finally, we significantly strengthened our balance sheet reducing leverage to 1.1x from the 1.8x this time last year, driven by net debt being reduced by almost GBP 30 million. Turning to the revenue bridge and focusing on the organic performance in the year. Europe was the standout performer, delivering robust growth. This was driven by sustained demand in aerospace and defense, where we're seeing structural shifts that are supportive to the business. This was offset by North America and Asia, where we faced volume reductions. In North America, the decline mainly reflects the EMS and components end market softness. In Asia, the reduction was primarily due to ongoing geopolitical uncertainty impacting customer order timing, particularly for the automation and electrification sector. Now turning to operating profit. The operating profit bridge tells a positive story of execution. Despite revenue headwinds, adjusted operating profit increased to GBP 37.2 million, up 2.2% year-on-year. Overall, we delivered GBP 0.8 million of net organic profit growth. This is the result of operational gearing in Europe, where higher volumes and favorable mix dropped through to profits and the turnaround actions in North America where the stabilization of Cleveland and the elimination of losses from Plano were critical. These actions allowed us to return the region to profitability in the second half. Plano, which was significantly loss-making in the first half, generated around GBP 3.5 million of profit from last-time-buys in half 2 and contributed approximately GBP 1 million to the group adjusted operating profit for the full year. Revenue at the site was GBP 13 million in 2025. Production ceased at the end of the year, and this contribution will not repeat in 2026. The progress in North America helped offset the impact of lower volumes and transition costs in Asia, where we have been investing to support the transfer of production from China to Malaysia. Now I'd like to focus on the balance sheet, which is the highlight of these results. We've delivered a strong cash performance this year. Free cash flow increased to GBP 29.9 million, up 7.9%. This was driven by a significant step-up in cash conversion, achieving 150% compared to 117% last year. The primary driver here was our disciplined focus on working capital, specifically inventory reduction. We have successfully executed inventory initiatives across the group, resulting in a GBP 14.8 million contribution to cash flow. When combined with the GBP 12.8 million inventory reduction in 2024, that reflects the very pleasing GBP 27.6 million reduction over the last 2 years. This strong cash generation has directly strengthened our financial position as we've reduced net debt by almost GBP 30 million to GBP 50.3 million and leverage down to 1.1x. Balance sheet discipline will continue to be a key focus. Earlier this month, we extended the expiry dates of our revolving credit facility to June 2028 and reduced the size from GBP 162 million to GBP 105 million. This facility is only drawn by GBP 10 million currently and in the next few months will be completely undrawn. Before I move into the regional performance, I will reiterate that from our next set of results, we'll be moving to a divisional reporting structure, which better reflects how we manage the business. This means a realignment away from regions into 3 clear divisions, Power, EMS and Components. Eric will talk about this in more detail shortly. And you can also find pro forma revenue and adjusted operating profit under this new structure for 2024 and 2025 in the appendix. Turning now to regional performance and starting with Europe. Europe performed well during the year, continuing to be a structural growth engine for the group. Revenue grew 7.4% organically to GBP 144.4 million, driven by our sustained demand in our aerospace and defense markets. Adjusted operating profit increased 13.9% to GBP 22.1 million, with strong operational leverage, expanding margins by 90 basis points to 15.3%. We are seeing strong order intake across A&D, and the trends are set to continue into 2026. Turning to North America. Revenue declined 3.7% organically to GBP 173.1 million. This reflects the volume reduction both at Cleveland and in the Components businesses. However, operational performance improved during the year and the region returned to profitability. Adjusted operating profit was GBP 1.2 million compared to a loss of GBP 2.7 million in the prior year. Margins recovered to 0.7%, a 220 basis point improvement. The operational turnaround was driven by 2 main factors. As Eric highlighted earlier, actions taken to stabilize Cleveland, improved yield, productivity and execution, materially reducing losses in the second half. In addition, production at the Plano site ceased at the end of '25, removing a structurally loss-making site from the group with last-time-buy activity, also supporting regional profitability during the year. We entered 2026 with a recent operational base in North America, which positions the business in this region for further improvement. And finally, to Asia. Revenue declined 9.2% organically to GBP 163.9 million. This was due to ongoing reduced demand from EMS customers in the health care and A&D sectors with continued geopolitical uncertainties, delaying customer ordering. Operating profit fell to GBP 21.6 million, with margins compressing to 13.2%. This performance reflects lower volumes and some transition costs as we transferred a major customer from our facility in China to Malaysia, which is now complete. Completing this transfer strengthens our resilience against geopolitical uncertainty, better positioning the region moving forward. On the next slide, we have broken down revenue by our end markets. Aerospace & Defense was the standout, growing 12% to GBP 152.8 million. This highlights our increasing exposure to structurally attractive markets where defense spending continues to rise. Automation & Electrification softened by 13%, reflecting the macro intrapolitical uncertainty that caused customers to be cautious with order placement. Healthcare was down modestly by 4.3%, primarily reflecting reduced U.S. research grants and funding though our pipeline in medical and life sciences is healthy, and this remains an attractive market for TT. Distribution declined 4.7%, which was expected as component demand continues to normalize post-COVID. Overall, the strong growth and positive structural trends we are seeing in aerospace and defense give us confidence. Whilst other end markets have not performed as well as we would have liked, this largely relates to macro-driven softness of demand. We entered 2026 in a better, more stable position. Thank you, everyone, and I'll now hand back to Eric. Eric Lakin: Thank you, Richard. I think we can all see there is an improving picture and a stronger financial base for TT. I will now return to the 4 priorities for our next phase before touching our customer base and finally, look at the outlook for 2026. First, our divisional realignment. As we have mentioned, from this year, we are shifting how we organize and present the business away from our current regional structure managed as Europe, North America and Asia, to a product-led divisional structure. The group will be aligned around 3 clear divisions, Power, EMS and Components. Why are we doing this? It aligns us better with our customers' capabilities and markets. It enables us to develop and deliver more coherent strategies aligned to divisions that have different technologies, characteristics and routes to market. It also creates clear accountability for product development, sales and planning. As part of this reorganization, we will devolve further responsibilities to the operating companies to enable a more agile business with faster decision-making being made by those closest to the customer. This also facilitates a simplification of the organization structure including an element of delayering and increasing the accountability of performance to the sites. As mentioned, pro forma divisional breakdowns are available in the appendix. Second is our cost reduction program. To support this leaner operating model, we have initiated a targeted cost reset to permanently reduce our structural overheads. We expect this program to deliver around GBP 5 million of gross benefits in FY 2026, which will be a net benefit of approximately GBP 3 million after implementation costs. Looking further out, we anticipate annualized savings to be around double this year's level. This is a program that directly supports our margin progression goals, and we will share more information as the year progresses. Third is sales transformation. We're upgrading our commercial capabilities and bench strength, particularly in North America and Asia, and investing in business development talent, tools and processes aimed at delivering improved pipeline, order intake and pricing discipline. In particular, there is a renewed focus on new customers and new product introductions with these activities already bearing fruit as there's been a significant increase in new business wins in recent months, especially in North America. And finally, portfolio optimization. And as a management team, we continue to review the group's portfolio on an ongoing basis to ensure it remains aligned with our strategic priorities and areas of competitive advantage. Our strategic review of the components business is now complete. The Board is actively evaluating a range of options, including a value-led disposal process. But as mentioned earlier, we are not committed to a sale. Our current focus is on improving margin quality and returning the business to being a value accretive part of the group. Looking further out, we have restarted early-stage prospecting activity for targeted strategic bolt-on acquisitions that strengthen our core capabilities and reach, especially in the power electronics sector in which we have developed a strong capability and market position. All in all, we see these 4 priorities as being key to the next stage of TT's growth and delivering value for all our stakeholders. I would like to spend a bit of time looking at some of our customer relationships. During my first year at TT, I've been able to see our client relationships in action and understanding the significance of these relationships gives me great confidence. We serve some of the world's most respective and demanding companies across our core markets. And these companies choose us because we operate in the mission-critical space. Whatever the requirement, our customers rely on TT for precision, reliability, engineering capability and production excellence. These are not transactional relationships. They are deep multiyear engineering partnerships we seek to solve customer needs typically in regulated markets for demanding specialist applications. This diverse blue-chip customer base provides us with resilience against market cycles and is a foundation upon which we will build our future growth. I want to highlight what one of our partnerships looks like in practice on the next slide. So Edwards is a customer we have supported for more than 15 years. They supply solutions to the semiconductor capital equipment market and we provide a full tier EMS solution spanning PCB assembly through to complex high-level assemblies and specialist testing for vacuum technology. They operate in a highly demanding sector where precision and reliability are nonnegotiable. By providing everything, from comprehensive test development support to supply chain transparency, we give Edwards the confidence to meet their own commitments. It is this level of deep rooted reliability that allows us to grow alongside our most specialist global clients. I recently met with the team at Edwards, and they conveyed the importance of our ongoing relationship to their success and the future growth of the business. As this example illustrates, our partnerships with customers go well beyond the supply vendor dynamic, and we are deeply integrated with their processes to help create value over the longer term. Finally, turning to outlook. TT enters 2026 on a firmer operational and financial footing. We have taken swift action to improve operational performance and are aligned on a clear strategy moving forward underpinned by the growing strength of our balance sheet. We have high exposure to the A&D market, which supports growth and margins across Europe and North America in what will now become a significant portion of our Power division. While we do expect some continued softness in EMS markets, I remain mindful of the ongoing geopolitical uncertainty. Our focus is firmly on what we can control. The operational and cost actions we have taken are expected to continue driving margin improvement and better execution across the group. The North America turnaround is now becoming a tailwind with losses in the first half turning to profits in the second half. The significant improvement in the region, together with the cessation of production at Plano, give us a cleaner, more stable earnings base moving forward. Cash generation also remains a key priority. We will continue to focus on working capital discipline and operational efficiency to support strong cash conversion. With leverage now reduced to 1.1x and our financing facilities extended, we have significantly strengthened the balance sheet and increased our financial flexibility. So we expect 2026 revenue and adjusted operating profit to be in line with current market consensus. And this reflects a more stable, higher quality and more resilient business following the actions taken during the year. 2026 is about consolidating the operational progress we have made, maintaining margin discipline and continuing strong cash generation as we build a stronger platform for a return to growth better placed to capitalize on opportunities as they appear. While there is still more work to do and the remain external factors and market uncertainties, we entered the year with a more focused business, a stronger financial position and the greater confidence in our ability to deliver further progress. So thank you very much for your time this morning. I hope you'll agree that this is an exciting time for TT, and we are looking forward to showing our progress moving forward. Richard and I are now very happy to take any further questions you might have. Mark Jones: Mark Davies Jones from Stifel. A few things, please. On the change in divisional structure, does that effectively get us back to where we were before the move to the regionals? Or is there a difference in what allocation you do between those divisions? And if you're devolving more responsibility to the operating units, are there implications for the divisional management teams? Are you retaining the current team and new people coming in? And then the other one is the step-up in sales investment. Does that consume some of the benefits of the cost savings plans? And what sort of investment financially does that involve? Eric Lakin: Thanks, Mark. I'll take those 3. The new divisions are very similar to but not identical to the previous divisions. I think there's a couple of differences. For example, Sheffield is power, not components as it was before. And Fairford is also power not part of EMS, which it was before or GMS in the previous name, but broadly similar. But the divisional structure we've got now is really designed to put all the sites with similar characteristics together. And so it's much more coherent. And the Components division is, therefore, what we've separately been running internally already, but without the Plano production. Mark Jones: So the whole scope of that is within the review. Eric Lakin: Correct. correct. And in terms of the impact of what was the regional teams, I mean, in fact, it's part of -- the cost reduction program is separate, but partly facilitated or enabled by the divisional reorganization. So for example, with the executive team, we've gone effectively from 4 regions, so 3 components to 3 divisions. So that's 4 to 3. And the divisional teams will be significantly smaller than what was previously regional teams. So there's that element of delayering. So it puts a point around putting more responsibility to the site teams and leaders. Much of the saving is around what was previously the group functional costs. So support, particularly in the sort of non-primary functions, supporting what was the regions and the teams, those responsibilities are covered affected by the sites, and so there's been a lot of reduction in that area. And then your... Mark Jones: The cost of the investment on the sales? Eric Lakin: Yes. So I think there is some net increase in cost for BD. It's really important that we don't -- with all the short-term benefits of cost cutting, we don't forget really, our mission is to grow the top line and drive profitable growth. There are some -- so I mean overall, the actual change in the business development function, including sales, commercial teams won't be materially different from prior year because we've also had some evolution of the sales team. So part of the sales transformation is a high-performance culture. And so as you expect in that culture of sales team, there will be some people coming in, some people going out. There'll be a net increase in head though. And so there'll be a modest absorption of some of the net savings, but it's quite small compared to the headline savings. And it certainly should pay for itself. Andrew Simms: It's Andrew Simms from Berenberg. Just a couple of questions around pricing initially. I mean you talked about sales transformation. It would be good to get maybe a little bit of a feel for where you're seeing the benefits of pricing coming through? Maybe some examples of how that's coming through there, that would be great. And then following on from that, in terms of new business, in terms of new logos as well, how should we think about gross margins and that business coming through, how that supports medium-term operating margin ambitions? Eric Lakin: Thanks, Andy. On pricing, there's 2 parts to it. It's existing contracts and new contracts. So with the former, we've done a review of a large customer and contract margins, in particular, around Cleveland. So we did customer product profitability analysis covering close to 100 different contracts and that was quite insightful. And that revealed really, so you can pareto these things, a handful of opportunities where the margins are not what we need or expect and some are very low in a couple of cases, actually negative. There's a legacy there and part of it is getting the right standard cost and rigor around bids. With the visibility we have in some of these cases, a contractual ability to increase prices with existing contracts, particularly in the aerospace and defense, we've got the right to have a transparent cost review and apply appropriate margin. So we've had 2 quite significant successful price negotiations and outcomes at the back of last year, which will have ongoing benefit this year. So that's been helpful. And it actually shows -- these aren't easy discussions to have, but the customer chose their value and need our ongoing support. Going forward, it's a point around sort of bid and pricing discipline. We've got a good -- a rigorous bid, no-bid structure in place. And so we make sure that we make the right decisions. And it's much about pushing the highest prices. For components, for example, we had a sort of a particular mandate, not accepting margins below x percent. And actually, we turned away some business that would have been contributing to our bottom line. So in some cases, by exception, we take a different view for certain contracts where it's making a positive contribution. You certainly want to cover at least all the variable costs, direct costs, and actually and get some scale and cover the overheads. So it depends on the circumstance. But overall, we're tracking that and there's a big important part of it. In terms of new logos and the impact on margin, I mean, it varies, I mean, particularly some EMS contracts. I mean overall, the margins will never be as high as, say, in other parts of the business. And you'll see that come through in the new divisional structure, and that is the nature of it. I mean you look at our peer groups, typically in EMS margins, and they're typically mid- to high single-digit percent. And as we get new logos, we're still pricing them to ensure we get profits from day 1. We're not doing any sort of cost entries. A couple of examples recently. We've got our first new logo in North America in agricultural drones, another one in data centers. And we are quite well aligned to meet their needs and make profits. There is business out there. We could win, but we'd lose money out. And we've been very disciplined to focus on profitable growth, not just top line. Alexandro da Silva O'Hanlon: Alex O'Hanlon from Panmure Liberum. Just a couple of questions from me. Firstly, just on the Cleveland productivity improvement. It's a good chart that you have in the deck, and you can see how that's progressed over the year. It's interesting to see that the improvement has tracked the, I guess, better targets throughout the year. Are we at the target level that you want to see now? Or is there further progress to go? And the second question is just on capital allocation. You mentioned the possibility for bolt-on acquisitions in the future. I was just wondering, on the dividend, what do you still want to see in terms of progress before you're reinstated? Eric Lakin: Thanks, Alex. In terms of productivity improvements, I mean, right, it's very pleasing when you implement initiative and you can see the evidence of that. And so productivity, I mean, the way we define it is, it's total hours spent on a product divided by total standard hours expected. And you're always going to have -- we set it at 75%, we're excess of that, which is good. I mean in practice, the way that is measured, you're always going to have some element of training time, vacation, what have us. So the similar measures of efficiency, and it's equivalent to that as more like 90% or so. So it's where we expect it to be. Could we push it harder? We're always trying to do more and more. And by getting higher productivity, that manifests itself improved profits by either having more capacity to do more or we can reduce headcount. So I think it's where I'd like it to be. I think if we're; going to sustain at that level, it'll be a good outcome because there's many other factors as well, including quality and the ability to also -- there could be a period where we have a slight impact. So we're bringing in new product introductions, and that has an impact as we get the standard costs delivered. And then in terms of capital allocation, I mean, look, a priority last year was absolutely a focus on balance sheet strength, resilience getting the gearing down and the refinancing. And Richard and team and Kirsty is here with us as well, Head of Tax and Treasury, done an excellent job resolving that. So it's nice to be getting these questions now. Looking forward, I think we're very mindful, obviously, a lot of uncertainty at the moment, are very mindful of maintaining a strong balance sheet. So the dividend position, the Board will continue to review that going forward, and we may well have an update at the interims and make sure we're making the right decisions in the medium to long term as well for shareholders. So I mean there's other options available, of course, whether it's share buybacks or acquisitions. On the acquisition point, it's too early. We need to be good stewards of the business, prove that being more reliable and consistent in our delivery against promises and prove we are a good owner of businesses. But it's also true cultivating targets can take a long time. So we're right to start that now. And there's definitely a runway of opportunities out there that could be additive to our business. So it partly depends on opportunities that arise and then we make the best decisions at the time. Mark Jones: Sorry, can I come back for one more, which is around the moving parts of this year and the guidance you're giving, because obviously, there's a lot of underlying progress. But the guidance you sort of stood behind this morning, the top end of that is flat year-on-year in profit terms and the bottom end of it is obviously a step down. So you've got a GBP 1 million headwind in terms of the full year contribution from Plano, you've got strong growth in Europe in the A&D business ongoing. You've got presumably better underlying performance in the U.S. we should have year-on-year, and we've done the big transfer in Asia. So can you talk through the other headwinds? Is it just volume in EMS? Eric Lakin: Yes, Richard, do you want to pick that one? Richard Webb: So one aspect is margins in Europe is now power. So there was -- there's some beneficial mix within 2025 that won't repeat in 2026. There will be some softening of power margins as we go into next year. But yes, the ongoing softness in EMS continues to be an area where we're being cautious for the 2026 outlook. That is the kind of primary driver of why you don't see 2026... Mark Jones: And it could be by end market within the... Eric Lakin: I mean I'd just add, big picture, there's obviously a lot of uncertainty. And it's too early to call what the impact would be with the current situation in Middle East. There's likely to be some level of inflationary impact. We've not yet seen any constraints on raw material and supply chain, but they might occur and they could have an impact. Obviously, we've got energy price rises, which could ultimately impact some of our fabrication costs, particularly where we use furnaces and so on. But it's early days. We don't know, and it's unclear what the impact would be in terms of customer demand patterns as well. But I think there's a broader caution around inflation and the impact of that on the business, which we're obviously taking countermeasures to that with the cost reduction. I mean, by division, the components business, we're two months in, so it's early, we're showing signs of good resilience, which is encouraging, but the lead times there are quite short, so we don't get the visibility of that division as we get for power or EMS. But in terms of end markets, we're seeing clearly ongoing strength in A&D. I think we have good growth in '25, I think sort of continued growth in '26. But we're not -- a lot of the very large contracts we won last year, a multiyear contract, so it's just temper enthusiasm we're talking. Single-digit growth in '26, not necessarily double digit. And look at the various markets across EMS. Health care remains somewhat subdued, and we're expecting, hopefully, to pick up towards the second half of the year, particularly around health care spend and that feeds into R&D and specific programs. Semiconductor CapEx is a very interesting one. That was down last year, which might be surprising, given the trend in that sector, but there's two elements to that. One, specifically to us, there was some additional safety stock ahead of the transition from Suzhou to Kuantan. So that had an impact year-on-year for '24 to '25. And actually, our customers who provide equipment for fabrication facilities. It's a little bit of a soft market because it's really about upgrade to new facilities rather than the production itself rate of semi chips. But we are seeing signs of improvement in that sector with the conversation we're having now with a couple of our customers encouraging. So we should see a pickup in that. Obviously, it starts with pipeline and then orders and then that feeds into revenue. So I'd be interested how that pans out through the course of this year. And then other general industrials, it's a mixed bag, whether you're looking at specialist industrials, rail and a number of other sectors we have we serve in EMS. It's sort of a mixed bag. But a key point around EMS because I think we would -- overall, we're not expecting to see growth in EMS this year. But this pivot to regional supply chains and moving and investing in regional and domestic sales is looking like it will pay off, particularly for China, regional sales. So we'll see, hopefully, as we progress that through the year, but we're sort of cautious at this point in the year. Kate Moy: We've got a question from online from Joel at Investec. Can you quantify the costs associated with the customer transfer from China to Malaysia impacting the APAC division? Is that process now complete? And are there any signs that the rate of APAC revenue decline is stabilizing or are you planning on it being lower in 2026? Eric Lakin: Do you want to cover the cost base? Richard Webb: Yes. So the overall cost was around about GBP 1 million to OpEx and then some limited CapEx investment as well, and that transfer is now complete. Eric Lakin: Thanks for your question, Joel. And I think it's complete. We've had success. It was a crucial project last year for a large customer and all of the first article inspections have gone through well. So we're now in the process of spinning up volume production. So that will be key next stage of that process this year. I think overall, we still expect for APAC region a reduction in the decline we saw in '25. So as I mentioned earlier, we're not expecting a return to growth this year because APAC is really driven by the EMS market. But we're seeing a level of stabilization as in anticipating a reduced decline this year. And crucially, the lead indicators we have is what does the order intake look like in pipeline to drive growth, certainly beyond this year and potentially see that coming through in the second half. But overall, we're being conservative around our forecast assumptions for '26. Kate Moy: Thank you. There are no further questions from the webcast. So over to you for any closing remarks. Eric Lakin: Okay. Well, look, thank you all for coming. It's good to see a full room. Thank you for your interest and time, and appreciate it, and look forward to seeing you all at the interims, if not before. So thanks very much. Have a good day.
Crissa Marie Bondad: Hi, everyone. Good morning. Welcome to the full year results briefing of D&L Industries. To discuss the results, here with us today is Mr. Alvin Lao, President and CEO. I now turn over the floor to Alvin. Alvin Lao: Hi, everyone. Good morning. Thank you for joining us today for the discussion on the full year results of D&L Industries. So the highlights, we did better than we expected. 2025 was not an easy year. So we managed to have net income increase by 10.6% versus the previous year. And very encouraging is, as you see there compared to fourth quarter of the previous year, net income was actually up by 20%. Second bullet point, we did see good growth in volume across almost all segments, and we'll go into more details later. Despite the big surge in coconut oil prices. So we did see margins also starting to improve. Gross margins in the fourth quarter doing better versus the previous quarter. We also saw our CapEx continuing to trend lower. Even though coconut oil prices peaked last year, they have started to ease, and it does give us a lot of room to -- with lower working capital to be able to allow us to be able to reduce debt going forward. So bullet point number 5, of course, we are faced with a lot of things going on outside the country, which is affecting everyone. But we are continuing to look for these silver linings as we always do. And essentially, hopefully, these are opportunities for us, to continue to present ourselves as a solid supplier and partner to work with our customers. So here's a look at the change or how our net income has been over the last couple of years. So you can see there, our net income actually peaked in 2022 at around PHP 3.3 billion and comparing 2024 to last year, they received a 10.6% increase. With -- on the right side there, you can see the breakdown. So Chemrez Group being the biggest contributor of net income, followed by specialty plastics, wood coming 1/3 and consumer products ODM in fourth place. So here's a look at how our Batangas plant has been doing. So it's still profitable. But -- and it is not -- it's not as steady as we hope, but it is still at least keeping its head above water. As we roll out the utilization, we should continue to see improvements in the income from the Batangas plant. Here's a look at the condensed income statement. So there, you can see a very big jump in revenue. But again, just as we have mentioned in previous quarters, a lot of this increase in revenue is tied with higher commodity prices. So a better way to measure our growth, how we're doing is really looking at the volume change. But what we've highlighted there in the green box is really how net income has changed. So year-on-year, up by 11% quarter-on-quarter, up by 15%. And then just fourth quarter year-on-year, up by 20%. So a look at our export sales in the next slide, you can see that our exports did go up, value went up by 16%. But in terms of -- so what's been happening is last year was the first full year of the 3% blend for biodiesel. So that had a very big impact in terms of adding volume to our domestic sales. So it made the growth in exports look smaller. So we actually saw a decrease in exports as a percent of total sales. But it's really more a factor of our domestic business growing much bigger. And so we can see that also here in this slide. So in the previous periods, I remember, I think it was last year and the year before, we would see revenue and net income -- or sorry, gross profits from exports outpacing that for the domestic business. But it wasn't the case for last year. So biodiesel was one factor with this. However, if you take a look at the bottom of the slide, you do see that as far as our profit margins are concerned, the profit margins for exports still do still performed much better than the domestic business, 16.4% versus below 12% for the domestic business. The next slide is our volume, how volume has changed across the different businesses, and then we split it between high margin and commodity. So almost all segments saw increases with the exception of the food commodity segment. So that was down by a little bit down by 2%. Everything else was up. the biggest increase coming from by diesel, which is a 36% increase in volume for Oleochemicals commodities. Overall, for the company, volume increased by 8%. And then overall, high-margin volume was up by 9%. So I would say we did pretty well considering for our Food Ingredients business, the commodity side, that's actually the lowest margin category we have in our business. We will talk about more details with that in the next -- in the upcoming slides. So just looking at high-margin specialty products. So volume for this, as was mentioned in the previous slide, for the year, was up by 9%, although it was down a little bit in the fourth quarter. So comparing fourth quarter 2025 versus fourth quarter 2024 volume was down by 4%. But for the year, it was up by 9%. So the -- even though we did see a slight drop, it was more than offset by the big increases we saw in the first and the third quarters, so that made up for that slightly weaker fourth quarter. Here's a closer look at the high-margin Specialty Products segment. Revenue up by 22%. And on the right side there, you can see Foods, the biggest contributor of revenue for high margins. On the bottom left there, you can see our margins for the last 12 years. And for the year 2025, high-margin specialty products margins were lower compared to the year before, coming in at 18.5%. However, if you take a look at the box in the dotted line there. It's a breakdown of margins across 4 quarters of last year. And you can actually see that there is an improving trend. The fourth quarter margins came in at 20.1%. So versus third quarter, which was at 17.6%. So it's not -- so there is a bit of a silver lining in the sense that there is that improvement as far as the quarterly margins are concerned. Next is the commodity closer look at the commodity segment revenue up by 64%. For the commodity segment, it's much easier for us much quicker to pass on price changes, so you can see that margins dipped a little from 8.7% to 7.5%, but still more or less in that midpoint between -- so the low for commodity margins would come in at around 4% and the high usually comes in at around 10%. So at 7.5%, we're just at that midpoint where we expect commodity margins to be at. So a look at our revenue mix. So there's that increase in the biodiesel blend. So that started October of 2024. So from 2%, it went up to 3%. We were a big beneficiary of that increase. And that is the biggest reason why we did see commodities as a bigger share of our revenues last year. However, we do expect the trend to approach that, meaning before COVID, it was roughly 2/3, 1/3 blend, meaning 2/3 coming from high margin, 1/3 coming from commodities. Long term, we still expect that direction or trend to be what we will see in the business. The next slide. So a couple of things going on here. In the middle, you see our 2 most used commodity raw materials, coconut oil and palm oil. Together, they make up approximately 60 -- roughly 60% of the raw materials that we used as a company. And you can see there on the right, coconut oil prices year-on-year were still up, we're up by about 62% versus palm oil, which is up by just 6%. And coconut oil prices actually peaked in August last year. So not -- you can kind of tell in the chart. So we hit $3,000 a tonne for coconut oil around August of last year. Currently, we're at roughly 2,3 -- between $2,300 and $2,400 versus the low -- so from this chart, you can see that the low is roughly at around $1,000 a couple of years ago. So it has been very volatile period for coconut oil prices. Below that, of course, is the dollar-peso exchange rate. So we ended the year at PHP 57.63. But of course, we're at the PHP 60 level today. So that has also been affecting our costs. But above that, you see there the change in margins don't so much reflect what's happening in the prices of our raw materials. And it's actually more a closer pattern to the change in our product mix that we showed in the earlier slide. So it's really the product mix that's driving our margins much more than the changes in the underlying prices of our raw materials. Next slide, our condensed statement of cash flows. So with coconut oil prices up by 62% and with coconut oil making up, I think still over -- sorry, over 30% of the raw materials we used. That's another big effect on our working capital. So more cash tied up in inventory and receivables even more than last year, up close to PHP 6 billion, as you can see. So -- but you also see that CapEx is lower versus the previous year. But we're still ending the year with negative free cash flow at negative PHP 1.2 billion. But as I mentioned earlier, coconut oil prices have been trending lower and it doesn't look like it's going to hit the high that we saw last year. So assuming working capital is much steadier this year because of steadier raw material prices, then that should be a very big change in -- not just our working capital, but in our free cash flow as well for 2026. So this slide, this is our -- how our CapEx has been. So end of 2018, we started construction of our Batangas plant, CapEx peaked in 2022 and since then, has been trending lower. So we ended the year at PHP 767 million in CapEx. So that -- I would say that's pretty close to the stable CapEx level, we would have going forward, meaning not much costs -- not much CapEx anymore tied to the big construction in Batangas. It's really more things like maintenance CapEx and upgrading of a couple of lines, but not as big compared to what we saw in the last couple of years. So this will be another factor, which will contribute to better cash flows for the group as well. So this is jump into more details into each segment. So here, you can see the contribution for each of our 4 major divisions in terms of revenue as well as net income. So in terms of revenue, food is still our biggest followed by Chemrez, third specialty plastics, fourth consumer products ODM. But in terms of net income contribution, Chemrez was #1, followed by Specialty Plastics. Both at or over PHP 1 billion in net income. Food ingredients at #3 and Consumer Products ODM at #4. So dive into our Food Ingredients business. So we saw volume up by 4% and revenue up by 34%. However, a lot of changes happening, especially. So first of all, we did see volume growth across all the high-margin segments in food. So -- in the 4 boxes that you see at the bottom, especially fats and oils, specialty ingredients, food safety. These have been our high-margin performers for food. It's only that second box, refined vegetable oils, which is low margin. As you can see, they're coming in at 4.8% gross profit margins. So in terms of revenue coming in at the same level of revenue increase as the overall food segment at 35%. But you can see there the volumes started to drop. Volume is actually down by 2%. And this is 1 segment that grew a lot during COVID. For those of you who have been following us for the last couple of years, during COVID, we saw a massive jump in our commodity refined vegetable oil segment because it was really a market share gain. A lot of our competitors were not active in this category. And so it was just an opportunity for us. We had the facilities. We have the access to our suppliers, so we were able to gain market share. However, we are starting to give a lot of that market share back. So you will -- so we did see volumes drop in this segment last year. You will continue to see volumes drop in this segment. The overall effect on margins and profits is not as big because it is -- the margins in this segment are quite low at below 5%. So you should see overall margins for this segment go up in the next couple of years as we trim that volume or that market share in the commodity segment. For the next slide, so that's Chemrez. And the big driver of change in this segment is really coming from biodiesel. So 2025 was the first full year of a 3% blend. We only had 2% -- sorry, we only had 2 months of the 3% blend in 2024 because it really started October. But in 2025, it was a full 12 months of the 3% blend. So there, you can see the big jump in volume, revenue as well as net income. Overall, margins were lower because biodiesel is a lower-margin business compared to the other businesses of Chemrez. But still, overall, Chemrez, the biggest contributor of net income for the group for the year. In terms of more details of the -- just a little bit of history. So the law, the biofuels law passed in 2006, 1% blend started in 2007, went up to 2% in 2009. It was only 15 years later that the blend increased to a further 3%. So that was in October of 2024. We do not know yet when the next increases will happen and our attitude even before, it's something we don't really price in or we count on our projections. It's just a bonus if it does happen. But what we have seen in the past, every time there is an increase in the blend, Chemrez does benefit. So here specialty plastics. So this segment -- it's the steady eddy of our business, doing -- continuing to do well. Even if volume was flat, revenue was up by 4%. Net income was up by 9%. And margins were higher as well by 0.6%. And this is a segment that doesn't really cater much to single-use plastics. It's really the plastic materials that we see replacing more materials that we use in our lives, everything from cars, cabling in buildings, appliances and so on. So still a lot of development going on, and we believe still a lot of growth coming going forward. And then fourth, Consumer Products ODM. So this was a business, especially personal care that really suffered during COVID. I remember it was just something that just looked like it fell off a cliff 6 years ago when COVID started. So it's still continuing to make a comeback. We have also started to see exports in this segment as well. So still a relatively small business, but now I believe it's contributing 8% of net income for the group. So becoming relevant. Next page. So our asset-light model. So on the left side, you can see there -- the group -- if you look at the balance sheet, it doesn't own a lot of fixed assets. So things like property, warehouses, barges and so forth. These are not -- D&L doesn't have any of these in the balance sheet. It's all leased from affiliate companies. So that cost usually comes in at between 1% and 2% cost and expenses. And then -- so these are related party expenses. On the right side, you see there D&L as a service company to the group performs a lot of what we call management and shared services. So everything from HR, admin, accounting and finance, legal, IT, and so it charges the sister companies and that charge is really the party income for D&L. So helping to offset the related party expense. Next slide, cost structure. So our biggest cost by far is still raw materials. So for 2025, it was 84% of costs and expenses just coming in from raw materials. Number two, is labor; number three, depreciation and rental. So our fixed costs are pretty much labor depreciation and rental and maybe some of the utilities and maybe half of others. So a little over 10% of our costs classified as fixed, almost 90% of our costs classified as variable. This is something which makes us very different from almost every other manufacturing company. It makes us -- in terms of our business model, this is what allows us to survive and be nimble every time there's a crisis. On the right side there, you can see the breakdown of raw materials. So coconut oil at almost 40%, palm oil, 22% together, 61%. And there, the text on the right side, roughly 31% of the raw materials we use are important. So if you do the math, you can kind of figure out that our -- the amount in terms of raw materials we use is almost exactly the same as the dollar amount of our exports. In fact, I believe our exports are already slightly ahead of our importations. So that means on a net basis, we're not a dollar user anymore. We are adequately hedged and over time, as our exports increase, we will likely be a dollar -- a net dollar earner already. Bottom left, you can see there, technology spend, so this R&D as well as IT and this is something that we have seen increasing gradually over time. So we are continuing to invest in R&D and technology. Next slide. So our balance sheet. So we did have to bring on more debt to finance the higher working capital needs. So that was in the cash flow slide that we showed earlier. So debt ratios have gone up. But in terms of book value per share, return on equity as well as return on invested capital, we have seen increases as well versus the previous year. Next slide shows you capital structure. So the yellow bar there is debt, so that has gone up. Net gearing is now at 96%. So still not -- I would say it's not -- we're not heavily geared. Interest cover is at 3x. Net debt is at PHP 21.9 billion. Average cost of debt at roughly 6%. This includes the cost of documentary stamp tax. And then the next slide. So this is our effective interest rate and net debt as well as interest cover over the last 10 years. Next slide is our working capital cycle. So big improvement from 139 days in 2024, we're down to 110 days, inventory at 74 days, an improvement over the previous year's 107 days. Payables is at 9 days. So this is something we are continuing to work on because it was 21 days the year before. We also saw an improvement in receivables. So 45 days now for our AR days. Okay. Next slide. So the family has been continuing to buy back shares. Even in 2026, we have bought back shares. So since the IPO, we've bought back roughly 9% of the company. So every time we saw the price drop to a level where we felt it was a good bargain, we would buy. We have stopped buying the last few days because we're in a trading ban because we are disclosing our results today, but once the trading ban is lifted, you can be assured as that price stays low, the family will continue to buy back. Okay. Next, so we are continuing to participate in various conferences, both domestic as well as internationally. And the previous one was with the PSE last week at the Grand Hyatt. And yes. So one reason why we like buying our shares back is just we know that the dividends are coming in pretty good. And yes, that's it in terms of what I wanted to present. So we're open to Q&A. Crissa Marie Bondad: Okay. Thank you, Alvin. [Operator Instructions] I have a couple of questions lined up here. So let me just meet them. Okay. The first question comes from Dan Brian. Okay. First question, what is your outlook on palm and vegetable oil given the recent surge in petroleum prices? Second question, how are your F&B related orders currently amidst the oil prices? Third question, how are your nonfood-related orders currently amidst the oil crisis? And he has a follow-up question, which I would also read now. Could you please remind us what products encompass the food commodity segment? Alvin Lao: Okay. So first question, outlook on palm and vegetable oil. Typically, there is a correlation. So the way it works normally from what I understand, crude oil, meaning petrochemical crude oil usually affects soybean oil prices in the U.S. because soybean oil is fuel substitute. And then the effect on soybean oil has the domino impact on palm oil and then eventually, it reaches coconut oil as well. So crude oil prices have gone up a lot. But from what I can see so far, coconut oil prices have not gone up that much. Crissa I'm not sure if you have a recent slide to show. Crissa Marie Bondad: We do have. Let me just... Alvin Lao: Sure. So okay. So while Crissa is pulling that up. So thank you. There you go. So this is as of, I think, a couple of days ago. Yes, okay. So as you can see there, there is a slight uptick but it's not as significant as what we saw happening with crude oil. And I think a big factor here is that we're still near extremely high price levels for coconut oil. We're not at high levels for palm oil. But from what I understand, there's no -- there's really no shortage in terms of supply for both of these oils. So with prices having -- especially for coconut oil peaked in August of last year at $3,000 a ton. It just went up too much. And so -- so the outlook is they may go up, but not as much as what's happened with petrochemical crude oil. So that's the first question. Second question was how our F&B related orders are currently amidst the oil crisis. I would say it's too early to tell because the war in Iran started 25 days ago on February 28. But I have been hearing from business owners that they have seen a decrease in business. So not just F&B, hotels and other nonessential, non like travel and so forth. Volume seems to be lighter in the month of March. That's what I have been noticing. What I heard was that January and February for the hotel. So the hotel industry is actually one industry that has been lagging in terms of recovery from COVID. So the lockdowns ended in 2022, but our international arrivals in the Philippines was only at around the 6 million level last year, 6 million, 6.5 million versus -- it's still down 20%, 30% versus the peak we saw in 2019 before COVID. So we were supposed to see continued recovery for international arrivals, especially for the hotel industry. January and February were supposed to be really good. March may not have done as well, we'll see. But in general, it's usually the case. Every time prices go up, especially for crude oil, that really sets the pace it affects everything -- the price of everything. And so there will likely be a dampener effect on the economy. That is very typical. And the F&B and even nonfood, we will see some impact as well. It's just how the way it is when costs go up, people spend -- they're not able to spend as much because more of their disposable income is tied up with essential goods. So that's question 2 and 3. Question 4 products at Encompass, food commodity segment. So that would be -- so we do trade coconut oil as well as palm oil, refined coconut oil, refined palm oil. Biodiesel is also a commodity. But when it comes to just food ingredients, it's really just what we call straight oils. So yes, you can see here in the slide more details. Refined usually means RBD. That means refined, bleached, deodorized and could be palm oil and other variants also as coconut oil. Crissa Marie Bondad: Okay. Next question comes from Dario Actually, he has 3 questions. First question for the commodities business is interest expense a cost pass-through with clients? Second question for Batangas plant. Could you elaborate more on why net profit had been trending down over the past few quarters? What has been performing above expectations? And what has not been performing quite up to expectations? Last question, I believe you touched on this, but in case you want to add something else. So how do you see higher oil prices impacting the business? Alvin Lao: So first question about commodity business. Yes, we do pass on interest expense to our customers. So every time we price a product for sale, we look at all of the costs, logistics, cost of money, insurance, so on and so forth. And interest expense is part of that. In terms of the Batangas plant, so yes, the income has been trending lower. I would say it's really a function of us varying the production between the Batangas plant and all the other plants. So Batangas plant is our biggest plant, but it's just 1 of 7 plants that we have. And it's normal for a company to tweak what we make across the different plants. Well, the other factor here is that -- we don't make any biodiesel in the Batangas plant. And with the Batangas -- sorry, with biodiesel being our biggest volume driver last year, it's -- we just saw more profits coming from the biodiesel plant, but Batangas didn't benefit from that. So that's another factor. But yes, that's -- I would say -- since the plant has already been operation for 3 years, maybe we don't need to focus so much on how the Batangas plant is doing, I mean at least not focusing so much on the income from the plant. I think what we've been able to show is that we reached profitability earlier than we projected, and it's already accretive to our business. And I think that's the most important point. In terms of how higher oil price is impacting us. So it's actually not just higher -- of course, higher prices for oil impacts everything eventually. That means our costs go up. But for us, since we do price pass-throughs, the effect is we're able to pass it on. I think a bigger worry for a lot of companies, including us, is with the closure of the Strait of Hormuz and the closure of a lot of petrochemical producing assets in the Middle East, will that reduce supply? And that, I would say, is probably the bigger worry a lot of companies have. And I am aware the government has been making a lot of statements to reassure everyone, not to worry about supply, but it is a common discussion point across many industries, many companies, many countries I would say that is as big a factor, not just price. Crissa Marie Bondad: All right. The next question comes from Martin [indiscernible]. So you mentioned margins are more driven by product mix than raw material prices. Can you quantify mix impact versus raw material price impact in full year 2025? If mix is the key driver, why did margins still compress significantly during the coconut oil spike? Alvin Lao: If you overlay this chart, so this is our product mix chart. If you overlay this against the -- I think it's the next slide, with the margins, there you go. You can really see the trend. So of course, the product mix is not the only factor affecting our margins. The high price of coconut oil last year, I mean we definitely are able to pass on price changes. If not, you would see much bigger volatility and fluctuation in our margins compared to what's shown here. I mean coconut oil prices going from $1,000 to $3,000 a tonne. That's a huge change. And I don't care what business you're in, if your raw material price goes up by 3x, your margin is going to be impacted. But -- so there is a change, but we're not seeing that level of volatility. I guess the other factor here is that when prices change, we do see a lag for commodity, which is roughly half of our business now, the general rule, when prices change in the market, our selling price changes immediately. But for our high-margin product, there is usually that 30- to 45-day lag because our customers typically order between 30 to 45 days ahead, we agree on the volume, but we also agree on the selling price. And we fix that price. What happens is when the raw material price goes up, we tend to lose out because prices went up. But after that 30-, 45-day period, we can adjust. So it's not a perfect pass-through, but effectively, it still is a pass-through, it's just a lag. I'd say, though, again, looking at where coconut oil prices were, looking at how prices peaked last year, hitting $3,000 a tonne level. And I'd say one big -- so let's compare coconut oil to how not just crude oil has moved. Let's go with jet fuel, for example. For those of you who track crude oil prices, you probably -- you're aware, there is no one benchmark crude oil price. The 2 most quoted are West Texas Intermediate, WTI, which is the U.S. benchmark and then Brent, which is the benchmark in Europe. But the Philippines actually doesn't use WTI or Brent for its pricing. It uses Dubai. You've got -- then you've got jet fuel price as well, which is another benchmark altogether. I mean -- so jet fuel from what I saw yesterday is at or around $200 a barrel. So that's I believe that is why yesterday, we were hearing news about the possibility that the Philippines and other countries might have issues as far as refueling planes. So compared -- the reason I bring this up, if you look at how coconut oil has moved, however, it's probably moved less than 10% from the [ $200, $250 ] level, it's now at [ $230, $280. ] So what's that, maybe a 5% change. It's not -- they're just I think it's accepted in the market, the prices really went up too much. So -- so that is, I would say, positive for us. It's good for our margins going forward. It's also good for our cash flows going forward. Crissa Marie Bondad: All right. Next question comes from Rainier Yu. Given current events, any risk for the biodiesel blend to be pulled back to 2%? Also, any supply challenges in resins? Alvin Lao: So for people who don't see the breakdown of how our pump prices are calculated, it's very tempting to just drop everything that's more expensive. So you've got excise tax that is actually bigger. I believe that at 12% -- I mean you can do the math. It's huge. Excise tax, I think, is at PHP 6 per liter. Biodiesel, I think, it's maybe PHP 1 effect currently or maybe less actually with pump prices as high -- I believe the DOE yesterday's guidance was as high as PHP 134 per liter for diesel. That's actually higher than the price of biodiesel now. So I don't think it would make sense to reduce the blend of biodiesel because it's actually a cheaper fuel compared to regular diesel now. So actually, it would make more sense to increase the blend. So I'd say there's a lot of knee-jerk reaction, drop the price because we don't want prices as high now because it has so much negative effect. But I believe we need to look at the details more closely. It's not as simple as just dropping everything. Sorry, and then the other question was about supply challenges in resins. Definitely, there are supply challenges. I mentioned earlier with shutdowns and blockages, it affects supply. And that is a concern we have. Crissa Marie Bondad: Okay. Next question comes from Clark. Is the lower inventory days due to lower volume stock for raw materials? If so, which raw materials? Alvin Lao: Lower inventory base is -- well, so we saw -- when we saw prices of coconut oil, not just coconut oil, almost everything prices went up last year. And when things are more expensive, it's more expensive for us to carry them. So it's just part of our efforts to be a more efficient company to try to reduce the cash that's stuck in inventory. So I would say that's the bigger factor. It's not -- and I think there was no worry about supply before February 28. So it was really a price game. You could buy as much as you wanted. You just have to pay the price. I don't think that's the case anymore. There is -- I don't think there's a lot of commodities now that's in unlimited supply. Things are not as fluid in terms of supply now for a lot of industries. Crissa Marie Bondad: Okay. Next question comes from Peter Wang. So coconut prices seem to stabilize at still a high level about $2,500 per metric ton. How will this impact our margins going forward, especially for a supposedly high-margin business segment like food ingredients. And by the way, in the last quarter, had the profit after tax for food ingredients turn around from losses in the past quarters? Alvin Lao: Good observation, Peter. I thank you for continuing to follow us very closely. So yes, our Food segment is doing better. And it did better in the fourth quarter compared to the previous -- to the second and the third quarter. Are margins going forward? So I did touch on this earlier, but I don't mind repeating this. When prices of raw materials go up, our capability to pass on price changes is something that we've been able to -- because that's really our business model. That's really how we are as a company. And it is something we can do. But -- if you look at the breakdown of what we sell -- the bulk of what we sell is not petrochemical related. So Crissa, could you go back to the breakdown of revenue by the 4 major divisions? There you go. So what's petrochemical-related here? So that's 100% of specialty plastics to 6%. Consumer Products ODM, you've got packaging let's just assume everything there is petrochemical-related even if it's not, but it's not food, okay. Then you've got everything else, 91%. So part of Chemrez is petrochemical related, but a big chunk of it is biodiesel as well as oleo chemicals. And -- so we've got probably 75% or 3/4 of our business in non petrochemical. I guess this is the benefit of being a kind of diversified company being in several different segments. So petrochemical margins will be challenging definitely. But as I mentioned earlier, it's really supply that's a bigger worry because if you have supply, you can really dictate prices. And that's something we saw in previous crisis. So our company has been around since 1963. We've been through the first oil crisis in 1973, the second oil crisis in 1979. I don't think Crissa was born yet then, but I was already around, but I was still in short pants in grade school. But I've heard the stories. I -- and other crises as well in the '80s, in the '90s, in the 2000s, and of course, we had COVID recently. And then when Russia attacked Ukraine, I think we're still going to be okay just because we do have that business model that allows us to survive. So yes, our high-margin segments should still be okay. And again, our worry is not really the margins because most of what we sell is actually not petrochemical based. And the costs are not going up as much. The bigger worry we have is really making sure we can maintain supply. And of course, on what's happening with the economy, that would be, I would say, the bigger worry. Crissa Marie Bondad: All right. Next question comes from Denise Joaquin. How exposed is B&L to supply chain disruptions from the war and which raw materials or inputs are or could be the most affected? Second question is management looking to provide an earnings guidance for the year? Alvin Lao: So I can go to that second question because it's easier to answer. All our budget forecasts that we made last year, having thrown up the window because things have just changed so much. All our assumptions, interest rates, dollar peso exchange rate, price of crude oil, economic growth, nothing is the same anymore. So we are not in a position to forecast net income or earnings guidance. What we can say is that we have seen a lot of crises before. And -- like if you look at how we did in 2022, when Russia attacked Ukraine, that was actually a record year in terms of net income. Of course, you had other factors like the reopening of the economy and so forth. But if you look at how we did in past crisis, I'd say we didn't do too badly. So it's just how our business model is and how we are as management in terms of how we run the ship. So your original question, how exposed are we to supply chain disruptions in the war and which raw materials or inputs are affected. It's not as -- so what I'm hearing from -- so luckily, we have a lot of people in the company who still remember what happened in the '70s. So I've been interviewing them. And I've been reading reports as well from what I understand, Things have not gotten as bad compared to -- in the '70s, I heard there was rationing, people were literally pushing their cars to the gas station because the cars didn't have gas anymore. You had coupons. So to buy gas at the pump, you need a coupon, things like that. We're not there yet. So things are not that valued. I think -- what's happened is access to media, especially social media, the day it happened, we saw videos of Dubai airport smoke coming out. We saw buildings, exploding and things like that. Media just has accelerated that fear that we have. I would say that's been the biggest impact so far, and that's what's driving all the sentiment. But we're nowhere at least from the conversations I've had with various people, we're nowhere near the effects that we saw from a lot of the past crisis. So yes, I'd say it's still early days. There will be impacts, but I think everyone is just pricing everything in now even in stock prices. It's just how the market is at the moment. Crissa Marie Bondad: Okay. Next question comes from Brian. What percentage of revenue or how much of revenue is coming from Batangas plant? So I can actually take this around 25%. Okay. I saw someone earlier raising his hand. Let me just check. Okay. I think this question has been answered already. I don't see anyone raising his hand. Okay. That's all the questions that I can see from my end. [Operator Instructions]. Okay. I got a question here from Peter Wong. Among the 4 business segments. In terms of profitability, which segments you will be most bullish on and vice versa. It seems to me that the profitability for specialty plastics will be significantly impacted by the war. What about the other major 2 business segments? Alvin Lao: Great question. That's something we have been discussing a lot in the last few weeks. Unfortunately, war, if things don't improve, it will really impact all our businesses. There -- I don't think any of our segments will be spared. And it's not just lack of supply. It's not just expensive raw material costs. It's really the effect on the overall economy. Our company provides a lot of very basic essential raw materials to industry in the country. If the economy does slow down, we're just going to be impacted. That's really how we are positioned as a company. So still early, but I don't think there's any probability that any of our businesses will not be impacted. Yes. Crissa Marie Bondad: All right. Thank you, Alvin. I don't see any more questions from my end. So if no more questions, that concludes our full year briefing. Again, if you have further questions later on, you can always reach out to us. So thank you very much for attending our full year briefing, and we'll see you next quarter. Alvin Lao: Thanks, everyone. Good morning.
Operator: Good morning, ladies and gentlemen, and thank you for standing by for Baozun's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I will now turn the meeting over to your host for today's call, Ms. Wendy Sun. Senior Director of Corporate Development and Investor Relations of Baozun. Please proceed, Wendy. Wendy Sun: Thank you, operator. Hello, everyone, and thank you for joining us today. Our fourth quarter 2025 earnings release was distributed earlier before this call and is available on our IR website at ir.baozun.com as well as on PR Newswire services. We have also posted a PowerPoint presentation that accompanies our comments to the same IR website, where they are available for your download. . On the call today from Baozun, we have Mr. Vincent Qiu, Chairman and Chief Executive Officer; Ms. Catherine Zhu, Chief Financial Officer; Mr. Junhua Hao, Director and Chief Strategy Officer of Baozun Group, and Ms. Ken Huang, Chief Executive Officer of Baozun Brand Management. Ms. Qiu will first share our business strategy and company highlights. Ms. Zhu then will discuss our financial outlook, followed by Ms. Wu and Ms. Huang -- Mr. Wu and Mr. Huang, who will share more about our e-commerce and brand management segment, respectively. They will all be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of the U.S. Securities Act of 1933 as amended, the U.S. Securities Exchange Act of 1934 as amended and the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions and relate to events that involve unknown risks, uncertainties and other factors, of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the U.S. Exchange Commission and its announcement, notice or other documents published on the website of the Stock Exchange of Hong Kong Limited. All information provided in this call is as of the date hereof and is based upon assumptions that the company believes to be reasonable as of this date, and the company does not undertake any obligation to update any forward-looking statements, except as required under applicable law. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB. In addition, we may elect to use adjusted in place of nongeneral accepted accounting principle on non-GAAP in order to reduce overall confusion that may arise from our discussion of our financials related to the GAAP brand. You may now turn to Slide 2 for the executive highlights for the quarter. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Qiu. Vincent, please go ahead. Wenbin Qiu: Thank you, Wendy. Hello, everyone, and thank you for joining us. I'm pleased that Baozun delivered a strong fourth quarter closing 2025 on a high note and successfully completing our 3-year strategic transformation. Over the past 3 years, we have rebuilt our company with focus and intention driving consistent sequential momentum throughout 2025. In the fourth quarter, our revenue increased 6% to RMB 3.2 billion while non-GAAP operating profit grew 91% to RMB 198 million. This was not just about short-term recovery. It was about fundamentally improving the quality and the potential of our business. BEC has become a sustainable cash engine. Through sharper execution and continued cost rigor, BECs are more agile and consistently profitable. We have moved from pursuing scale to focusing on value, prioritizing margin expansion and reliable cash generation. and most importantly, build alignment with BBM. BBM, meanwhile, has reached a defining inflection point. After 3 years of repositioning and localization, our brand management platform achieved its first quarterly breakeven in fourth quarter '25. This milestone validates the sustainability of our model. Importantly, scale is beginning to translate into tangible operating leverage, marking the transition from a turnaround to profitable growth. Our financial profile has strengthened alongside operational progress. Margins have expanded, profitability has improved meaningfully and our balance sheet remains solid. In addition, our operating cash flow more than tripled to RMB 420 million in 2025. These results validate that our business is not only growing. It is growing with better structure and healthier economics. In summary, 2025 marks the successful completion of the initial phase of our transformation. As we enter into 2026, our focus shifts decisively from rebuilding to scaling. Our priority now is to amplify the progress to accelerate in the next 3 years. We will do this by expanding BEC's margin, building scale and operating leverage in BBM and deepening the strategic synergies between BEC and BBM. Our ambition is clear, to drive the group's non-GAAP operating profit growth to RMB 550 million by 2028. With a stronger organization, a proven strategy and a highly focused execution culture, we are entering this next phase with confidence and the momentum. Now I will hand over the call to our team for a deeper dive in our financials and the business performance. Catherine Yanjie Zhu: Thanks, Vincent, and hello, everyone. Now let me provide a more detailed overview of financial results for the fourth quarter and full year of 2025. Please turn to Slide #3. While Group's total net revenues for the fourth quarter of 2025 increased by 6% year-over-year to RMB 3.2 billion. Of this total, e-commerce revenue grew by 2.5% in to RMB 2.6 billion, while Brand Management revenue rose by 24% to RMB 664 million. Breaking down e-commerce revenue by business model. Services revenue increased 3.1% year-over-year to RMB 2 billion. This increase was driven by revenue growth in digital marketing and IT solutions as well as strong performance in the luxury category within our online store operation services. BEC product sales revenue increased modestly by 0.5% year-over-year to RMB 574.5 million mainly driven by growth in Health and Nutrition category, which was partially offset by lower sales in appliance category as we continue to optimize category mix to prioritize profitability. BBM product sales totaled RMB 663.7 million, representing a 24% year-over-year growth. This growth was mainly driven by the strong performance of the GAAP. Please turn to Slide #4. From a profitability perspective, our blended gross margin for product sales at the group level was 36.5%, an expansion of 640 basis points year-over-year. Gross profit increased by 35.9% year-over-year to RMB 451.5 million for the quarter. Breaking this down by our key business lines. Gross margin for e-commerce product sales expanded to 18.4%, reflecting a 760 basis point improvement compared to 10.8% a year ago. This margin expansion was primarily driven by product mix optimization. Gross margin for BBM improved to 52.1% from 50.4% a year ago, reflecting the adaptiveness of its merchandising and marketing initiatives. Now please turn to Slide #5 for a walk-through of our OpEx. Sales and marketing expenses increased by RMB 181 million to RMB 1.2 billion. This included an increase of RMB 136.9 million for BEC which was mainly due to higher spending on creative content and market initiatives onto, in line with the growth in digital marketing revenue. BBM sales and marketing expenses increased by RMB 49.6 million, which was mainly driven by the expansion of offline stores and marketing activities during the quarter. Fulfillment costs for the quarter was reduced by 11.1% to RMB 683.4 million, reflecting ongoing efforts in cost optimization. Technology and content expenses decreased by 20.2% to RMB 116.9 million as we continue to enhance tech monetization efficiency. G&A expenses decreased slightly by 2% to RMB 187.9 million due to the company's continued efforts to implement cost control and efficiency improvement initiatives. Turning to bottom line items, please refer to Slide #6. During the quarter, our non-GAAP income from operations was RMB 197.7 million, an increase of 91.4% from RMB 103.3 million in the same period of last year. BEC's adjusted non-GAAP income from operations was RMB 195.9 million, representing 43% year-over-year increase compared with a year ago. BBM reported a non-GAAP operating income of RMB 1.8 million, a solid milestone as we achieved a very first breakeven quarter for the segment. Let us turn to a quick full year summary. The group's total revenue was RMB 9.9 billion, an increase of 6% year-over-year, of which e-commerce net revenues were RMB 8.3 billion, an increase of 2% year-over-year. BBM net revenues were RMB 1.8 billion, an increase of 25% year-over-year. Our adjusted operating income totaled RMB 126 million, a significant improvement compared with RMB 11 million in fiscal year 2024. As of December 31, 2025, our cash, cash equivalents, restricted cash and short-term investments totaled RMB 2.8 billion. We continue to improve working capital efficiency through back-end process optimization across inventory management, billing and cash collection. As a result, our adding operating cash flow reached RMB 420 million, representing a 315% year-over-year increase. Let me also briefly address our GAAP item recorded during the quarter. We recognized an investment impairment loss of RMB 230 million primarily related to preinvestments in the e-commerce sector as well as impairment provisions for certain equity investments. While these investments have at the time, today's macroeconomic environment, combined with our sharpened focus on developing our brand management business, make it prudent to recognize this impairment. These adjustments reflect our commitment to maintaining a focus and resilience business portfolio. Importantly, our remaining investment will be healthy, and we are confident in their long-term potential. Let me now pass the call over to Junhua to update you on BEC, our ecommerce business. Junhua Wu: Thank you, Catherine, and hello, everyone. I'm pleased to share we've closed 2025 with significant momentum. In the fourth quarter, we delivered 2% revenue growth and a 43% increase in non-GAAP operating profit, capping a year of progression from stabilization to accelerate performance. Throughout the year, we focus on driving sustainable, profitable growth while making strategic investments in high opportunity areas. Now let me quickly walk through some of our operational highlights in the e-commerce segment for the first quarter of 2025. Please turn to Slide #7, highlighting the continued quality improvement of our distribution model. During the quarter, BEC product sales gross profit increased 70.9% despite a largely flat top line. Notably, BEC's gross margin rose to 18.4%, setting a new record since our inception. This improvement was mainly driven by ongoing optimization of our category mix with strong growth from health and nutrition and beauty and cosmetics categories. In addition, our efforts to expand into nonstandard categories and are beginning to show results. Apparel delivered a strong contribution across sales, gross margin and profitability during the quarter. . Turning to Slide #8. Our services revenue grew 3% year-over-year in the fourth quarter, led primarily by strong performance of BBM and IT solutions, which includes 19%. We gained market share in key categories such as luxury, sports and outdoor. Our omnichannel capability remains one of the Baozun's core advantages and a focus of developing on going forward. During the quarter, we received 41 awards in Tmall ecosystem, including the Prestigious 2025 Tmall Ecosystem in Service Award. Douyin we were once again certified as a Douyin e-commerce diamond service partner, the platform's highest tier of accredition. Together, these recognitions affirm our sustained leadership and execution strength across major platforms. We also continue to focus on strengthening our bottom line. Across the organization, we are implementing a series of lean initiatives designed to streamline processes, reduce costs and enhance efficiency. Furthermore, we are expanding the use of artificial intelligence tools across a wide range of employees and business scenarios to enhance productivity. These efforts have significantly improved our profitability. With BEC's non-GAAP operating income increased 43% year-over-year to RMB 196 million in the fourth quarter of 2025. Overall, we are pleased with our performance in the final quarter of the strategic transformation, a period that certified our shift towards the sustainable and profitable operations. Moving forward, we will continue to deepen client engagement and stickiness, innovate our service models and enhance operational efficiency. For 2026, our priorities are clear. Deliver the numbers, deliver the strategy and deliver the talent. Delivering the numbers means maintaining our focus on profitable growth and ensuring that our operational progress continues to translate into strong financial performance. On strategy, we are advancing 3 key initiatives. First, we will expand our apparel distribution business leveraging the synergy between BEC and BBM to unlock the new growth opportunities and strengthen our brand ecosystem. Second, we will further enhance our digital marketing and the traffic acquisition capabilities. helping brands partners capture demand more efficiently across an increasingly complex omnichannel landscape. Third, we will deepen technology empowerment, accelerating the deployment of AI and digital tools to improve operational efficiency and elevate our service capabilities. Finally, delivering the talent remains essential. We will continue strengthening our leadership bench and reinforcing a strong execution culture with the right people and the capabilities in place. we are well positioned to scale the business and deliver sustainable growth in the years ahead. Now I'll pass to Ken for an update on BBM. Ken Huang: Thank you, team, and hello, everyone. Please turn to Slide #9 for BBM's performance in the fourth quarter of 2025. . The fourth quarter marks a defining milestone for BBM as we delivered our first breakeven quarter. This result reflects our structural improvements across merchandising, marketing, store productivity and networking expansion. In Q4, BBM revenue grew by 24% year-over-year to RMB 664 million, supported by a double-digit same-store sales growth and the continued contributions from new store openings. Gross margin improved by 170 basis points from a year ago to 52.1%, leading to a 28% increase in gross profit. Moreover, inventory turnover efficiency improved, reducing our inventory turnover days by 16% to 114 days. Merchandising was the core growth driver for the quarter. We entered the winter season with a balanced assortment architecture, reinforcing Gap's iconic categories, sweatshirts, denim and denim wear while sharpening segmentation across channels and consumer groups. Our partnership with the Forbidden City has maintained a strong sell-through in Q4. More recently, we launched a new IP collaboration with packing Oprah, showing case our ability to blend the Chinese culture storytelling with Gap's global DNA in a commercially effective manner. Since introduced our brand ambassador on September 15, we have collaborated closely to create authentic, engaging content that connects with our audience. We also launched the seasonal products and the limited styling collections aligned with the key moments in the retail calendar. This ambassador-driven initiatives have boosted social buzz leading to higher consumer engagement, increased brand visibility and a strong brand voice. Offline expansion continues to be a strategic priority for us. In the fourth quarter, we opened 7 new stores for a total of 29 new Gap stores in 2025, bringing our total store count to 164 by the year-end. Our new stores continue to outperform older locations, driven by better site selection and enhanced visual merchandising. For instance, our new image stores at Dongguan Min International Trade City and Shanghai Century Link Mall have delivered strong results. The improving in-store experience and the outfit-based presentation have driven a double-digit gain in sales productivity. This early performance indicators are highly encouraging and reinforce our confidence in our store expansion strategy. As a result, we are accelerating our store opening efforts to build on this momentum, and currently plan to open 50 stores in 2026 through a hybrid model that combines direct and partnership stores in line with our asset light approach. With these initiatives in place, we are confident in sustaining double-digit year-over-year revenue growth and achieving operating breakeven for GAAP on an annual basis in 2026. Turning to Hunter. The brand continued to strengthen its premium positioning in Q4, elevated store plantation created lifestyle storytelling are resonating with urban consumers seeking both function and fashion. In the fourth quarter, we launched 5 new Hunter locations and entered our national footprint into high potential Tier 2 cities, including Nanjing, Qingdao, Shenyang and Taiwan. We concluded 2025 with a portfolio of 177 stores under the BBM umbrella. This expanded physical network sets a solid foundation to enhance supply chain efficiency in the future. In summary, Q4 2025 represents a structure inflection point for BBM. We achieved our first breakeven quarter. This validates our strategy, strengthens partner trust and sets the stage for long-term double-digit growth. The direction is clear, BBM is well positioned to become an increasingly meaningful growth engine for Baozun Group. That concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session. Operator: [Operator Instructions] Our first question comes from Chris with Huatai Securities. Unknown Analyst: I have 3 questions. The first one is about the AI, and with the rapid evolution of AI technology, would the management share that -- what is the current status of our workflow transformation using AI agents? And have we observed any measurable gains in efficiency? The second question is about the AI to our mid- to long-term impact. This is -- what is our perspective on the mid- to long-term impact and opportunities that AI agents present for our e-commerce business and the brand management business? And my third question is about our business outlook to the mid- to long term. And I have noticed that in our report, we stated that in 2028, we will reach RMB 550 million on operating profit. So with the management share, what is the key driver behind this business outlook? Junhua Wu: Okay. This is Junhua. So let me address your first 2 questions regarding AI implementation in Baozun. So the first one is about the AI agent. So we have already leveraged a lot of AI agent technology from the beginning of last year. So most focused on our bottom line. In terms of the digital assets creating and uploading products, digital assets on to different platforms, saving a lot of operating people in terms of doing repeatable kind of works. We have already leveraged a lot of AI agents. . So AI agent technology is more focused on driving our efficiency internally more focus on the bottom line. In terms of the top line, we haven't having any very clear definition about the scenario in business case about how do we leveraging AI technology, increasing our top line. About the AI agent, the agentic platform and technology is very new in this industry. So we realize that in terms of the agentic kind of the technology right now is more focused on the GEO generic search engine optimization. So there is amount -- your DAU among the shopper APP is close to approximately about 850 million. And among them, the DAU of 300 million is on AI and all those apps in terms of the large-scale mode and AI agent APPs. So this is transforming the consumer behavior and reallocate the traffic structure. So we are closely focused on the trend of different big platforms and attracting all those changes of the traffic allocation, and we can share you more in the future quarters. The third one is regarding the business outlook. Wenbin Qiu: Yes. The -- we just talked about the 2028 operating profit goal. That will go to RMB 550 million is our planned target. The main driver for this is that we are -- firstly, is our strategy. We're turning the e-commerce business into a BEC plus BBM plus synergy model. And you can see, firstly, BBM is improving its profitability, especially GAAP, is getting more and more profitable in the coming years. And in the meantime, because we leverage the experience in this kind of apparel industry from BBM, we then add more brands into BEC with a franchise model. So this also expand our margin greatly. So combined by both BBM's growth and also margin expansion of BEC, we can see this result in 2028, but it's not the end of our acceleration. I think in the coming years, even beyond 2028, we can see a more clear sign of this improvement of our profitability. Operator: Next question comes from Alicia Yap with Citi. . Alicis a Yap: My first question is about the latest macro sentiment and would management share some color about latest macro Chinese New Year demand and the March promotional performance. And what is your expectation for 2026?. And my second question is about AI. How do you see generative AI and other advanced AI technology, changing consumer behavior and the e-commerce landscape? Would you elaborate on Baozun's strategy for integrating AI into your operations and service offerings? Are you developing -- are you developing your AI tools or partnering with leading AI firms? My last question is about Gap China. What is the growth expectation for Gap China this year? What is your long-term vision for the Gap business in China? And what do you see as the key growth drivers for the brand over the next 3 to 5 years? Junhua Wu: Okay. This is Junhua. Let me address the first 2 questions. And the first one, I will elaborate from the BEC perspective and Ken can just feedback some new sentiment kind of the forecast, aligned with the third question from the BBM perspective. So yes, we did have a very strong finish on the Chinese New Year campaign and the Queens day campaign on the March 3. So this is definitely very strong. And we had a late Chinese New Year this year. So from the online digital e-commerce growing, that was very promising. And we see the momentum of each category growing a lot, and the platforms are still compensating a lot of kind of coupons to the end consumers to increase the overall GMV growth. And the efficiency of the traffic quality is increasing. So yes, we believe that we had a very good, strong start. And the future quarters will be very promising from the BEC perspective. And the second one is also related to the AI in terms of the GEO and how does GEO really changing the consumer behaviors. Just like I mentioned that GEO is changing the consumer behavior, is changing from the DAU of 850 DAU shoppers from different APPs to 300 million from different kind of apps like, and Changan, those kind of the generating kind of AI large-scale mode. So consumers started to asking questions for their daily lives -- during their daily life and those kind of GEO can smoothly push a lot of information along with some kind of the reference with the brand-oriented right information such as a shopping link or such as a very emotion linkage from the brand's perspective, with the content, with short video clips or with a very comprehensive information. So we can foresee that the change of consumer behavior is slightly changed from the instant shopping category to different categories. So in terms of the instant shopping category, so the AI agent is becoming very promising. You can easily order a bubble tea from, for example, from the AI GEO systems. And -- but from different categories, it's still not in the business scenario. So we are closely tracking all those technology operation and make sure that we can share more in the future quarters. And in terms of the bottom line, so we definitely input a lot of efforts in the AI agent to increase our efficiency, especially those repeatable kind of systems. So those proprietary AI tools, so we're not a partner with any other leading AI firms for now. We still use some kind of the public services with our in-house engineering team to do a lot of Baozun customization for our leading brand partners. . Ken Huang: This is Ken. For the first question about the C&I consumer segment. For GAAP, we also see high increase in February and January in both months. The increased rate year-to-year is over 30% for Gap. So we can forgive actually, we continued our 20 to 30 increased rate in the last quarter and this quarter. . For the third question, the gross expectation for Gap, First, I think for 2026, we will still continue to keep the growth rates. In 2025 our growth rate is more than 20%. So we will keep this around 20% increase in 2026 by both same-store increase and new openings. We plan to open more than 50 stores, and we will also expand our e-commerce sales scale. For the long-term vision of Gap business, in 2027 and 2028, we plan to accelerate our growth rate from 20% to 30% so we'll be 25% to 30% in the next 2 years in the top line. And we were also trying to improve our operating profit from breakeven to 150 basis points increase per year. And the main growth driver for Gap in the next 3 years, I think we're coming from 3 areas. One is the same-store sales increase. driven by our product improvements, our vision merchandising, our store new images, which will, in the end, to improve our in-store traffic and commercial rates. And the second is the scale expansion, both offline and online. For example, offline also plan to open reenter some markets such as Hong Kong and Macau. And the third one is the supply chain efficiency. With the scale increase, we expect to gain our efficiency in our cost management and also in the expenses. That's all. Wenbin Qiu: Here is Vincent. We have some more things to say about the AI because AI application right now is one of the core strategy of the Baozun Corporate. So our goal is quite clear. We want to make the AI utilization and also application as the best practices for both e-commerce and also apparent industry. So we will be the best practiced AI for these two areas. So not only for the sales side, but also the supply side for BBM and also, of course, for the efficiency improvement. So it's quite important for us. And we are confident we'll be in a leading position in utilizing AI capabilities, yes. Operator: Our next question comes from Jiawei Yin with CITIC Securities. Jiawei Yin: I have 2 questions. The first is that we have seen many industry changes such as the compliance of e-commerce tax, the levy of traffic tax and the restriction of competition in the industry, which are generally beneficial to the sales of branded goods and are also accommodated by a narrowing growth gap between platforms. How does Baozun impact of such evolution on operational preference and strategies? And what's the brand's response to this change? And my second question is, has there been any change to Baozun's development strategy for the BBM business in 2026? And how view Baozun balance scale and profit what are your expectation for the growth pace and the long-term vision of each brand? Junhua Wu: Okay. So this is Junhua. Let me address the first question. So those policies really don't really affect our detailed operations and day-to-day because the government has signed up the direction about setting up a different sliding scale in terms of different kind of policies, and none of the term has really changed the allocation of the marketing fee of our existing brand partner, because after the pandemic, so all our brand partners are being very careful and very cautious about spending money, especially into the marketing spending, allocation and the others. So we want to help the brand partner to leverage all those money wisely and to drive a higher ROI as before. So in terms of that, so we are really within the range of all those policies. And in terms of the cutthroat competition in the industry, so Baozun is taking the lead of providing logistics and courier services. So we have already leveraged a lot of kind of the pricing efficiency and the cost efficiency for so many years. So that doesn't really just affect our day-to-day operations. So in terms of the brand repositioning between different platforms, so indeed, the brands are either diversifying view different kind of the strategy for different brands because for some kind of the leading live stream brand, to focus on GMV growth or treat those platform as a content creation platform and let those traffic exceeded to all those traditional transaction platforms is different strategies from different kind of categories. So most -- some kind of the categories of the brands, they choose to drive GMV from both categories, both Baozun platforms and some of the brands that treat the livestream platform as a content creation center and let them exceed all those content building the leakage to the traditional kind of via transactional platforms. So we are helping all those different brands in different categories to diversify their strategy across in different platforms. So there is no unified strategy in general in terms of that question. Wenbin Qiu: Here's Vincent. I will talk about the BBM strategy. I think the strategy is quite consistent with the past years. The only change is about the level of our confidence. We think we are much more confident right now than before that the transformation is already there, we can see the results. So we build a 3-year model. And we believe in the coming 3 years, BBM will grow -- we'll enter into acceleration phase. So we were quite excited about that. . And talking about -- especially for Gap, the biggest brands, we will see a very good trend and also the improvements or the capabilities also promising. For the premium brand like Hunter and others, I think we -- the most important thing for us is to build capability on merchandising and also marketing. So they will be also growing quite fast, but building capability is more important. And talking about the BD of the new brands, yes, I think we are -- now a lot of more brands come to us trying to work with us. It's a good sign. And right now, not only BBM can work with the brands in a very deep relationship and also BEC also have the capability to do more franchise business with brands, so in this case, we -- that's why we think the coming 3 years will be an acceleration phase. Thank you for that. Operator: Our next question comes from Wang with HSBC. Unknown Analyst: I have 2 questions. The first one is on the growth outlook for 2026. And what are the key upside and downside risks you see based on your expectations? And the second question is how should we think about the capital allocation plan given the AI investment and other investment priorities this year? And can management share our stores how you think about shareholder return going forward? Junhua Wu: Sorry, the first 1 is about the overlook of the business growth in the future 3 years or 2026? Unknown Analyst: 2026 for the group outlook. Junhua Wu: The group outlook. Okay. Wenbin Qiu: Yes. Maybe I try to say something, maybe Catherine, you can say more about that because it's expectation. Yes. I'd say, firstly, we are trying to make a positive year in terms of net income to ordinary shareholders, and -- so yes, it is quite exciting goal to achieve because that means we have more to contribute to our shareholders and investors. To achieve that, of course, we need to make all the aspects of our operation better than before. Our margin expansion needs to be improved as well. So in this case, we're not only to treat our customer or employee better and also give more return to our investment -- investors. Yes. In terms of numbers, can we share anything or... Catherine Yanjie Zhu: Yes. Okay. Thank you for your question. I think the management are quite confident and -- for the coming 2026. We think it's quite promising. Of course, we are doing a lot of initiatives, including like the easy part and also brand management segment. So regarding the revenue, we are expecting a certain number of increase and like BEC segment. If we split into 2 segments, BEC, we expect a single-digit increase. And for BBM part, we are expecting like a very good number to come. And regarding the non-GAP operating profit, we are also expecting like double the number compared with the 2025. And so we are expecting this -- we are doing all kinds of initiatives like I mentioned in the call, so I think the management are quite confident about that. Wenbin Qiu: And also Vincent here again. Talking about the AI right now, although it is still an initial phase for the industry to adopt the results, the development of the AI, but we are seeing this change very fast. So first we need to keep us very active and agile to keep our pace up to this development. So for us, along with the investment into IT and the internal process improvement every year, we put resources there. And this year, starting from this year, we have more initiatives from the corporate level. We have several very interesting and important initiatives. But doesn't require a lot of investments. So I think talent will be more important than investments. So that's why we are so confident that we will be the best practice for not only e-commerce but also apparel industry in China will be the -- we're quite committed to be the most advanced utilization of AI capabilities. Operator: The next question is from with CMBI. Unknown Analyst: My question is regarding your development strategy for overseas business. And can management share with us the update regarding your overseas strategies? And can management share with that your development plan regarding both International business? Wenbin Qiu: Yes. Let me first address some about the international business. Right now, for the priority, of course, BBM and BEC are contributing the major share of our business and also growth. So these 2 are very important. So that's why we talk more about these 2 sections. For BCI, I think recently, we have a very solid progress, but still, it's a minor contribution to the whole company and the growth. We are consolidated in outside the business outside of China. Hunter is already in Southeast Asia making progress. We have several major e-commerce projects improving and to be profitable in the region as well. We have opportunities in Korea and also South Korea and also several very big projects is going on in Hong Kong, in Taiwan. We are seeing this improving which is a promising future, and we are confident that the growth of the international business will be solid but we are not expecting a big contribution from international business yet in the coming 2 years. Junhua Wu: BBM new brands. Wenbin Qiu: Yes. I think you just talked about the new brands of BBM as well. Right now, I think we are in a very good situation because we are having quite big base of our brands from BEC. So when there's opportunity emerges in the market we'll be the first one to have the opportunity to work with them. Recently, we see a lot, yes. They trust us, and we have such a solid track record for BBM in the coming -- in the past 2 years. So people just want to work with us. But for us, I think we know what we need to have. So at least we will not have a lot more brands in the future. But definitely, during -- in the coming 3 years, I think we will have new brands, carefully selected, better profitable brands to add to our portfolio. Operator: Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Wendy Sun for closing comments. Over to you. Wendy Sun: Thank you, operator. On behalf of the Baozun management team, I would like to thank you again for your participation in today's call. If you require any further information, feel free to reach out to us. Thank you for joining us again. This concludes the call. Thank you. . Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Unknown Executive: Good morning, everyone. This is Tracy Lee from Waterdrop Investor Relations. It's my pleasure to welcome everyone to Waterdrop's Fourth Quarter and Facial Year 2025 Earnings Conference Call. [Operator Instructions]. As a reminder, today's conference call is being recorded. Please note that discussion today will come from forward-looking statements made under the safe harbor provision of the U.S. Private Securities and Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but not limited to those outlined in our public filings with the SEC. The company does not undertake any obligation to update any forward-looking statements, except as required and applicable law. Also, this call includes discussion of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and GAAP. Joining us today on the call are Mr. [indiscernible], Chairman and CEO; Mr. [indiscernible] GM of Insurance Business; Mr. [indiscernible], Head of Finance Department; and Ms. [indiscernible], Board Secretary. We'll be happy to take some assessments in the [indiscernible] conference call. Now [indiscernible] our CEO, [indiscernible]. Unknown Executive: Dear investor analyst, thank you for joining Waterdrop's fourth quarter and fiscal year 2025 earnings conference call. Looking back at 2025, we executed firmly on our AI [indiscernible] insurance energy, delivering tangible progress in both AI application and business growth. Our financial performance were robust. We saw significant top line and bottom line expansion, further solidify our core fundamentals. For the fiscal year 2025, our revenue reached CNY 3.98 billion, up 43.5%, net profit attributable to ordinary shareholders reached CNY 570 million, registering a year-on-year growth of 54.8%. Notably, we met our guidance to the market and have now delivered GAAP profitability for 16 consecutive quarters. Our Intertek segment was as announced with revenue surging 51.3% and an operating margin of roughly 18%. Furthermore, our LLM integration significantly category. the value of our medical performance platform, our platform has response for 3.68 million patients which is watched and our digital team in client solutions enrolled over 4,000 patients this year. Reflecting the strong performance in the second half of 2025, our Board approved our safe cash dividend of CNY 0.03 per ADS, totaling $10.8 million, this will be paid in later -- late April to early May to shareholders a record as of April 24, 2026 U.S. ET time. Meanwhile, our share repurchase and remains on track with 60.7 million ADS repurchase for about $118 million for [indiscernible]. On technology plans, we are valuing our shift to become an native company. As of the end of year-end 2025, we filed a 72 LLM related patent applications. including [indiscernible] international ones. Throughout the year, we deployed the [indiscernible] and virtual interactions across all core workflows. From acquisition and conversation [indiscernible] and customer service through quality control and R&D. Every stage is now production-ready delivering [indiscernible] operating gains. This capability is unified from under the [indiscernible] AI, our [indiscernible] platform for the [indiscernible] specific agents now also open to the industry partners. Beyond the [indiscernible], we are pioneering open collaboration infractors what is Guardian AI corporate, which is called Cloud [indiscernible] built on a distributed at design our cloud leader enables a different AI agent to autonomously communicate and collaborate. [indiscernible] demos have already validated its core workflow seamless the multi-round dialog and automate to cover between the AI agents. In terms of ESG, we acquired with 19 organizations to launch over 15,500 products earning global recognition forward policy reduction efforts and upgrading our ESG rating to A+. As we enter our 10th anniversary in 2026, our goal is to move beyond using [indiscernible] to becoming truly AI enabled company. We aim to [indiscernible] reconstruct our entire value chain, embedding AI as a several competitive advantage. We expect me to depend the momentum this year with moderately higher [indiscernible] marketing and AI, targeting double-digit growth in both revenue and profit. Now I will pass to [indiscernible] to introduce the development of insurance business. Xiaoying Xu: Thanks, [indiscernible]. In the fourth quarter, our insurance continued its strong momentum, ensuring related income surged to 125% year-on-year to CNY 1.31 billion, while operating profit grew 42% year-over-year to [indiscernible]. On the traffic side, we have sharpened our real-time user amentization leveraging our sales deployed [indiscernible] we can now capture potential user attributes with nearly second profession in high concurrency traffic. This allows for [indiscernible] update and [indiscernible], which has significantly improved the accuracy of our high-quality traffic for future and made a solid condition for our FYP growth. Regarding product supply, our market first [indiscernible] version 2.0 this quarter new 0 deductible features now colored a long-term medical cost and routing the medial centers. Additionally, our pre-existing condition product gained strong action with FY at 7%. While our disability insurance contributed about $100 million app validating our long-term strategy. And most importantly, AI is now invented in every node of [indiscernible] on the user side, our AI Pro insurance engine on the mini-program drove 33% of sequential increase in premium, while our AI medial insurance experts generated over 50 million [indiscernible] 145% quarter-over-quarter. We have also expanded the facility to standard health products, we can generate incremental most premiums of over 1 million. For human agent empowerment, our large banner copilot has cumulated site in over 370,000 [indiscernible] this quarter end. [indiscernible] perform in our fully operational and having completed the fourth quarter without the core module like local agents, batch testing and proactively past figures. This infrastructure powers our [indiscernible] planner deployers, both the share of facial accounts and many programs to handle the product recommendations, business facilitation and user [indiscernible] agent matching, we have even owned this platform to our current insurers to uplist the industry-wide efficiency. In [indiscernible] our AI customer service agent handled over [indiscernible] and our coloscopilot [indiscernible] efficiency to 2.5 that of the many only business. This concludes the insurance business update for the fourth quarter. Now I will pass to Board of Secretary [indiscernible] to introduce the progress of our metering and health services. Unknown Executive: Thank you, [indiscernible]. As of the annual of approximately 490 million people have [indiscernible] a total of $72.3 million to [indiscernible] medical profound platform. In this quarter, while maintaining robust platform governance and user experience with strengthen risk control in 2 key areas: to protect our user privacy, we have fully upgraded our system with large language models total of identifying specific data and applying dynamic [indiscernible] in real time. So critical information, frequently see in their components that either IP members, bank accounts and the medical record IT. We have moved [indiscernible] reduction to automate protection and marketing. And this [indiscernible] leads end-to-end securities for user debt better across our type platform, fundamentally preventing any reason of information staff. Secondly, our simplicity, we deployed a new model combining medical [indiscernible] with a credential validation. This system and cost reference the clinical logic to precisely identify the fabric, ensuring every donation we reached those patients [indiscernible]. On the user service front, we launched a standardized [indiscernible] to our service goal of fee structures and retaining guidelines, these initiatives reinforce our commitment to concurrency and ensure our uses are fully involved. And moving to the Healthcare business, our [indiscernible] platform is in high-quality growth tuner with 224 pharmaceutical companies and [indiscernible] and are enrolled in a record of [indiscernible] patients. initiative 131 new programs. Once again, we set up setting a new quarterly enrollment with record. This quarter, we achieved a major milestone that was proprietary [indiscernible] patient matching technology, the first of this time in China was officially granted a national invention pattern. By combining deep neural networks with major [indiscernible] processing, our technology achieved end-to-end protection matching [indiscernible] and clinical trials [indiscernible] filtering for [indiscernible] results, well analyzing and trusted medical records against that helped criteria to uncover the heating match. The due engine approach [indiscernible] between the weeks of the manually screen workflows down 2 minutes, strongly a [indiscernible] process. And building on this, we significantly expand our accounts. We'll continue to grow our patient base in complex and rare [indiscernible] revenue digital clinical trial revenue related to [indiscernible] 30% this quarter compared to the previous 3 average [indiscernible] ability to pool release and earnings and have made a solid foundation for our sustainable volume growth. And now I will [indiscernible] our Head of Finance to discuss our financial performance in this quarter. Unknown Executive: Thanks, [indiscernible]. Hello, everyone. I will now walk you through our financial highlights for the fourth quarter and fiscal year 2025. Before I go into details, please be reminded that all numbers quoted here will be RMB and please refer to our earnings release for detailed information on our financial performance and both the year-on-year and quarter-over-quarter basis, respectively. In the fourth quarter, our performance of [indiscernible] significantly with quarterly revenue more than doubling year-on-year to RMB 1.41 billion, up 105.5% for the full year 2025 revenue reached RMB 3.98 billion, up 43.5% year-on-year, concluding the year on strong note. By second, the insurance business within a stable client with full year insurance really into approximately RMB 3.58 billion, up 51.3% year-on-year. The other segments are [indiscernible] for about 10.1% of the total revenue with medical performing services at RMB 260 million and [indiscernible] income at RMB 118 million. Operating costs for the quarter reached RMB 680 million. up 109.2% year-on-year, driven by RMB 320 million increase in cost and the referral and service fees and RMB 23.8 million is on S&S, driven by rapid business expansion, opening costs and expenses in the fourth quarter rose to RMB 1.33 billion, up 109.4% year-on-year. For full year operating cost and expenses increased 39.1% from 2024. [indiscernible] the pace of revenue growth. Selling marketing expenses was roughly RMB 510 million at 178.4% year-on-year with significant improvement in customer acquisition efficiency. The company proactively scaled up investments, resulting roughly [indiscernible] year-on-year in place and marketing expenses for third-party traffic channels. G&A expenses were RMB 77.1 million, a modest year-on-year increase of 4.6%, mainly due to a [indiscernible] in allowance of [indiscernible], partially off setted by RMB 6.5 million reduction in personnel call. Research and development expenses were approximately RMB 66.2 million, up 21.9% year-on-year, primarily driven by a RMB 6.4 million increase in personnel costs and a RMB 5.8 million in cross services. [indiscernible] improved significantly year-on-year. Net profit attributed to the company's ordinary shareholders for the quarter was RMB 153 million, up 62.7% in the period. For full year, the net profit attributable to the ordinary shareholders reached about RMB 570 million, up 4.8%. The common maintained ample cash position of about [indiscernible] 2025, providing strong support for our fee growth. And this concludes our financial overview for the fourth quarter and fiscal year conference side. Ladies and gentlemen, with that, we will conclude today's conference call. We do thank you for joining. Have a good time.
Operator: Ladies and gentlemen, thank you for standing by for So-Young's Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the meeting over to your host for today's call, Ms. Mona Qiao. Please proceed, Mona. Mona Qiao: Thank you, operator, and thank you, everyone, for joining So-Young's Fourth Quarter and Full Year 2025 Earnings Conference Call. Joining me today on the call is Mr. Xing Jin, our Founder, Chairman and CEO, and Ms. Hui Zhao, VP of Finance. Before we begin, please refer to the safe harbor statements in our earnings release, which applies today's call as we will be making forward-looking statements. Please also note that we will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under GAAP in our earnings release on our Investor Relations website and filings with SEC. Please also note all figures mentioned in this call are in renminbi or otherwise stated. At this time, I'd like to turn the call over to Mr. Xing Jin. Xing Jin: [Interpreted] China's medical aesthetic industry structural adjustments as upstream capacity expanded and consumers become more value driven. Return to value has become the common theme. For institutions pursuing scaled and repeatable models, this offers a critical window to build long-term edge. In Q4, we continued to improve our investment and make progress in 3 directions. First, delivering scale breakthrough stand and operational improvements in our aesthetic center business; second, reinforcing medical service delivery capabilities to build a long-term trust-driven mode; and third, building our supply chain barriers to enhance brand and seize opportunities. We are pleased to see these choices are reflected in our financial results. The total revenue was RMB 451 million in Q4, up around 25% year-over-year, hitting a record high for quarterly revenue. Revenue from our aesthetic center business reached RMB 248 million, up over 205% year-over-year and about 10% above the high end of guidance. Our aesthetic center business has become our largest revenue contributing segment and growth engine with So-Young Clinic becoming the largest medical aesthetic chain in China by a number of centers. Now let me walk you through our progress in Q4 and our 2026 deployment, focusing on our aesthetic center business. -- our aesthetic center business has recently achieved 2 milestones. The first is our center footprint. By year-end 2025, we have opened 49 medical aesthetic centers, ranking first nationwide among all tiers by center count. The second is the treatment volume. In Q4, verified treatment visits exceeded 125,000, up 178% year-over-year. Verified aesthetic treatment performed exceeded 289,400, up 168% year-over-year. As of December end, our total active users surpassed 170,000. The growth in both treatment volume and user base validates the market demand and ongoing recognition from consumers. As we scale, center level operational efficiency continues to improve. In Q4, 25 centers achieved profitability and 39 centers generated positive operating cash flow. In 2026, we will accelerate the expansion, opening at least 35 new centers. We will deepen density in core cities, including Beijing, Shanghai, Guangzhou and Shenzhen, while also expanding our presence in second-tier cities. As our operations mature, we are confident in further improving profitability while maintaining expansion and driving the overall profitability at an early date. Second, we are enhancing our medical service delivery capability to build a long-term trust-driven mode. In Q4, we enhanced our service across 3 dimensions: physician team, compliance framework and data security. The improvements reinforced the user trust. Year-end 2025, our full-time physician team expanded to 211, up 41% from the end of Q3, ranking first nationwide among our peers by physician count. In terms of quality, all our physicians have a public hospital background and pass our regular internal certification before practicing. Over half of them hold attending physician qualifications or hires. On average, our team possesses over 6 years of clinical experience and those with a year or more and So-Young have delivered over 6,200 treatments per physician, reflecting our solid clinical capabilities. In 2026, we will launch a new physician initiative to accelerate recruitment and build talent pipeline. The program will provide industry-leading hands-on practice, systematic training and clear care path, enabling physicians to quickly achieve top-tier performance and our physician team's expertise deepens and user wordfmouth growth, we expect her physician productivity to grow, driving continued improvement in profitability. On compliance, we established a 6-pillar compliance framework and a regular inspection mechanism. With digital software, we deliver full process traceability of medical services. On data security, So-Young is the first in the industry to obtain the TIA certification, setting a benchmark for the industry. Our ongoing investments are reflected in user behavior. Core members have a quarterly rate of 80% and their average annual spending is around 16,500. The growing user trust is the foundation of our low-cost sustainable growth. we will continue to build on our supply chain, enhance and seize market opportunities. As of Q4, we worked with 18 top-tier domestic suppliers and have procured nearly 1,400 devices. For injectables, we have 42 top-tier upstream partners with a cumulative procurement of over 700,000 units -- in 2025, the upstream supply expanded sharply. The NMPA issued over 50 certificates for Class II medical devices, up over 60% year-over-year. For So-Young, this delivers a broader product portfolio, more durable procurement cost and enhanced user experience. Backed by the China's largest light medical aesthetic chain, we continuously enhance our supply chain layout capabilities. We have also built long-term partnerships with core suppliers and established a volume price linkage mechanism, securing the industry's best procurement prices. On our product layout in Q4, we launched a light version Merle PLLA version 3 printing, which lowers the customers' barrier to trail. We are also the exclusive distributor of [indiscernible] Biopharma's HP solution, now approved for marketing in China, which expands our portfolio. For BPL treatment, we improved bra influence and conversion through IP co-branding and immersive experiences. In Q4, we partnered with [indiscernible] and launched the Youth [indiscernible] Radiant campaign. The campaign leveraged multiple channels and formats, including celebrity treatment experience, pop-up events and in-store visits by bloggers on notes. Our corporate wins generated about 2 million on-site visits and total exposure on that note exceeded 40 million. This online and offline synergy reinforced our brand awareness and lead sales conversion for BBL, aligning brand building with revenue. Our product integration, new products launches and market activities reflect our commitment to the blockbuster strategy. In Q4, this blockbuster products delivered strong results contributing over 37% of revenue with sequential growth and remain a core engine for our aesthetic business. Meanwhile, our brands have been fully validated in off-line scenarios. To date, we have successfully established a presence in high-end shopping malls nationwide including Beijing H1, Guangzhou ICC Mall, Hangzhou Care Center, and so on. These premium shopping malls reinforce our brand recognition and help us reach target customer groups. Finally, let me share our outlook for the future. As the industry gradually shifts back to a regional quality-driven path, value distribution is being reset. We believe that in the long run, the industry will be led by the closest consumers and capable of delivering the most trusted services. For So-Young, 2026 is a turning point. We are moving from scale first to a engine of scale and efficiency. Our aim is not only to open centers, but also to prove the model is profitable as we expand. Our systematic capabilities over the past 2 years give us great confidence that our ambition is to beyond that. As our center network, supply chain and medical service delivery create a flywheel, we will lower access barriers and let more consumers enjoy safe, transparent and inclusive services while delivering sustainable returns to shareholders. We believe companies that create value will earn long-term recognition from the market. Now I'll hand it over to our VP of Finance, Ms. Hui Zhao, to walk through the financial results, followed by the QA session. Hui Zhao: Thank you, [indiscernible], and thank you, everyone, for joining us today. I'm [indiscernible], Vice President of Finance. On behalf of our CFO, I will walk you through our fourth quarter 2025 operating and financial results. For additional details on our fourth quarter and full year performance, please refer to the earnings release we issued earlier today. Unless otherwise noted, all amounts are in RMB. 2025 marked a transformational year for So-Young. The rapid scaling of our branded extent extended network fundamentally reshaped our business profile, and we are pleased with where we are today. Total fourth quarter revenues reached RMB 46.7 million, up 24.8% year-over-year. This was driven by continued expansion of our branded aesthetic center business. As of year-end, our cash position stood at RMB 936.4 million, providing solid runway to fund our expansion plans while preserving financial flexibility. Let me now walk you through performance by business segment. Our branded aesthetic center business sits at the core of our growth with our platform and upstream supply chain businesses serving as complementary dealers. Together, they form an integrated value chain across the medical aesthetics industry. Revenues from aesthetic treatment services reached RMB 248.1 million, up 205.3% year-over-year. This has been our largest revenue segment since Q2 and this quarter, it crossed the 50% revenue contribution threshold for the first time. Also, this marks our third consecutive quarter of exceeding the high end of our segment guidance. This strong performance was driven by both continued network expansion and improving cost center economic. As of December 31, we operated 49 So-Young clinics across 15 major cities, reflecting a net addition of 10 centers during the quarter. Now breaking down revenue by central development phase. Our 17 mature phase centers generated RMB 102.5 million in revenue or roughly RMB 8.4 million per center. Our 19 growth-based centers contributed RMB 89 million or roughly RMB 4.7 million per center. The 13 ramp-up phase centers contributed RMB 16.6 million Notably, average revenue per center nearly doubles as centers progressed from growth phase to maturity. With 19 centers currently in the growth phase, we see a clear built-in revenue growth driver as these centers continue to mature. And for their profitability, 25 centers achieved profitability during the quarter, including 15 mature phase centers generated positive operating cash flow as intense move through their development cycle, profitability has consistently followed. This gives us confidence in the financial trajectory of our newer centers. Turn to other statements. Information and reservation services revenues were RMB 125.7 million, down 26.8% year-over-year, primarily due to a decrease in the number of medical service providers subscribing to information services on our platform. Sales of medical products and maintenance services revenues were RMB 69.3 million down 19.9% year-over-year, primarily due to a decrease in the order volume for medical equipment. Other services revenues were RMB 17.7 million, down 40.7% year-over-year, primarily due to a decrease in revenues from So-Young Prime. I will now walk you through our financials below revenue in more detail. Cost of revenues was RMB 255.9 million, up 67.2% year-over-year, primarily driven by the expansion of our branded aesthetic centers to break this down further. Cost of aesthetic treatment services was RMB 189 million, up 189.9% year-over-year. Cost of information and reservation services was RMB 10.1 million, down 5.6% year-over-year. Cost of medical products sold and maintenance services was RMB 41.6 million down 4% year-over-year. Cost of other services was RMB 15.3 million, down or 7% year-over-year. Total operating expenses were RMB 327.7 million compared with RMB 815.2 million in the same period of 2024. Excluding the impact of goodwill impairment charges in both periods, total operating expenses increased moderately year-over-year, reflecting continued investment in scaling our aesthetic center business. Sales and marketing expenses were RMB 168.7 million, up 25.8% year-over-year. This was primarily driven by branding and user acquisition investments according branded aesthetic center growth. G&A expenses were RMB 101.9 million, up 3.5% year-over-year due to the business expansion of the branded aesthetic centers. R&D expenses were RMB 37.4 million, down 12.4% year-over-year due to improved staff efficiency. We also recorded an impairment of goodwill and longest assets charge of RMB 19.7 million based on our annual [indiscernible] impairment assessment. Income tax benefit amounted to RMB 0.6 million compared with income tax expenses of RMB 2.1 million in the same period of 2024. The net loss attributable to So-Young was RMB 108.8 million compared with RMB 607.6 million in the same period of 2024. Non-GAAP net loss attributable to So-Young was RMB 93.4 million, compared with RMB 53.2 million in the same period of 2024. Basic and diluted loss per ADS improved to RMB 1.08 compared with RMB 5.92 in the same period of 2024. As of December 31, 2025, our cash and cash equivalents restricted cash and term deposits, term deposits and short-term investments totaled RMB 936.4 million compared with RMB 1,253.2 million as of December 31, 2024. The decrease primarily reflects our accelerated investment in brand aesthetic center expansion. Looking ahead, the fourth quarter of 2026, we expect aesthetic treatment services revenue to be between RMB 258 million and RMB 278 million, representing year-over-year growth of 171.2% to 181.3%. This guidance reflects our confidence in the sustained momentum of our branded aesthetic center business. As of today, our standard network has crossed the 50 center milestone. In 2026, we will shift our focus from peer network expansion towards balancing growth with profitability improvement. We plan to add no fewer than 35 new centers in 2026, while leveraging our expanding scale to improve gross margins and drive efficiency gains across the network. This concludes my remarks. Operator, we are now ready for the Q&A session. Operator: [Operator Instructions] Our first question comes from [indiscernible] with Citi Securities. Unknown Analyst: [Interpreted] Let me briefly translate. I'm [indiscernible] from Citi Securities. So firstly, congratulations on the accelerating growth in Q4. And we are glad to see that there is improving gross margins in the aesthetic centers business and service business. So I have a question regarding the gross margin prospects. So could you share more about the gross margin plan and source further margin expansion. Xing Jin: [Interpreted] Thank you for your question. We believe that 3 core factors shape margin performance. The pace of center openings, consumable costs and seasonal promotions. Based on these factors, we have planned to enhance gross margin. First, we will continue optimizing the pace of center openings and the ramp-up efficiency of new centers. Upfront investments to new centers can create short-term margin pressure and license approval timing in our industry is often predictable. Going forward, we aim to adopt a more even cadence throughout the year combined with our integrated operating system. This accelerates each center's path to efficient operations and short-term ramp-up cycle. For 2026, new openings will represent a smaller share of total centers compared to last year. This will reduce margin dilution of concentrated new center investments. Meanwhile, the proportion and profit contribution from mature centers will rise, driving the overall gross margin levels. Second, we will optimize consumable costs. Currently, we have built deep collaborations with upstream partners, including [indiscernible] Biopharma, China Medical System [indiscernible] Farm and [indiscernible] Medical. This guarantees reliable supply and ongoing cost optimization. Looking ahead, we will strengthen empower with our partners and convert more high-quality upstream manufacturers in 2 long-term partners. At the same time, we will continue advancing our broad faster strategy. In the fourth quarter, our 4 major products accounted for over 37% of revenue as our core offering through the procurement cost panties will become more pronounced. Third, we will refine our seasonal promotions. Digital accounting remains a critical channel for user base expansion, customer conversion and building long-term user assets. Going forward, we will optimize our product mix and integrate campaigns more deeply with the membership system, targeting repeat transit among core members. We aim to transform short-term traffic into customers' LTV. This will drive gross margin. Operator: Your next question comes from John Wong with GF Securities. John Wang: This is John Wang from Guangfa Securities. Congratulations to the company on this outstanding performance. My question is about the development of So-Young Clinic in second-tier cities. And I would like to know whether the current operating performance of these centers has met management's expectations. Could management also share some operational updates on the several representative centers? Operator: Ladies and gentlemen, the line for the management has been disconnected. Please stay connected while we reconnect the line for the management. Thank you for patiently holding, ladies and gentlemen. The line for the management has been reconnected. Yes, please go ahead. Xing Jin: [Interpreted] From an industry perspective, while China's medical aesthetic market in second-tier cities have reached relative maturity, they like to have first-tier cities in medical service delivery capabilities and operational standards. We ensure that our centers in second-tier cities deliver the same level of medical service quality as is in first tier cities. Based on our operational track record, centers in second-tier cities are also growing well, both the traffic and per customer treatment are rising, and the revenue per center is close to first tier levels. As of December, mature centers in secondary cities such as Wuhan Tiandi Center and Changshu Center generated an average sales per square meter of RMB 7,000 per month. Among the opening in second-tier cities, [indiscernible] stood out. These centers have maintained robust revenue growth with industry-leading CAGR. For example, goudaSuzhou Su Plaza broke 1 million in monthly revenue with 3 months since opening, proving that our model works in second-tier cities. In terms of profitability, mature centers in second-tier cities enjoyed slightly higher margins due to lower staff payroll and rental expenses compared to the first tier cities. [Interpreted] We believe that the fundamental advantage of a chain model line in reduced transaction costs and enhanced brand trust, scale and accessibility. At present, most players in secondary cities are single center operators without meaningful density. Based on how we involved in both tier cities and So-Young's live trust grows, customers will tend to to push out multiple treatments per visit. Looking ahead, we believe the process improvement, resource synergy and traffic management will drive continued gains in our second-tier centers and economics of scale will take effect across our network. We are confident that this will lead to stronger profitability and market competitiveness in second-tier cities. Maggie Huang: And let me translate my question. This is Maggie Huang from CICC. Congratulations for our excellent performance. And we would like to know whether the competitive advantages in customer acquisition costs has been maintained amid its continued scaled expansion. And could management also share the customer acquisition strategy for 2026? Xing Jin: [Interpreted] Our edge in customer acquisition cost has been preserved and further strengthened. During the quarter, we opened a significant number of new centers and seize the opportunities brought by major shopping campaigns, including Double 11 and Double 12, bringing a new quarterly record for new customers. For the full year, our average CAC remained below 10% of revenue, a highly competitive benchmark in this industry. We sustained this advantage primarily through our customer referral model. Through our membership system and differentiated benefits, we will incentivize existing high-value users to refer new customers. This will not only lower CAC, but also improve the quality and retention rate of new users. Second, we will continue to optimize the mix of our public and private domain customer acquisition channels and enhance their LTV through refined operations. Meanwhile, we will continue to roll out co-branding initiatives with the world's top IP. Recently, we launched co-branding programs with 2 renowned IP, Little Print and Disney. Through brand storytelling, we reached a broader customer base and resonated with users emotionally, further amplifying our brand equity. As our footprint expands and user base grows, we anticipate further reductions in tax. Operator: Your next question comes from the line of David Chang with Haipeng International. David Chang: [Interpreted] I'll translate my question. Thank you management for taking my question. My question is about the user growth and the membership operations, especially for core members. Could management share the specific measures you will take to improve the LTV of core members going forward? Xing Jin: [Interpreted] For our core members, Level 3 and higher members continue to show solid growth momentum. Our user service show that core members still have significant room for growth in their annual medical aesthetic budgets, laying a foundation for us to boost user LTV. This quarter, revenue contribution from core members and their quarterly return rate both exceeded 80% with new core members surpassing 14,000. Consumer performances are shifting towards efficiency and clinical capabilities. Against this background, we will focus on, first, expanding our product portfolio. We will introduce more comprehensive product offerings, including standardized side treatments and mid- to high-end services. We expect this to elevate user value. Second, we will further optimize our membership system by offering differentiated benefits and service touch points so as to realize tiered user segmentation and provide corresponding services. This will strengthen co- members' perception of our brand value, building a positive feedback loop, which will drive their loyalty. These measures will lead to improved presenter profitability and provide strong momentum for our long-term growth. Operator: This concludes our question-and-answer session, and this concludes our conference for today. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the EDAP TMS Fourth Quarter and Year-End 2025 Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the call over to Louisa Smith from Gilmartin Group. Thank you. You may begin. Louisa Smith: Good morning. Thank you for joining us for the EDAP TMS Fourth Quarter and Full Year 2025 Financial and Operating Results Conference Call. Joining me on today's call are Ryan Rhodes, Chief Executive Officer; Ken Mobeck, Chief Financial Officer; and Francois Dietsch, Chief Accounting Officer. Before we begin, I would like to remind everyone that management's remarks today may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause actual results to differ materially from those anticipated. We direct you to the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2025, to be filed with the Securities and Exchange Commission as well as our other filings with the SEC for a description of factors that may cause such differences. These statements speak only as of today's date, and we undertake no obligation to update or revise them, except as required by law. Additionally, this call is being recorded and constitutes a public disclosure under Regulation FD. I would now like to turn the call over to EDAP's Chief Executive Officer, Ryan Rhodes. Ryan? Ryan Rhodes: Thank you, Louisa, and good morning, everyone. 2025 was a transformative year for our company, highlighted by 39% revenue growth in our core HIFU business and record commercial performance for Focal One. Importantly, much of this growth was driven by accelerated adoption in the U.S., where we delivered record system placements and strong procedure growth. As our installed base continues to expand, we are also seeing increased utilization across hospitals, emphasizing the positive recurring revenue opportunity created by each Focal One system placement. Today, we will begin with our fourth quarter results, then reflect on our achievements, including our financial performance, and we will close the call by outlining our strategic priorities for 2026. The fourth quarter was the strongest quarter in the company's history for HIFU revenue, representing an increase of 34% over the same period last year. This growth was led by capital sales and treatment-driven revenues, which continue to be the driving force of our ongoing commercial success. We achieved a record 15 Focal One placements worldwide, including 14 cash sales, representing our strongest quarter-to-date in both placements and cash sales. Performance was driven by the U.S. market, which delivered 10 cash sales, its highest quarterly total on record. Beyond the headline numbers, the profile of our customers continues to be led by the expanding adoption of Focal One amongst leading academic centers in major community hospitals. Notably, we achieved our first Focal One placement in the state of Wisconsin at Aurora St. Luke's Medical Center, part of Advocate Health, a major integrated health care delivery network spanning 18 hospitals across the states of Wisconsin and Illinois. In total, we achieved 4 new Focal One placements in the state of Pennsylvania during the quarter, further strengthening our presence in this region. The University of Pennsylvania, a member of the National Comprehensive Cancer Network and a National Cancer Institute designated Comprehensive Cancer Center, converted their existing HIFU program to Focal One. With the addition of University of Pennsylvania, Focal One now has been adopted by 55% of NCCN member institutions. The University of Pittsburgh Medical Center, UPMC, a Society of Urologic Oncology Approved Fellowship program was also added to our Focal One installed base this quarter, bringing our penetration to 63% of the prestigious SUO group of teaching hospitals in the U.S. Of noted importance after the recent placements at 2 additional Cleveland Clinic hospitals in the U.S. during the fourth quarter, there are now 5 Focal One systems within the global Cleveland Clinic Hospital network. As hospitals see increasing patient demand, they are expanding across multiple locations. We now have 10 leading U.S. health care systems with 2 or more Focal One programs. We also continue to see existing competitive HIFU programs converting to Focal One technology. During the quarter, 3 major focal therapy programs converted from use of legacy HIFU technology to Focal One, including the University of Pennsylvania, Penn State Health as well as Lakewood Ranch Medical Center in Florida. Notably, at Lakewood Ranch Medical Center, Dr. Stephen Scionti, a high-volume focal therapy expert, has transitioned to the Focal One i platform. Dr. Scionti is widely recognized as one of the most experienced HIFU experts in the U.S., having treated 2,000 prostate cancer patients in over 20 years using a legacy HIFU platform. His decision to adopt our latest technology further validates our strategy of ongoing innovation and reflects Focal One i's advanced imaging and robotic precision. Internationally, our Focal One capital sales momentum also continues to expand in existing regions as well as new emerging markets. During the quarter, we achieved 4 cash sales outside the U.S., including the first Focal One system in India and the first Focal One system in Argentina. The sale to Ruby Hall Clinic, a top-tier institution in Pune, India, represents a key commercial milestone in a large and underpenetrated market. Additionally, the sale at the Argentinian Institute of Diagnostics and Treatment in Buenos Aires expands our South American footprint, adding to other existing Focal One sites in Brazil and Chile. Finally, our momentum continues to build across Southern Europe with additional new Focal One system sales in both Italy and Spain. While we were encouraged by this strong momentum, we believe we are early in the overall adoption life cycle of Focal One Robotic HIFU in this large and growing addressable market. Turning our attention to utilization. U.S. Focal One procedure volumes reached the highest quarterly level, growing 28% as compared to Q4 2024. This procedure growth is driven by a combination of newly launched programs as well as increased patient demand with existing programs. This was consistent across the different geographic market segments to include hospitals in large metropolitan statistical areas as well as hospitals in smaller communities. Complementing our commercial success, we achieved an important regulatory milestone during the fourth quarter. On November 20, we received FDA clearance for the latest evolution of Focal One Robotic HIFU, introducing advanced ultrasound imaging and streamlined treatment planning. This next-generation ultrasound imaging engine provides real-time visualization and supports the future development of AI-driven algorithms designed to assist surgeons with tissue ablation visualization and treatment evaluation. These combined advancements along with the launch of Focal One i earlier in 2025, further strengthens our leadership position in focal therapy while providing incremental sales momentum into 2026. Turning our attention to reimbursement. The landscape continues to move in a favorable direction for Focal One. TMS finalized the 2026 outpatient prospective payment system rule awarding a national facility payment average of $9,671, representing a 4.6% increase versus 2025. This new rate went into effect January 1. As it relates to the physician payment, Focal One is also supported by favorable economics. In the 2026 final rule of the physician fee schedule, TMS has set the total facility RVUs at 26.33 for the HIFU procedure. This compares favorably to alternative ablative treatments for prostate cancer for a single urologist under the same setting and patient conditions. In short, the Focal One HIFU procedure provides a physician from 28% to 67% higher RVUs than an alternative ablative treatments in 2026. Beyond prostate cancer, we continue to advance our clinical strategy to expand new indications with use of the Focal One Robotic HIFU platform. As endometriosis awareness month comes to a close here in March, we continue our commitment to advance new innovative treatment options while raising visibility on the unmet need for a new noninvasive treatment option for women suffering from this highly debilitating condition. Claude University Hospital in Lyon, France is treating patients and hosting training programs for leading European endometriosis specialists, including physicians from Cleveland Clinic London, who recently observed Focal One procedures. Regarding BPH, our combined Phase I/II study continues in Europe according to our outlined protocol. Simultaneously, we initiated a new clinical trial in South America in collaboration with the Mount Sinai Health System in New York with several patients already treated in early March by a team of local and U.S. BPH experts. This represents another positive step towards broadening the addressable market for use of Focal One Robotic HIFU. Transitioning to surgeon education, our activities continue to build growing awareness across the urological community. We recently attended the 41st Annual Congress of the European Association of Urology in London, U.K. This is the second largest scientific meeting dedicated to urology in the world with more than 12,000 attendees from 124 countries. In front of this year's EAU meeting, we collaborated with Cleveland Clinic London to host a sold-out urology peer-to-peer educational event dedicated to learning and understanding the clinical value and applications delivered by Focal One Robotic HIFU in the treatment of prostate cancer. This coming weekend, the world-renowned urology team at NYU Langone in New York City, we will host the first international symposium on robotic focal therapy. This large inaugural event entirely dedicated to Focal One will offer attendees lectures, hands-on training, detailed video case reviews and semi-life Focal One procedures led by top U.S. and international experts. I will now turn the call over to Ken, who will review our financial results. Ken Mobeck: Thanks, Ryan, and good morning, everyone. Before I begin, I want to note that all 2025 figures are reported in euros, our functional and reporting currency. For conversion purposes, our average euro-dollar exchange rate was $1.16 for the fourth quarter 2025. Beginning with our Q1 2026 results, we will report in U.S. dollars, reflecting our transition to a domestic issuer. Turning to full year 2025 performance. EDAP set a calendar year record for HIFU revenue in 2025. HIFU revenue for the full year 2025 was EUR 33.1 million, an increase of 39% as compared to HIFU revenue of EUR 23.8 million for the full year 2024. The increase in HIFU segment revenue versus the prior year was due to a 59% increase in the number of Focal One system units sold and a 19% year-over-year increase in treatment-driven revenue. Total revenue for full year 2025 was EUR 62.4 million, a decrease of 3% compared to EUR 64.1 million for the full year 2024. The year-over-year decrease was driven by a 27% decline in our noncore distribution and ESWL businesses, which offset the 39% growth in core HIFU business, as I just outlined. This is consistent with our strategy of focusing resources on the higher-margin HIFU business while managing the legacy businesses through their natural decline. Now turning to the fourth quarter. Q4 2025 was a record quarter for HIFU revenue. HIFU revenue was EUR 11.7 million, a notable increase of 34% as compared to HIFU revenue of EUR 8.8 million for the same period in 2024. The increase in revenue was due to continued significant strength in our Focal One HIFU business driven by 14 Focal One capital sales in the quarter versus 11 capital sales in the prior year period as well as a 22% year-over-year increase in Focal One treatment-driven revenue. As mentioned earlier, Focal One procedures in the U.S. grew 28% year-over-year. Total revenue for the quarter was EUR 18.9 million, a decrease of 7% compared to EUR 20.3 million for the same period in 2024. The decrease was primarily driven by a 38% decline in our noncore distribution and ESWL businesses in the quarter versus Q4 2024, offsetting the 34% year-over-year growth in HIFU business. We continue to expect our noncore segments to decline as a percentage of total revenue over time, consistent with our strategic focus. Regarding gross margin, gross margin for the quarter was EUR 8.1 million compared to EUR 9.1 million for the same period in 2024. Gross margin on net sales was 42.6%, down from 44.8% for the same period in 2024. This decline was primarily driven by 2 items: tariffs on imports of finished goods from France and an inventory reserve related to legacy parts. Excluding these items, underlying gross margin performance was in line with the prior year. We continue to actively monitor the tariff environment. Operating expenses were EUR 13.2 million for the quarter compared to EUR 12.8 million for the same period in 2024. The increase in operating expenses was primarily due to focused investments in our HIFU business. Operating loss for the quarter was EUR 5.2 million compared to an operating loss of EUR 3.7 million in the fourth quarter of 2024. Net loss for the quarter was EUR 8.2 million or EUR 0.22 per share as compared to a net loss of EUR 1.9 million or EUR 0.05 per share in the same period a year ago. The increase was driven by 2 items below the operating line, a EUR 2.5 million noncash charge related to warrants and interest expense on the European Investment Bank Tranche A drawdown and a EUR 2 million negative currency impact versus the prior year period. Turning to the balance sheet. Inventory decreased to EUR 10.9 million at quarter end as compared to EUR 13.8 million at the end of Q3. This reduction was driven by the high volume of capital system sales in the quarter and disciplined inventory management. Total cash and cash equivalents were EUR 17.4 million at quarter end, up from EUR 10.6 million at the end of Q3, primarily reflecting the EIB Tranche A drawdown. Finally, on to our 2026 outlook. As previously announced in January, we expect core HIFU revenue to be in the range of USD 50 million to USD 54 million, representing 34% to 45% growth over 2025. Combined noncore revenue is expected in the range of USD 22 million to USD 26 million. This guidance reflects our confidence in the capital placement momentum Ryan described, our expanding installed base and the continued ramp of procedure volumes across our growing network of Focal One programs. I would like to now turn the call back to Ryan for closing comments. Ryan Rhodes: Thanks, Ken. In closing, 2025 was a year of record performance, expanding clinical validation and technological advancement. As we enter 2026 with accelerating commercial momentum, we are executing with discipline against 3 high-impact priorities designed to drive durable growth and long-term shareholder value. First, commercial execution. We are expanding our penetration across leading academic centers, community hospitals and integrated delivery networks with significant runway ahead as we remain early in the adoption life cycle of this large underpenetrated market in prostate cancer. Second, clinical indication expansion. Beyond prostate cancer, we are unlocking incremental growth opportunities for Focal One across new indications. We are making meaningful progress on our BPH clinical and regulatory pathway and accelerating commercialization in endometriosis. Third, technology and innovation. We are advancing AI-driven treatment planning and next-generation imaging capabilities to strengthen Focal One's leadership as the most advanced robotic focal therapy platform in the market. The combination of these priorities, commercial execution, indication expansion and continued technology innovation and leadership underpins our confidence in our 2026 outlook and beyond. In closing, we are confident in our ability to deliver sustainable growth and create long-term shareholder value. With that, I will now turn the call back over to the operator for questions. Operator? Operator: [Operator Instructions] We'll take our first question from Mike Sarcone with Jefferies. Michael Sarcone: I guess just to start, can you give us a little more color? I know you're reiterating the 2026 guidance, but particularly on the HIFU side, any color on kind of splitting out growth in procedures versus capital sales would be helpful. Ryan Rhodes: Yes, Michael. So again, we see pipelines building and being strong both in the U.S., but importantly, also in the outside U.S. markets. We continue to execute around global regions. So as we've talked about in the past, pipeline development and a growing pipeline in the U.S., but equally in the outside U.S., and some of that was demonstrated certainly with our results here at the end of the year as -- and we're already into 2026. Procedure growth, again, we saw a notable increase Q4, 28% over prior year. We see double-digit growth from quarter-to-quarter if we measured ourselves Q4 versus Q3 of last year. And I think we're, again, seeing more and more centers actively looking to expand to a broader audience of patients. Again, each program ramps differently. But I think overall, we look outward and see a strong year for us, both in terms of capital sales as well as procedure growth. Ken Mobeck: And Michael, as we move forward to, as Ryan referenced, with 35 Focal One sales in 2025, that is going to lead down the road to procedure growth as well as service growth when those expire. With our installed base now at 165 units, that's also going to lead to disposable sales growth and service growth as well. Capital sales will lead the way again on a percentage basis, but we do see the procedure and service revenue volumes picking up as a total percentage of revenue for HIFU. Michael Sarcone: Great. That's all very helpful. And then maybe just my follow-up. What have you seen so far 1Q to date in terms of procedures in the U.S. and globally? And particularly in the U.S., have you seen any impact from some of the storms in the Northeast and along the East Coast? Ryan Rhodes: No impact that I can point to. I would say, generally, we see a nice ramp developing. We came off of Q4, a strong quarter. But again, Q1 is ramping as planned. Nothing holding us back from growing appropriately per the guidance we've given in procedure growth and revenue. Operator: We will move next to Joseph Downing with Piper Sandler. Joseph Downing: Yes. So I guess the HIFU guide was reiterated here. And I'm just thinking how should investors be thinking about the first half, second half split within the HIFU guide given the seasonality with 4Q? And then specifically, what's a reasonable baseline for 1Q HIFU revenue given typical hospital CapEx sensitivity? And then just at a higher level, are you embedding any cushion for lumpiness throughout the year of the capital sales line? Do you think that should kind of flatten out a little bit over the course of this year? Or should we expect more of the similar from the previous few years there? Ken Mobeck: Yes. So thanks for the question. So when we look at this year's revenue 2026, we're going to see the following patterns, very consistent with prior years. We anticipate Q4 to be the highest growth quarter, revenue-wise and our biggest dollar-wise quarter. And the lowest quarter will be in Q3. That's very consistent with Q4 capital budgets spending and Q3 summer slowdowns. So we see a little less than 50% of the business in the first half of the year, and I'd say a little more on the second half. Joseph Downing: Great. I appreciate that, Ken. And then just on the noncore wind-down trajectory, obviously, implies another step down from last year's figure in 2026. Curious if you could just break out how much of that is ESWL versus the distribution business? And then at what point does noncore revenue effectively reach a de minimis level? I guess, said a little differently, when does the revenue mix shift kind of become clean enough that investors should evaluate EDAP purely on HIFU metrics? Ken Mobeck: Yes. So when you look at the noncore, ESWL is roughly 20% to 25% of the noncore okay? And the way we're looking at the business going forward is as follows, okay? Our ESWL business now is service-only business, okay? So we're going to continue to serve that and look at ways to monetize that business. And the way to look at the distribution business going forward, it's just like I explained last year. When these agreements expire, our annual distribution agreements, we're taking a look at each agreement. Is it material to revenue and is it accretive to gross margin? And then we're making executive decisions on should we ramp that business going forward. So I would still see that business sticking around in the short term. Operator: Our next question comes from Swayampakula Ramakanth. Swayampakula Ramakanth: This is RK from H.C. Wainwright. A couple of quick questions for me. The first one being on the margins, you cited a normalized margin of 46.9%. I understand some of that is being hit by the Section 232 tariff stuff. What percentage of your revenue gets impacted by that? And then what's the strategy going forward if this -- if there is stickiness to that 232 tariffs? Ken Mobeck: Yes. So RK, as you know, we manufacture our product in Lyon, France. So the pieces of the business that are impacted are when we ship the finished goods from Lyon, France to the United States. So it's basically our U.S. revenue that's an impact to those dollars today. We're monitoring the situation closely. We have budgeted about $2.5 million in tariffs in 2026 to be conservative, and we're just going to continually monitor what everything is happening from the government regarding those. The offset to the tariff is we do have our new ultrasound engine. As we anticipated and told you last year, we were transitioning to this engine. It's going to have better functionality and also lower cost. So that will help offset some of the tariff impact. Swayampakula Ramakanth: Okay. Then Ryan, just about a high-level thought here. I know for quite a bit of '24 and the early part of '25, you are concerned about cash sales. You closed out 2025 with 14 cash sales and 1 lease. So does that mean some of those concerns regarding cash sales have mitigated quite a bit. And so you're comfortable going into '26. And also, if there was any price increase taken in early part of 2026, just trying to understand what could be the potential levers or the full push on the revenue guidance that you just gave us? Ryan Rhodes: Yes, RK. So again, as I tell people, we sell a clinically necessary strategic revenue-enhancing service line in the #1 diagnosed cancer in men. So it puts us in a position to be strategic in nature. And with that, hospitals need to invest in the technology, and that means purchase the technology. So we've been leading with the cash sale. We believe our platform is best-in-class in the market. It brings immediate tangible value when we launch our programs. So a cash sale makes total sense, plus the reimbursement that's in place today. So cash sales will be our lead theme going forward. In the past, we have offered some time-based operational leases or bridge to budget or bridge to purchase. We don't need to do that as much anymore. I think people realize that Focal One is a key anchor point to their overall focal therapy program. So we showed excellent sales and cash sales here in Q4. Our theme going forward will be leading with cash sales as notably. In terms of a price increase, we took a price increase last year with the launch of Focal One i. And as you heard in the past, we made notable advancements in this new platform, both hardware and software. And we're not done. We will continue to innovate on the platform. We've made improvements in a number of areas, and we're never satisfied. So we have a price increase that went in place last year. We haven't changed our pricing strategy at the beginning of this year, and we see our average selling prices tend to hold or even slightly increase. So I'm proud of the work our commercial teams are doing in the field. Operator: And at this time, there are no further questions in queue. I will turn the meeting back to Ryan Rhodes for closing remarks. Ryan Rhodes: I want to thank everyone again for joining us on today's call. We look forward to seeing you in Washington, D.C. at the upcoming Annual Meeting of the American Urological Association in May and our important Investor Day being held in New York City on June 1, along with the Jefferies Healthcare Conference also taking place in New York City at the beginning of June. Thank you, everyone. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to the Andean Precious Metals Fourth Quarter and Year-End Conference Call and Webcast. [Operator Instructions] Thank you. I would now like to turn the call over to Amanda Mallough, Director of Investor Relations. You may begin. Amanda Mallough: Thank you. Good morning, everyone, and thank you for joining Andean Precious Metals Conference Call to discuss our financial and operating results for the 3 and 12 months ended December 31, 2025. Our press release, MD&A and financial statements are available on SEDAR+ and on our corporate website at andeanpm.com. Before we begin, I would like to remind listeners that today's discussion will include forward-looking statements. Please refer to our cautionary language in our filings. Joining me on the call today are Alberto Morales, Executive Chairman and CEO; Yohann Bouchard, our President; Juan Carlos Sandoval, our Chief Financial Officer; and Dom Kizek, our Vice President of Finance and Corporate Controller. Following prepared remarks, we will open the line for questions. And with that, I'll now turn the call over to Alberto. Alberto Morales: Thank you, Amanda, and good morning, everyone. 2025 marked a step change for Andean where we delivered focused financial -- record financial results and fundamentally strengthened our balance sheet. We achieved record revenue, adjusted EBITDA and net income alongside with strong free cash flow generation and exited the year with a record $167 million in liquid assets. This level of cash flow generation fundamentally changes our positioning as a company. We entered 2026 with a strong balance sheet and the financial flexibility to fund growth initiatives and evaluate opportunities to expand our asset base. Operationally, both assets contributed to this performance. At San Bartolome, the operation delivered consistent production and strong margins, supported by efficient processing and strong silver prices. At Golden Queen, production strengthened into the fourth quarter, supporting higher consolidated gold production and contributing to our record financial results. For the year, we maintained a balanced production profile with approximately 57% of revenue coming from silver and 43% from gold. Looking ahead, we expect several important milestones in 2026, including our planned New York Stock Exchange listing and the updated technical report at Golden Queen. Overall, 2025 demonstrated the strength of our platform, a business capable of generating meaningful cash flow, maintaining strong margins and positioning itself for the next phase of growth. With that, I will turn it over to Yohann. Yohann Bouchard: Well, thank you, Alberto, and good morning, everyone. For the fourth quarter, Andean produced 27,777 gold equivalent ounces, bringing full year production slightly below 100,000 gold equivalent ounces. While production finished near the low end of guidance, both operations delivered strong cost performance and margin generation, supporting record financial results. At San Bartolome, the operation continued to perform consistently. For the year, the operation delivered 4.5 million ounces of silver, contributing to a total of gold equivalent production of 53,854 ounces. Operational performance remained strong for the full year with cash gross operating margin of $16.11 per silver ounce and gross margin ratio of 42.75%. These results reflect continued efficiency in ore sourcing, stable throughput and strong realized silver prices. At Golden Queen, the operation produced 45,311 gold equivalent ounces in 2025, comprised of 41,627 ounce of gold and 331,000 silver ounces. Production improved into the fourth quarter, supporting stronger consolidated results. For the year, cash costs were $1,698 per gold ounce and all-in sustaining cost was $2,194 per gold ounce. The operation continued to focus on optimizing stacking, blending and recoveries, which are expected to support improved performance going forward. From an operational perspective, both assets are well positioned heading into 2026 with stable production and strong margins. Production is expected to be weighted approximately 45% in the first half of the year and 55% in the second half, driven by mining sequence at Golden Queen and ore delivery timing at San Bartolome. With that, I will turn it over to J.C. Juan Sandoval: Thank you, Yohann, and good morning, everyone. From a financial perspective, 2025 was a record year across all key metrics. In the fourth quarter, we delivered strong results across the board, including revenue of $134 million and adjusted EBITDA of $47 million. For the full year, revenue reached $359 million, adjusted EBITDA was $133 million, and net income was $118 million or $0.78 per share. Free cash flow totaled $36 million in the fourth quarter and $59 million for the year, reflecting strong cash generation. Our balance sheet strengthened significantly over the year. Total assets increased to $434 million, while total liabilities declined to $170 million, reflecting debt repayment and strong cash generation. We ended the year with $167 million in liquid assets, a record for the company. This was comprised of $79 million in cash and cash equivalents, $38 million in treasuries and money markets and $49 million in strategic equity investments. During the year, we fully repaid our legacy credit facilities and established a new $40 million revolving credit facility with National Bank further enhancing our financial flexibility. This positions the company with strong liquidity and financial flexibility moving into 2026. With that, I'll turn it back to Yohann for an update on our exploration programs. Yohann Bouchard: Thank you, J.C.. Our exploration programs are focused on extending mine life and supporting long-term production across both operations. At Golden Queen, exploration remains focused on expanding known mineralization and supporting mine life extension. In 2025, we completed 47 core drill holes aiming at extending the existing mineralized zone. While the drilling program met our expectations, turnaround times at the independent assay lab were longer than anticipated. Consequently, we have decided to postpone the release of the technical report by a few months to include this new information. Looking ahead to 2026, our primary objective is to advance infill drilling to convert inferred resources into the measured and indicated categories. Our second objective is to follow up on the zone drilled in 2025 with additional infill drilling, which is intended to further extend mineral reserves along the trend of the existing mining areas. Postponing the release of the technical report by a few months ensure the market receives a clearer and more complete picture of the asset long-term value. At San Bartolome, exploration is focused on securing additional oxide resources to support long-term plant feed. We continue to advance exploration across multiple targets with the objective of increasing available resources and maximizing utilization of the plant capacity. Overall, these programs are designed to enhance production, extend mine life and support long-term value creation across both operations. With that, I will turn it back to Alberto, who will talk to the 2026 guidance. Alberto Morales: Thank you, Yohann. As we look ahead to 2026, we have already provided detailed production, cost and capital guidance to the market. We expect consolidated production to be in the range of 100,000 to 114,000 gold equivalent ounces, with production expected to be weighted approximately 45% in the first half of the year and 55% in the second half, reflecting mine sequencing and ore delivery timing. At Golden Queen, we expect cash cost between $1,500 and $1,800 per gold ounce and all-in sustaining costs between $1,850 and $2,150 per gold ounce. At San Bartolome, we expect cash gross operating margins between $20 and $35 per silver ounce and gross margin ratios between 35% and 45%. Overall, this positions the company to continue generating strong margins and cash flows across the range of a commodity price environment. Our capital program for 2026 is aligned with our strategy of driving long-term value while maintaining financial discipline. We expect sustaining capital of approximately $17 million to $24 million and growth capital of approximately $21 million to $30 million. At Golden Queen, capital will focus on leach pad expansion, development and infrastructure, equipment additions supporting mine life extensions. At San Bartolome, capital will be directed towards processing improvements, plant optimization initiatives and sustaining infrastructure. Overall, 2026 plan is designed to enhance operational flexibility, support mine life extension and positions the company for continued free cash flow generation and long-term growth. To close, 2025 marked a significant step forward for Andean. We delivered record financial results, generated meaningful free cash flow and transformed our balance sheet. As we move into 2026, we are focused on delivering against our guidance, continuing to generate strong margins and cash flow and advancing key initiatives across both of our operations. We are entering 2026 from a position of strength with a clear path to continue scaling the business and delivering long-term value for the shareholders. With a strong balance sheet, a clear operating plan and upcoming catalysts, including our planned New York Stock Exchange listing, we are well positioned to execute on the next phase of growth. Thank you, everyone, for your continued support. And operator, I would like to please open the line for questions. Operator: [Operator Instructions] And your first question comes from the line of Justin Chan with SCP Resource Finance. Justin Chan: Congrats for cash generating year. Just my first question is on the, I guess, the timing of the updated resource at Golden Queen. I guess maybe can you give a bit more color on -- will you be doing more drilling in the first -- I guess, will drilling from the first quarter of the year go into the update? Like what's the cutoff for data going into it? And then if you could give us kind of the flow of timing from cutting off drilling data and then when you expect to release it? Yohann Bouchard: Yohann here, and thanks for the question. So the main reason for postponing by, say, 3 to 4 months, the technical report is really to make sure that we include all of the information from 2025, which is pretty exciting. I mean we got 47 holes that we drilled in the extension, and we believe that everything can make its way into resource, but -- and we feel that by rushing the report, I mean, we're not giving full value to that report basically. I would say postponing the report has very little to do with drilling that we're doing in 2026. We're going to try to include some of those holes if we can, but this is not the end game here. The end game is really to include all the information that we have drilled in 2025, which is meaningful, I think, for the operation. Justin Chan: Understood. Got you. So it's not like you need to do any more infill. It's just a matter of enough time to actually model up the data you already have. Yohann Bouchard: Absolutely. We are very satisfied with the drilling of 2025. Again, I mean, this is out of our control. I mean, the lab was quite busy, and we had some delay with that. And I believe that everybody is winning by postponing a little bit and providing something that can give a clearer picture to the market. Justin Chan: Got you. And then I have a question on just the marketable securities. And I guess there was some movement overall, I'd say, especially this quarter in terms of the FX impact on your cash and also, I think, quite a bit like about $10 million worth of revaluation of the marketable securities. Could you give us a bit more color on -- it sounds like you have a mix of treasuries and also or money market, let's call it, debt instruments, but also equities. I'm just curious, I guess, how that revaluation might work in future periods. Juan Sandoval: Yes. Thank you, Justin. It's J.C. So yes, as you know, as part of our cash management strategy, we hold 3 things: cash, marketable securities, which is mostly composed of treasuries, whether it be short term or up to 3 years and then our strategic equity investments, right? Yes, as you -- as we have seen over the last few weeks, there has been more volatility, especially in mining companies. So yes, we've seen a reduction in the valuation of our equity investments. However, we believe that when we present our first quarter numbers, we will compensate some of that loss that we have seen on the market overall. Justin Chan: Got you. And just -- and the equities themselves, they're accounted for as part of the marketable securities short and long term. Is that right? Juan Sandoval: Yes, that's correct. Justin Chan: Okay. Got you. And then just the last one, and I'll free up the line. I mean I would expect less impact given where your operations are, but just, I guess, good housekeeping that I've been asking on other calls. Given the volatility in global supply chains, oil prices, et cetera, I'd imagine your locations are less impacted, but can you just flag any impacts that we should consider? Juan Sandoval: Yes. So obviously, everyone is being impacted. If oil prices remain above $100 per barrel, it will have an impact. We are working on that. But yes, as you say, at least in the U.S., it will be less of an impact compared to the international markets. But yes, I mean, right now, we don't really know where it's going to end up, but it's -- again, if oil prices continue to be where they are, yes, it will have an impact on our overall bottom line. Justin Chan: Okay. Got you. But it sounds like it's limited to more just the price of oil as opposed to like supply of any consumables or anything else? Alberto Morales: Energy-driven inflation basically. Juan Sandoval: It's mostly diesel and fuel, but some of the consumables might also be affected as well. But it's mostly fuel and diesel, Justin. Justin Chan: Yes. And it's a pricing rather than availability issue? Juan Sandoval: Correct. Yes, absolutely. Operator: Your next question comes from the line of Ben Pirie with Atrium Research. Ben Pirie: Congrats on another strong quarter and closing out 2025. Just going -- piggybacking off Justin's question there with the resource. Can you just confirm -- so now this is being pushed to the end of Q2, early Q3? Or is it 3 months further than that? Yohann Bouchard: The way I see it, I mean, there's going to be pushed towards the end of Q3. Ben Pirie: Okay. Okay. Understood. And then at the Golden Queen, can you just touch on the increase in costs between Q3 and Q4 of 2025? And then going beyond that, we're looking at the AISC guidance, $1,850 to $2,150 for 2026. Can you just touch on what's sort of going to change from Q4 '25 to bring those costs back down to that range and just sort of give investors some confidence around the cost going forward here? Dom Kizek: Ben, it's Dom here. This is the question. Q4, we had some catch-up costs, including some inventory adjustments there. But going forward, we have reiterated our guidance. So we do expect those costs to be within that guidance as of today. Juan Sandoval: And all-in sustaining costs increased as well during Q4 because if you look at the CapEx, we accelerated some CapEx in that fourth quarter. So that's why for that fourth quarter, all-in sustaining costs did increase a bit, but it was mostly related to that CapEx allocated during the fourth quarter. Ben Pirie: Okay. Understood. And then just, I guess, lastly, I don't have too much. But on San Bartolome, can you just talk to us about how the volatility in the gold price over the last couple of months might impact margins just given it is a margin business? Juan Sandoval: Yes. So bear in mind, Ben, that we have a processing facility, right? Part of our feed is coming from long-term contracts and part of it is coming from spot purchases. On the spot purchases, yes, we are paying ore at market prices, obviously, higher prices. But as we've mentioned in our guidance, we have a very profitable margin. And then on the fixed contracts, well, it's a fixed price per ton. So on those contracts, we are more exposed to commodity prices. So in this high price environment, we're -- it's becoming more profitable. But the combination of both, as I have said, still make it a very profitable business, but less risky overall because on the spot purchases, we have sort of like a natural hedge, right? Ben Pirie: Yes. And so in a sharp sort of decline like we saw with gold over the last couple of weeks bouncing back this morning, there's a little bit of a margin compression in that environment. But again, the trend has been up and to the right for the gold price has been benefiting you with this business as of late. Juan Sandoval: That is correct. Ben Pirie: Okay. Great. Well, again, congrats on a strong year and that's all I have today. Operator: There are no further questions at this time. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, and welcome to Reed's Fourth Quarter and Full Year 2025 Earnings Conference Call for the 3 and 12 months ended December 31, 2025. My name is Joelle, and I will be your conference call operator for today. We will have prepared remarks from Neal Cohane, Reed's Interim Chief Executive Officer and Chief Operating Officer; and Doug McCurdy, Reed's Chief Financial Officer. Following their remarks, we will take your questions. Before we begin, please take note of the company's cautionary statements. Today's call will include forward-looking statements, including statements about Reed's business plans. Forward-looking statements inherently involve risks and uncertainties and only reflect management's view as of today, March 25, 2026, and the company is under no obligation to update them. When discussing results, the presenters may refer to non-GAAP measures, which exclude certain items from reported results. Please refer to Reed's fourth quarter and full year 2025 earnings release on Reed's investor website at investor.reedsinc.com and its annual report on Form 10-K for the 2025 fiscal year for the period ended December 31, 2025, expected to be available on the website soon for definitions and reconciliations of non-GAAP measures and additional information regarding results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements. I will now turn the call over to Mr. Cohane. Neal Cohane: Thank you, Joelle, and appreciate everybody joining us today for the call, the fourth quarter and full year 2025 results. Before diving in to our results, I'd like to briefly address the leadership transition. As announced in our earnings press release, Cyril Wallace has stepped down as CEO. I will assume the additional role of Interim CEO while continuing as Chief Executive Officer -- as Chief Operating Officer, and I will also join Reed's Board of Directors. On behalf of the entire Reed's team, I want to thank Cyril for his contribution and wish him all the best in his future endeavors. I'm honored to step into this role at an important time for the company. Reed's is a strong brand with long heritage, a loyal consumer base and robust operational foundation. Having spent many years with the business and recently returning as COO, I have a clear understanding of both the opportunities ahead and the work required to improve execution and performance. The Board has initiated a search for a permanent CEO. And in the interim, I am focused on advancing the operational priorities necessary to support profitable growth. Let's turn to our results. We made important strides during the fourth quarter to stabilize the business and reinforce the operational framework needed to support sustainable growth. We also saw sequential improvements in net sales, gross margin and net loss, which we view as early indicators that the actions we have taken are starting to gain traction. We saw encouraging sequential sales improvements across several channels, including natural specialty, grocery, mass and e-commerce. This was driven by a combination of increased sales velocity and seasonal product launches during the quarter. A couple of the retailers helping to drive this growth with Sprouts, Costco, Walmart and our Amazon and Shopify business. While we're still early in the process, these results reflect meaningful progress in improving execution. We are rebuilding and expanding distribution relationships, strengthening our presence on the shelf and driving greater efficiency across our supply chain and product portfolio to support more consistent performance over time. From a production and supply chain standpoint, we're making meaningful progress in driving efficiencies and reducing costs across the business. This includes optimizing our manufacturing network, improving plant productivity and implementing tighter operational controls to better align production with demand. We're also enhancing our sourcing strategy by leveraging scale, renegotiating key supplier relationships and improving procurement discipline. At the same time, we are actively identifying additional opportunities to lower our per unit cost structure, including packaging optimization, freight and logistics efficiencies and SKU rationalization. As we continue to streamline the supply chain and improve throughput, we expect these initiatives to expand margins, improve service levels with our retail partners and position the business for more scalable and consistent performance over time. Looking ahead in 2026, we are focused on expanding our presence in under-penetrated channels, particularly food service and convenience, which represent meaningful white space opportunities for the Reed's brand. These channels are highly complementary to our core retail business, enabling us to reach consumers in new consumption occasions and drive incremental trial and brand awareness. I'd like to share a few updates on our product portfolio. First, we are launching the Reed's -- new Reed's Ginger Ale Cranberry and Blackberry in Q2 2026 as a line extension to our #1 selling SKU, which is the Reed's Ginger Ale. The core item, the Reed's Ginger Ale, remains the #1 premium ginger ale in total U.S. and continues to grow and is plus 13.7% in dollar sales over the past 52 weeks. Second, we are expanding into high-growth adjacent categories with the launch of nonalcoholic mixers in early Q3 2026, providing incremental sales opportunities in the back half of the year. Third, we are amplifying visibility at the digital shelf. In March 2026, we went live across Instacart, walmart.com and albertsons.com, reaching over 4 million targeted shoppers monthly through sponsored search, sponsored product and banner advertising. Finally, we launched a social media strategy in Q1 2026, targeting over 100,000 viewers per month. We partner with recognizable talent, including a retired NFL player, Hayden Hurst, alongside a network of high-reach influencers. This approach is designed to authentically integrate Reed's into our culture, driving awareness, engagement and trial in a scalable, cost-efficient manner. Overall, these initiatives reflect a deliberate multipronged growth strategy, building on our core and expanding into high potential agencies and fully supporting the brand through digital and cultural relevance. Now let me take you through a couple of the fourth quarter operational highlights. During the quarter, we continued our efforts to evaluate and manage finished goods inventory, including actions to address slower moving and obsolete product as part of our effort to simplify the portfolio and focus on higher-performing items. On the logistics and supply chain front, we continued executing our rebalancing initiatives to optimize inventory placement across regions and improve overall delivery efficiency. These efforts are focused on reducing freight distances, enhancing service levels and minimizing out of stocks in key markets. We are beginning to see the tangible benefits from these actions with delivery and handling expenses declining 35% year-over-year in the fourth quarter. While still early in the process -- while still early, the process reinforces that we are moving in the right direction, and we remain focused on further refining our logistics network to drive continued efficiency gains and cost reductions over time. We continue expansion into the Asian market and we'll be exhibiting at the sugar and wine trade show in Chengdu, China, one of the biggest food and beverage trade events in the world. We will be launching our latest take on new modern energy drink called [ U Oxygen ], Reed's U Oxygen. U Oxygen will be making its debut for the first time, introducing innovative flavors to key industry retailers and distributors. Reed's U Oxygen builds on Reed's natural ginger base and innovatively integrates the classic eastern herbs of astragalus and ginseng to deliver clean, balanced energy for today's health-conscious consumer. During the fourth quarter, we completed a $10 million underwritten public offering and uplisted our shares to the New York Stock Exchange American, marking a significant milestone in the evolution of Reed's. This transaction strengthens our balance sheet and enhances our financial flexibility providing additional capital to support key growth initiatives across the business, including distribution expansion, brand investment and continued operational improvements. Additionally, uplisting to the New York Stock Exchange American meaningfully elevates our visibility within the investment community and broadens access to institutional investors while improving overall trading liquidity for our shareholders. As we continue to execute against our strategic priorities, we believe this enhanced capital markets platform, combined with our stronger financial foundation, provides Reed's to accelerate growth and drive long-term value creation. Looking ahead, our priorities remain centered on improving overall operating performance and driving more consistent, profitable growth. We see a clear path to margin expansion through a combination of more disciplined trade spend, improved pricing and promotional effectiveness and continued operational efficiency gains across our supply chain and organization. We're also continuing to invest in our international expansion in Asia, where we see a significant long-term opportunity to extend the reach of Reed's brand and capture incremental growth. We believe the combination of these initiatives will enable us to execute our growth and profitability objectives ahead. Before wrapping up with closing remarks, our CFO, Doug, will cover financial highlights and fourth quarter and full year in more detail. Doug? Douglas McCurdy: Thank you, Neal. Turning to our results. All variance commentary is on a year-over-year basis, unless otherwise noted. Net sales for the fourth quarter of '25 were $7.5 million compared to $9.7 million in the year ago quarter. The decrease was primarily driven by lower volumes with recurring national customers and higher promotional and other allowances. Gross profit for the fourth quarter of 2025 was $1.5 million compared to $2.9 million in the year ago quarter. Gross margin was 20% compared to 30% in the year ago quarter. The decrease in gross margin was primarily driven by inventory write-offs and higher cost of goods sold. Delivery and handling costs were reduced by 35% to $1.1 million during the fourth quarter of 2025 compared to $1.7 million in the year ago quarter. As a percentage of net sales, delivery and handling costs were 14% or $2.46 per case in Q4 2025 compared to 17% or $3 per case in the year ago quarter. Selling, general and administrative expenses were reduced by 19% to $4.0 million compared to $4.9 million in the year ago quarter. The decrease was primarily driven by lower contract proceedings and asset impairments. Net loss during the fourth quarter of 2025 improved to $3.8 million or negative $0.44 per share compared to $4.1 million or negative $1.33 per share in the year ago quarter. EBITDA was negative $3.6 million in the fourth quarter of 2025 compared to negative $3.1 million in the year ago quarter. For the fourth quarter of 2025, we used $3.8 million of cash from operating activities compared to cash used of $3.9 million in the year ago quarter. As of December 31, 2025, we had approximately $10.4 million of cash and $9.3 million of total debt, net of capitalized financing fees. This compares to $10.4 million of cash and $9.6 million of total debt, net of capitalized financing fees at December 31, 2024. I will now turn the call back to Neal for closing remarks. Neal Cohane: Thanks, Doug. Our fourth quarter reflects important strides in stabilizing the business and reinforcing the operational foundation needed to support sustainable growth. While there is still work to do, we are encouraged by the sequential improvement in several key financial metrics and remain focused on executing against our priorities to drive profitable growth for our shareholders. With that, Joelle, we're ready to open the line for any questions. Operator: [Operator Instructions] Your first question comes from Aaron Grey with Alliance Global Partners. Unknown Analyst: This is [ John ] on for Aaron. So how best is it to think about the cadence of distribution gains in 2026 and whether the spring resets have presented any opportunities? Neal Cohane: John, thanks for the question. I think we have some work to do when it comes to getting placements right now. We're working on it as we speak. We have the sales team aligned. We're bringing on people to help and support, picking up and gaining more placements, and we're also working on velocities, to improve velocities at store level. So we're going to be completely focused in 2026 on the customer and on our distributors. And it's going to be all about velocities and increasing shelf placement. Unknown Analyst: Okay. Great. And how should we think about the path to profitability and some of the margin initiatives you have in place starting to flow through the P&L? Neal Cohane: The path to profitability is -- Doug and I have been meeting extensively on this. And we're looking at a couple of things here. It's one, we're looking to reduce expenses, which we are doing year-over-year, quarter-over-quarter, we're reducing expenses. But at the same time, we're driving -- we're going to be driving growth this year. So I think what you see today is going to look a lot different than in, say, Q4 of this year. But it's going to be a combination, like I said, of reducing expenses and driving volume at store level. Unknown Analyst: Okay. Great. And then just lastly, is there any additional detail you can provide on the timing of the Smarter Soda (sic) [ SodaSmarter ] launch or color on learnings from the past launch to improve the product, flavor, packaging or otherwise? Neal Cohane: On which launch, I'm sorry? Unknown Analyst: The SodaSmarter. Neal Cohane: Yes. The SodaSmarter launch right now is -- that is one of the first things that I spoke with our flavor house that helps us with launches as I want to improve flavors. But at the same time, we're launching our new mixer line. And our new mixer line, which I think is going to be a great addition to what we're all about as a Reed's brand, we're working on that line and that launch at this moment. And then we're coming back to the SodaSmarter, and we're going to be looking at improving flavors, improving formulas, and then we're going to improve execution on that at the same time. Operator: There are no further questions at this time. I will now turn the call over to Mr. Cohane for closing remarks. Neal Cohane: Well, thank you, everybody. I appreciate everybody joining today. We appreciate your continued interest in Reed's. We look forward to updating you on our progress, and we'll do that on further calls. We have a lot of work to do, and we're getting it done. But thanks for everybody and their time today. Operator: Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Thank you for standing by. This is the conference operator. Welcome to the AGI Fourth Quarter 2025 Results Conference Call and Webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions] Before we begin, we caution listeners that this call may contain forward-looking information and discussion and that actual results could differ materially from such forecasts or projections. Further, in preparing the forward-looking information, certain material factors and assumptions were used by management. Additional information about the material factors that could cause actual results to differ materially from the forecast or projections and the material factors and assumptions used by management in preparing the forward-looking information are contained in our fourth quarter MD&A and press release, which are available on the AGI website. I would now like to turn the conference over to Paul Brisebois, Interim President and CEO of AGI. Please go ahead, sir. Paul Brisebois: Thank you, operator, and good morning, everyone. I'm pleased to be speaking with you today from our corporate headquarters in Winnipeg. Our CFO, Jim Rudyk, is here with me, and we are eager to use this call as a kickoff to a new era for AGI. Before getting into a more detailed discussion on the quarter as well as other relevant business and corporate updates, I would like to first introduce myself and share a few more details on my professional background. I've spent my entire career, which spans nearly 30 years in the global agriculture business with a strong foundation in sales leadership, marketing, business development and operations. I've been an executive with AGI since 2012, played a large part in the growth that we have accomplished going from a $300 million company to a $1.4 billion company, most recently leading our North American Farm and Global Portables businesses. That role has kept me close to our customers and provided a clear view of the operating levers that drive performance across AGI. Agriculture is a compelling industry. People must eat and global demand continues to grow, but it is also cyclical, shaped by factors such as weather, geopolitics, interest rates and government policy to name a few. While I've seen significant change over the years, the fundamentals remain constant. Crops are grown every season and grain must move from the field to storage to processing and ultimately to end markets. The industry generally follows a predictable seasonal rhythm and understanding that rhythm is essential to understanding our customers, what matters, what's urgent and where they need the most support. As the leader of the company, having decades of hands-on operating experience is particularly important as we navigate a cyclical North American market while managing through significant change internally. To support the pace of change and provide the appropriate level of strategic input, governance and oversight, AGI has also made several important changes to the Board of Directors in recent months. Led by our Board Chair, Dan Halyk, the Board now collectively brings a strong mix of hands-on operating experience, deep agriculture sector experience, restructuring and value creation knowledge, capital markets expertise, deep institutional knowledge from AGI's formative years in addition to meaningful shareholder representation. Overall, this is a Board that is well positioned, well equipped and well aligned to support a renewed focus on operating fundamentals, improving shareholder returns and enhancing return on invested capital metrics. I look forward to working closely with our Board as we execute on our corporate priorities and strategies. Before getting into more detail on our current strategic priorities and recent restructuring activities, I'll provide some brief comments on our fourth quarter results, which Jim will expand on later in the call during his prepared remarks. Fourth quarter revenue increased 4% year-over-year to $396 million, supported by strength in our Commercial segment, particularly in international markets, offset by continued softness in the North American Farm segment, Canada in particular. However, adjusted EBITDA decreased to approximately $48 million, down 38% and our adjusted EBITDA margin compressed to 12.2%, roughly 830 basis points year-over-year. Given the extent of margin compression in the quarter, it's important to be direct about the drivers of this result. First, within our Farm segment, lower volumes for permanent storage and handling, especially in Canada, reduced overhead absorption and impacted profitability. Second, within our Commercial segment, we experienced execution-related cost pressures on various traditional equipment-only projects in Brazil, including cost overruns, warranty charges, remediation expenses and bad debt write-offs. For clarity, when we refer to our traditional Brazil operations, this includes everything other than the large-scale projects we've recently engaged in. Third, in our North American commercial business, a combination of product mix and production efficiency issues weighed on margins. Taken together, these items contributed to the bulk of the fourth quarter margin outcome. They also reinforce why we initiated a new phase of restructuring early in 2026. As we move forward in 2026 and beyond, we have three key guiding principles, which taken together shape our actions and priorities. The first is simplification. We will continue to streamline layers, clarify accountability and standardize core processes among other activities in a concerted effort to structurally reduce the overall complexity of how we operate. We are simplifying the organization end-to-end from the high-level organizational structure to how decisions are made day-to-day. The objective is to move faster with better discipline. The second is customer focus. We are refocusing resources on what matters most to customers from quoting through delivery and how we manage key accounts. The objective is to make customer-first thinking a core part of our culture and day-to-day operations. The third is reducing debt and managing cash flow more broadly. We are operating with tighter financial discipline to improve cash generation and conversion. Outside of managing debt through operating cash flows, we are reviewing our options and alternatives to help accelerate debt repayment. As we work through 2026 in consultation with our Board, we will continue to calibrate our strategy and priorities with greater precision and through the lens of ROIC metrics. Given the amount of change underway, we believe it's important to share our current direction as of today, so stakeholders understand the priorities guiding execution and resource allocation in the near term. In our renewed commitment to enhance the AGI customer experience and simplify operations through the start of 2026, we have begun and are continuing to undertake a comprehensive strategic restructuring initiative. This process focuses on streamlining our operations and aligning our decision-making processes more closely with our customers' needs. By simplifying our business structure, we aim to empower our teams to respond more swiftly and effectively to customer feedback and market demands, ensuring a more agile and customer-focused approach. These actions include four main changes. First, we restructured the top level of the company, what we call the executive operating team, going from a team of 17 down to a team of 8 to facilitate accelerated decision-making and improved execution. Second, we implemented a significant overhaul of the North American business to simplify the leadership structure and reduce layers of siloed functions. The objective is to strengthen day-to-day execution and improve the speed of effectiveness of our response to customers and changing market conditions across North America. As part of this alignment, several smaller business units, including feed, food and digital are being integrated into the broader North American organization, all of which will now operate under a single regional leader. Third, a streamlining of certain corporate functions and leadership capabilities to our Winnipeg headquarters, consolidating activities previously managed elsewhere. And finally, after careful consideration and evaluation of our current operational landscape, we have made the strategic decision to terminate our ERP implementation. The ERP implementation has been challenging, delayed, resource-heavy and ineffective to date, raising concerns on the realization of expected benefits. Our executive team reviewed the ERP decision through the lens of simplicity, customer focus and cash flow management, coming to the conclusion that we must cease implementation and refocus on other priorities. In addition, we have also suspended the dividend going forward effective immediately. The objective of all of these actions are straightforward. They are aligned with our strategic focus areas of simplifying our business, increasing customer focus and managing cash flow to reduce debt. Collectively, these actions will drive annualized SG&A cost savings of at least $20 million. In addition, terminating the ERP will enable about $20 million of cash cost avoidance over the next two years. Further initiatives to help remove cost and simplify the organization are under review. Stepping outside of these immediate actions, we have also made some other targeted refinements to our corporate strategy, including a decision to halt any new large-scale projects that include general contracting and financing elements in Brazil or elsewhere until balance sheet capacity improves, while continuing to pursue equipment-only opportunities in Brazil that are aligned with the company's traditional operating model and a comprehensive internal review of our alternatives to reduce leverage and accelerate debt repayment. In addition, we are placing an increased focus on metrics such as return on invested capital to guide strategic decision-making alongside updates to corporate compensation structures, both of which are aligned with the objective of improving shareholder returns. Moving to some comments on order book and overall market conditions. We ended the year with an order book of $543 million, down 26% year-over-year, primarily reflecting the execution of several significant projects in our International Commercial segment. In the Farm segment, areas of North America have shown some early signs of improvement, notably in our year-end early order program for 2026. With this provides some cautious optimism for 2026 Farm segment results could show an improvement over 2025. It is still early in the year and visibility remains limited. We'll need to get further into the season for additional validation of the demand picture and how to place 2026 within the broader agriculture cycle. In commercial, order intake softened in late 2025 and into early 2026, reflecting longer customer decision-making and project review cycles. Finally, an important note on the underlying makeup of our 2025 results so we can be clear for listeners, analysts and shareholders as they set expectations for 2026. Our full year results in 2025 benefited from significant revenue connected to large-scale projects in Brazil, which included general contracting and financing components. That said, backfilling this volume of revenue with traditional commercial business projects to replenish the order book to 2025 levels will be challenging. Overall, the demand environment remains an issue in the near term, but we're leaning in, keeping opportunities in our pipeline moving forward, staying close to customers and simplifying the organization so we can execute better and be ready to capture growth opportunities as conditions improve. To wrap up, I'm grateful and genuinely honored to be in the position to lead AGI through this next chapter. We see both challenges and opportunities ahead, and our team is ready to execute. We are firmly committed to strengthening alignment with shareholder returns and recognize that this is an area where improvement is required. Enhancing value creation for shareholders is a core priority, and we are taking deliberate steps to better align our strategic decision-making, capital allocation and incentive structures with this objective. We are fully aware and aligned on the need for action to drive consistent, measurable improvement in shareholder returns and alignment. Jim, over to you. James Rudyk: Thanks, Paul, and good morning, everyone. I'll begin with a brief review of Q4 results and then discuss other key financial metrics. Starting with Farm. Farm segment revenue declined year-over-year in the fourth quarter, reflecting continued challenging market conditions across North America, including soft crop prices and ongoing uncertainty related to trade and tariff policies. Revenue decreased 8% to $123 million, with the decline concentrated in Canada. Canada Farm revenue decreased 34% year-over-year, impacted by slow demand across both portable and permanent grain handling equipment and declining, though still elevated dealer inventory levels alongside an overall cautious approach to purchasing behavior by farmers and end users. In contrast, U.S. farm revenue increased 11%, reflecting improved volumes versus prior periods, particularly in portable grain handling equipment, and early signs of potential stabilization across certain portable and permanent categories. That said, demand remains below historical norms and visibility into sustained improvement remains limited entering 2026. International Farm revenue increased 36% year-over-year, led by strong demand in Australia, though the overall contribution from international regions remained modest in relative terms. Adjusted EBITDA for the Farm segment declined 39% to $19.8 million and margin compressed from 24.1% to 16%, driven primarily by lower volumes and margin pressure on permanent handling and storage solutions in Canada. Now turning to the Commercial segment. Commercial segment revenue increased year-over-year in the fourth quarter, driven primarily by large-scale comprehensive projects in international markets with Brazil again delivering a strong quarter and complemented by solid contributions from our EMEA region. Overall segment revenue increased 10% to $273 million, with international commercial revenue up 18% to $206 million, reflecting the mix of large projects, notably in Brazil. In North America, U.S. commercial revenue increased 9% on continued execution of projects secured earlier in the year, while Canada commercial revenue declined significantly as the prior year period benefited from substantial project wins. And in Q4 2025, a few major projects were pushed from Q4 into Q1 2026. Adjusted EBITDA for the Commercial segment declined 39% to $33 million and margins compressed from 21.6% to 12%. The decline was driven primarily by execution-related pressures on traditional projects in Brazil that led to cost overruns, warranty charges and remediation expenses as well as product mix and production efficiency issues in our North American commercial business. While we are executing a plan to mitigate the margin pressure, we do expect some of these margin challenges to persist for both the Brazilian and North American commercial businesses into 2026. Moving on to adjusted EBITDA and a few comments on specific line items within that reconciliation. Some of the key items to note include transactional, transitional and other representing a mix of legal accruals, asset disposal costs and personnel expenses. A meaningful component this quarter of transactional expenses included a $21 million purchase of the interest of related parties for some of the large-scale Brazilian projects. This represented the purchase of our Brazilian construction partners' equity interest in three of the large-scale projects. While this would normally be recorded as an equity transaction, it was expensed due to the timing of when the transactions close. Another key item is our ERP implementation costs, which will soon be removed given the strategic decision to terminate this activity going forward. Finally, I'll provide a few comments on a few of our focused financial metrics, including free cash flow and leverage. Free cash flow in Q4 was negative, driven mostly by temporary working capital requirements associated with large-scale international commercial projects in Brazil. Improving cash flow is a paramount objective for both management and the Board. Of the negative $111 million of free cash flow in 2025, a very significant portion of this was tied to these large-scale projects in Brazil. As we monetize existing receivables and halt further investment, the cash flow pressure related to large-scale projects in Brazil should subside. From a leverage standpoint, our net debt leverage ratio was 4.7x at year-end compared to 3.9x at quarter-over-quarter and 3.1x year-over-year. We recognize that leverage is elevated and improving free cash flow generation and reducing leverage are key priorities. It is worth noting that our syndicate remains highly engaged and supportive. In Q1, we finalized an amendment agreement with the majority of our lending group that extends our senior credit facility maturity date out to 2030. One key element of our deleveraging plan is the investment vehicle established in Brazil to monetize financing receivables provided by AGI. To date, this vehicle has generated $7 million of inflows, and we have made progress on securing additional inflows in the near term. This structure is designed to relieve working capital, support delivery of large projects, improve cash conversion and strengthen leverage metrics over time. We are working through some of the detailed administrative aspects of the monetization process, and we expect meaningful progress on the long-term accounts receivable monetization efforts shortly. For clarity, it is worth reiterating that following our strategic choice to stop pursuing large-scale projects in Brazil, which require general contractor and financing components, we will refrain from entering new customer or project agreements that would increase our long-term receivables or otherwise use our balance sheet. When our balance sheet improves, we may revisit, but for now, the priority is on reducing debt. In closing, our go-forward focus is clear: improve execution, restore margin performance, strengthen cash conversion and reduce leverage. With that, I'll turn it back over to the operator. Operator: [Operator Instructions] The first question today comes from Gary Ho with Desjardins Capital Markets. Gary Ho: I want to start off with the Commercial segment. It was fairly weak. I think it was mentioned execution-related pressures in equipment-only projects in Brazil, mentioned cost overruns, higher warranty and remediation expenses and also comments around North American production inefficiencies. Can you elaborate on these items? And also related, maybe for Jim as well, of your $48.3 million reported EBITDA, it looks like you didn't back out some of these onetime items, they are commercial or otherwise like bad debts, et cetera. Can you maybe quantify these nonrecurring items that's in your Q4 EBITDA? Paul Brisebois: Gary, it's Paul here. Thanks for the question. I'll answer the first question, and then I'll turn it over to Jim. With regards to the execution-related cost overruns, about half of that of the issues were in cost overruns, warranty charges and then half was in bad debt write-off. To be honest, when we look at our Brazil business, the pace of growth in our Brazil operations outpaced our capabilities to execute, and that creates challenges in the business, and that's why we had the cost overruns, warranty charges and unfortunately, a couple of customers from a bad debt perspective. We've installed a new business leader in our Brazilian business. We're focused on technical accounting review on large-scale projects, and a full review of project management and procurement practices going forward. So we feel that all of these are addressable in our Brazil business as well as in the North American commercial business when we talk about product mix and production efficiency issues. We had lower margin product that we were selling in Q4 and then inevitably had some production efficiency issues, which led to lower margins. James Rudyk: And Gary, just on your follow-on there, no, we did not back these out. These are our operating costs. We've got a number of initiatives to address them. We're working hard to ensure they are not recurring, but they were not backed out. We do expect to still have some challenges, particularly in Q1 as we work through our restructuring plan, but we thought it made sense to leave them in just our normal cost of goods sold or SG&A as opposed to backing them out. Gary Ho: And sorry, Jim, are you able to kind of quantify what those could have been if it was? James Rudyk: Well, so in terms of specifically the Brazil costs or are you talking about all in general? Gary Ho: Yes, all in general. James Rudyk: Yes. So of the overall impact on our margins, about 1/3 of them are attributable to each of the three categories. So lower farm volumes, the Brazil impact and then North America commercial, they'd be about 1/3 each of them of the total dollar impact year-over-year. Gary Ho: Okay. Great. Okay. And then maybe I'll just move on just one other one for Paul. You listed kind of four operational initiatives in your prepared remarks. Can you elaborate kind of what's been achieved up to today? Are the leadership streamlining and unifying of North American ops complete? Or should we expect some noise throughout this year? I just want to hear the time line for these initiatives. Paul Brisebois: Yes, you bet, Gary. So we have restructured our executive team going from 17 down to 8. So that's been done. David Postill, who is leading our North American business is in the process of restructuring that business. And so that will happen within the next 30 days. Many of the activities in terms of looking at offices and relocating roles have been -- taken place already and will continue to in the next 30 days. And we're trying to do this as efficiently as possible, as quickly as possible and keeping in mind a focus on the customer to make sure that nothing is impacted in a negative way in terms of our customer experience. And we believe through our restructuring and getting closer to the customer in terms of removing layers of the business will benefit us with regards to execution going forward. Operator: The question comes from Steve Hansen with Raymond James. Steven Hansen: Look, I understand the desire to level set expectations here, and I think that makes sense. But I think you're going to have to give us a little bit more in terms of what you expect for the margin profile here given how radical the move has been to the downside. I know you suggested some of these margin challenges are expected to persist. Does that mean we should account for similar margin profile for the next couple of quarters? I mean, how do we -- do we get back to a normalized level where we were before? I mean some degree of directional support here would be useful because, frankly, getting punched in the face like this is a little bit unexpected. So just a bit more clarity around where we're going from a margin perspective would be the first point, and then I'll get to free cash flow. Paul Brisebois: Yes, you bet, Steve. And I'm familiar with getting punched in the face. I'm a hockey player as well. And this was a tough quarter. So Q4 was tough and we had challenges. We believe that those challenges are all addressable. Q1, we believe will be -- continue to be tough as we work through this. We're not satisfied, obviously, with that margin outcome. The restructuring that we've put in place is designed to improve our execution, restore our margin and strengthen our cash conversion. And the target is to get back to historical margins going forward. So Q4, Q1 tough and driving towards more historical margins after that. Steven Hansen: Okay. Helpful to a degree. Maybe just on free cash flow then, we've had -- I think you cited at just over $110 million of negative free cash in the year. All the actions that you're taking seem to make logical sense. But when can we actually expect to see positive free cash flow in the coming period here? And then I understand, again, on a related note, your banks and syndicate have been supportive here, but are we at risk of any sort of covenant-related breaches at some point in the future? James Rudyk: Yes. Thanks, Steve. Yes. So free cash flow, you probably -- as you read through the press release and our comments, obviously, is elevated, it's very serious. We're taking it very serious, big focus on it. A lot of the initiatives, the restructuring plans, all the things that we're doing are focusing on free cash flow. From a -- if you look year-over-year, the bulk of it of the negative has to do with our investment in these large turnkey projects. And I'll just speak quickly on that. So we did monetize some of it in Q4, a small amount, $7 million. We talked about this in the past, where it's administratively very slow and burdensome process in Brazil to get all of the steps necessary to then get the cash. The cash is in motion. Progress continues. We have calls every couple of days focusing on it. And as we've mentioned in the past, we expect to monetize between $80 million to $100 million shortly within -- by H1. That will make a big difference to our free cash flow. Q1 will still be tough, though. We expect negative free cash flow in Q1, candidly. And then as the funds come in from the monetization of the Brazil business, that will turn things around. But make no mistake, there's still challenges as we work through the restructuring plan, but our focus is on generating positive free cash flow going forward. In terms of your covenant question, as you know, the bank covenants exclude our debentures. And so we are in compliance. And we have a great group of banks, 11 banks in our syndicate. They're very supportive. We just extended the maturity date. So no concerns on the covenants. Operator: The next question comes from Tim Monachello with ATB Capital Markets. Tim Monachello: First question here, just a clarification. You lumped in the dividend cut and some of the restructuring efforts. And I just want to be clear here, is that dividend included in the $20 million of cost savings you're expected? Or I would assume it's not... Paul Brisebois: No, good question, and it's not included in the $20 million of cost savings. And just for context, Tim, our Board reviews our dividend each period in the context of the business and where we're at. And given our priorities to manage cash and pay down debt, a decision was made to postpone it, to hold on. Tim Monachello: Okay. Great. And then second question, I just want to dive into what you're seeing on the ground in the Commercial segment, understanding that your -- so the breadth of opportunities that you're looking at in Brazil, in particular, has shrunk with, I guess, the change in your offering around general contracting and financing options. But you also mentioned a slowdown in, I guess, the commercial order cycle. So maybe you can elaborate on what you're seeing on the ground in terms of demand and the market outlook in the commercial side of the business relative to how you had described it in past quarters? Paul Brisebois: Yes, you bet. So I'll talk about the broader commercial business, North America. First, we're seeing good quote activity, but we're not seeing customers move forward on that quote activity at this time. So everybody is a little bit cautious and not pulling the trigger with regards to projects at this time. Now that could open up. We're very happy to see the quoting activity happening. So that's a good sign. When we look at our EMEA business, Rest of World, it had a fantastic year in 2025 with a lot of execution on those projects happening and getting finalized in 2025. We see a smaller order book. And we've started to see a little more traction. That being said, there's been some small projects that have been impacted in the Middle East because of the conflict there and -- but it won't have any kind of material impact. And then when we look at the Brazil business, a challenge for us will be to replace the $183 million of revenue that we did in large-scale projects in 2025 that were financed. And so we've made a decision that we are no longer doing those projects going forward with regards to financing. We will participate with regards to equipment sales. And that decision is made from a cash flow perspective to ensure that we're getting cash as we do the projects and getting paid as those projects are finalized. So with that, we believe that the challenge going into 2026 for Brazil, in particular, will be to fill that gap of the $183 million that we accomplished in 2025. Tim Monachello: So the slowness in, I guess, order cycling that you've seen or I guess, the willingness of customers to actually place orders is mostly outside of Brazil? Paul Brisebois: That's right. Tim Monachello: Okay. And then just the $180 million of large project revenue in Brazil in '25, how does that compare to total commercial revenue in Brazil? And how much of those large projects are still in backlog for '26? James Rudyk: Yes. It's a significant amount, Tim. It's -- '25 in particular, was a big year for the turnkey projects. So it's more than half of the amount. Tim Monachello: And how much do you expect to process of those large projects in '26? James Rudyk: In '26 -- so yes, good question. So there is -- 2 of the projects still have some work being done in 2026. We'll complete them through this year. It's a big gap that we need to fill, let's put it that way. Operator: The next question comes from Michael Tupholme with TD Cowen. Michael Tupholme: So it's clear that a lot of these efforts are intended to improve free cash flow and in turn, improve the balance sheet. Jim, wondering with the leverage ratio where it is now, how we should think about that evolving over the course of the year, where you think that can be come the end of the year? And as part of that, also wondering how you're thinking about refinancing or repaying the senior unsecured debenture that comes due at the end of this year. James Rudyk: Yes. Thanks, Michael, for the question. Yes. So leverage ratio is high, 4.7x. It must improve, no doubt about it. And if you look at our initiatives, we're really, really focused on those -- getting those -- and we're going to improve it through a number of ways. You've got improving our earnings, so SG&A savings that we've called out, delaying the ERP implementation that will free up quite a bit of cash flow over the next couple of years. A big part is our decision to pause any of the financing opportunities with some of these large customer opportunities. That will free up quite a bit of working capital. So we expect to have some meaningful improvements in that leverage ratio through 2026. In terms of the refinancing, you're right, we have a debenture that's due in December. We expect to refinance that debenture likely with a similar type instrument, but that will be something that we'll likely pursue and try to get done Q2, Q3 time frame. Michael Tupholme: Okay. Related to the question here about improving the balance sheet. I guess there was mention in the release of reviewing the portfolio of assets with the intent of refocusing on core business lines. I guess the sort of two part here. So first thing is where is that portfolio review at and how material could the proceeds from that be? Just trying to understand if this is something we really need to be focused on or if this is sort of more marginal in terms of the potential impact. Paul Brisebois: It's a good question. So we have gone through an extensive review of all of our available options to reduce debt. We've looked at it from our priorities of simplifying the business, having a customer focus and cash flow to reduce debt. We've identified the most actionable options and are focused on this goal for the coming months. So there is some low-hanging fruit. And when I say that, we have facilities that are not operating right now that we could sell for cash. We have land that's available to sell for cash. And then we have other assets within the portfolio where we're looking at it that can range from either smaller but more actionable to large opportunities that can have a significant impact on our debt reduction. And we're taking all of those into account with a focus on debt reduction. Michael Tupholme: Okay. That's helpful. And maybe just to clarify though. So nothing has actually been finalized yet. You've got sort of a good set of opportunities here that things you could act on, but nothing has been completed to this point. Paul Brisebois: That's correct. The internal review has been done, and we're actioning things that are in the queue. Operator: The next question comes from Maxim Sytchev with National Bank. Maxim Sytchev: My first question, I guess, pertains to the rollback of the ERP implementation. And I guess as you commented in your prepared remarks around getting closer to the clients and sort of more agility, et cetera. I'm just wondering how do you balance these kind of competing priorities around presumably less data over time while trying to sort of accomplish operational priorities. James Rudyk: Yes. Thanks, Max. So the ERP project, it's been ongoing for quite a while. It's extremely resource heavy. It does consume lots of cash. And importantly, too, it's a distraction to a lot of people, especially in the time when we're trying to simplify the business, focus on the customer and get back to basics. And so with our extreme focus on freeing up free cash flow, we decided that it made sense to stop this project. We need to focus on execution. We need to conserve cash. This will -- is a good mechanism to free up some of that cash. And now in terms of your -- what does that mean in terms of the future? I think that who knows? I mean we've got systems. We've operated for a lot of years with our current systems. Once we get our execution done, figure out our processes, get that streamlined, things will get reassessed. But for now, this has made the most sense to do. Maxim Sytchev: Okay. And then in terms of -- recently, we're seeing fertilizer pricing obviously spiking. I'm just curious to see what you may be seeing closer sort of on the ground? Because I mean, you made a comment around commercial, but maybe anything farm related, that would be helpful. Paul Brisebois: Yes, you bet. So we were pleasantly surprised actually with our order book through our early order program that happens in Q4. We saw an uptick with regards to that order book versus 2024, which was a positive sign. So we remain cautiously optimistic on our farm business. The reality is the reason we remain cautiously optimistic is it really is dependent now on when farmers go into planting season which will happen in the next month or so, depending on region. And as they see their crops come up and obviously, with input prices, as you mentioned, with fertilizer prices going up, they're putting -- they put all of their resources into that first. And then once they see their crops come up and if they are looking good and commodity prices are decent, then we'll have an opportunity to maybe get more optimistic or less optimistic about the second half. But right now, we feel pretty good with regards to that order book and better than what we anticipated going into 2026. Operator: The next question comes from Jacob Efrosman with Strive Global Holdings. Jacob Efrosman: The question is for Paul. I was wondering as it relates to offloading some of your assets to free up your balance sheet. Was there any manufacturing assets that would be based in Canada or North America that you'd be looking at offloading in the next few months? Paul Brisebois: Thanks for the question. We're reviewing all of our global assets. So we haven't determined what that looks like on a North American basis at this time. Operator: We have a follow-up from Steve Hansen with Raymond James. Steven Hansen: Two quick follow-ups, if I might. Paul, maybe too early, but I mean, how are you thinking about the tariff situation as we move into CUSMA renegotiations? I'm thinking about the bin side in particular. I don't seem to be too worried about the Auger portable side, but the bin side is one where there might be more risk to the portfolio. How do you plan and adapt for that as we move into that process? Paul Brisebois: Yes. That's a great question, Steve. 2025 was challenging to say the least with regards to tariffs. It did have an impact on our overall margins on the farm business, particularly on the storage side throughout the year. And I'd say not only on the cost of the tariff, but the inefficiencies that it created when it was on again, off again, what we were shipping, where we were shipping. So that was a big challenge. And we are constantly thinking about that as we move forward, trying to understand what the future looks like with whether there's a USMCA in place or not. We happen to have our bin manufacturing equipment still available to us packaged up in Grand Island. And we are looking at all available options to ensure that we can be competitive on a North American basis in the storage business going forward. So I'll leave it at that, Steve. We're definitely considering what our options are going forward under a regime where it makes it difficult to participate in the U.S. business from our Canadian facility. Steven Hansen: Okay. Helpful. And just maybe one last one on a more positive note. I just wanted to go back to perhaps the green shoots in the portable business in the U.S. That was actually a pleasant surprise. And I know you've spoken to the order book improving. But I mean, are you seeing broad-based support there, Paul? I mean, how do you think about pricing? What do you think is driving that sort of earlier stage sales cycle? I'm just trying to get a sense for how real this improvement is out there because it has been the bigger drag for the past, frankly, two years. Paul Brisebois: Yes. Yes, absolutely. Good point. So 2024 was a challenging year for the U.S. portable business. We put in -- we had a lot of inventory, retail inventory. We put in programs -- rebate programs to support our dealers to help move product to the farm. And those rebate programs essentially went on for 14 months to really focus on it. We had all of our sales team focused on inventory counts to understand, and we typically do historical inventory counts of our retail network. So watching that closely was really critical for us. And what we saw was our inventory was coming down. And we saw in Q4 a good reduction of that retail inventory in the U.S. in particular, which facilitated better early order program. And I think the dealers themselves were pleasantly surprised with regards to the sales that they achieved in Q4, and that's why we saw a better early order program. And we just -- we had some market share information results that just came through. And we've been successful in terms of maintaining our share where we have large share and successful in gaining share where we had lower share of the business. So it's been positive the work that the team has done in a difficult market. And so just to wrap that up, U.S., it's coming around. Canada, obviously, was a big challenge, and that's why Q4 was impacted. And we see that we'll probably be in a position in Q4 of '26 where Canada feels the same thing in terms of coming around. And I guess, -- the goal and what we're working towards is that Q4 '26 shows marked improvement going forward into 2027. Operator: We have a follow-up from Michael Tupholme with TD Cowen. Michael Tupholme: Yes. So maybe just building on that last answer you provided, Paul. It does sound like you're sort of encouraged about some of the things you're seeing within Farm. I guess on a full year basis, anything further you can help us with in terms of how to think about from a top line perspective, progression of Farm and where that puts you at the end of the year on a year-over-year basis? And similarly, on the commercial side, just there seems to be sort of more moving pieces there and difficult comps. But you still do -- notwithstanding the fact that the order book is down, there's still some -- presumably some orders that come in or some activity, pardon me, on the commercial that flows in, in the first half of the year. So just anything on the top line you can help us with on the two segments beyond what you've already kind of provided would be helpful, if possible. That's the first one. I have one other one after that. Paul Brisebois: Yes. Difficult to kind of give any concrete numbers on that. So -- and not comfortable at this time really giving any guidance as it relates to top line or bottom line in terms of margin that we're doing. Our team really right now is just focused on simplifying our business, focusing on our customers, paying down debt, doing everything that we need to do to drive the business forward and want our team just to continue to focus on it. So I don't want to speculate on what the numbers could look like. Michael Tupholme: Okay. Understood. The second follow-up is just around the cost savings you expect, just to be clear. So the $20 million of annualized savings, does that kick in at that level of annualized savings beginning in the third quarter, so sort of $5 million a quarter starting in Q3. Is that how to think about this? Paul Brisebois: I think that would be a decent way to think about it. We're going to try and do things faster than that. But to be cautious on it, I would say, managing that through Q3 going forward is a good way to look at it. Michael Tupholme: Okay. And then -- sorry, just as an extension of that, like with everything you're doing now, if you go back to some of the past commentary around margins, I mean, this year, there was an expectation of some -- before today, there was some expectation even then about some things that would weigh on the margins a little bit, particularly the mix between farm and commercial. But I guess there have been some commentary about longer term, like an 18% to 20% EBITDA margin within the business. Does everything you're doing today allow you to get back to that plus something even higher? Or is the effort here just to kind of get back to even that kind of a level? Just trying to understand kind of the longer term and what all of these initiatives are likely to do as far as profitability. Paul Brisebois: Yes. It's a good question. We want to get back to historical margins. I would say getting to 20% is probably pretty difficult at this time. The changes that we're making are absolutely focused on improving our margin. But at this time, I think it's difficult to really say how long it will take to get back to higher teens. We'll see that over time in terms of the progression with regards to the strategy by simplifying our business, taking cost out of the business, getting closer to the customer. If that turns into driving more sales in a more efficient way, then obviously, we'll see some margin improvement. But right now, we're just targeting to get back to historical margins as the first point versus stretching ourselves in that 18% to 20% range. Operator: We have a follow-up from Tim Monachello with ATB Capital Markets. Tim Monachello: I've got a few, but they're quick. On the ERP cost savings for $20 million, how does that relate to -- I think you're looking for around $15 million per year of costs in '26, '27 related to that implementation, so roughly $30 million. So is that delta, the $10 million, I guess, cost that will be incurred to in-house some of the capabilities that you're thinking about that? James Rudyk: Yes. Thanks, Tim, for that clarifying thing. Yes. No, there's just some costs that we've incurred to date through the year that obviously need to be paid. And then there's just some wind-down costs. Tim Monachello: Okay. And that ERP, like anything that has been implemented to date that is useful? Or is everything getting rolled back and you're basically have to start from scratch on it? James Rudyk: We've learned a lot. I mean we have a big team that has been involved. We've learned a lot about processes that we need to follow, approaches that we need to follow. So a lot of knowledge that we benefited from that will be retained as we move forward. Tim Monachello: Okay. Within the restructuring initiatives, I don't see anything really that relates to capital spending. So can you talk a little bit about how you're thinking about CapEx this year and maybe next, where we should be thinking about that? Anywhere you can say about CapEx? Paul Brisebois: Yes, you bet. So obviously, maintenance CapEx is a priority across all of our facilities. And then as it relates to incremental CapEx beyond maintenance, we'll be looking at that through an ROIC lens and making decisions that make sense and drive our return on invested capital as much as possible. So we'll be keeping a close eye on it, and it will need to hit defined metrics to be able to get approval moving forward. Tim Monachello: Do you want to provide any guidance on what should be a range where we think CapEx will come in '26? James Rudyk: No. So still early days. I think if you look back at what we spend from a maintenance perspective and intangibles, those will be similar. And then from what we've categorized as a growth bucket, those will be limited. And as Paul mentioned, we're very aligned in terms of prioritizing what we spend on, and we'll only move forward on anything if the return on invested capital is greater than our WACC. Tim Monachello: Okay. And then the onetime costs of $20 million in H1 '26, should we expect that to be spread evenly in Q1, Q2? Or is that going to be front-end loaded? James Rudyk: Probably close. Tim Monachello: Okay. And then how are you guys thinking about the longer-term leverage target now? I think 2.5x is the old target. There are a lot of things in earnings we've seen lately, so it could be confusing. Is that still the range you're thinking of? Or are you thinking lower now? James Rudyk: No, still working to get to the end of that 2.5x as quickly as possible, a little detour in the last year. But as you can tell by the initiatives we put in place, massive focus on getting that down as quickly as possible. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Paul Brisebois for any closing remarks. Paul Brisebois: Thanks, Chloe. I appreciate it. Everyone, I just want to comment on -- obviously, a lot of change. Q4 was a difficult quarter. Q1, we believe, will be a difficult quarter as well. And as we do this change, I want to reiterate our focus areas. It is around simplifying the business, making our business more streamlined, empowering our employees across AGI to do good work and feel like they've been successful every day in their role when they come to work. And that's what the whole goal of our restructuring is around simplification. And that's to get closer to the customer. And so that's driving our customer focus. And the goal is that by the end of 2026, our customers tell us that we've substantially improved from our quote to delivery execution and improved our quality going forward. And if we accomplish that where we have employees that are engaged closer to our customers, customers that feel like we've been successful, then we'll achieve our goal with regards to cash flow and debt reduction. And the goal there would be that shareholders really see stabilized margin performance going forward, improved cash flow and tangible progress on our debt reduction. So I just want to be clear with those that are listening or that will listen later. That is our goal, and that's what the executive team here at AGI, eight of us are focused on as well as the broader employee group across AGI. So I want to thank all of our employees that are going through the change and looking forward to working with them in terms of achieving the goals that we've set out. Thank you, everyone. Operator: This brings a close to today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.
Eric Lakin: Good morning, everyone, and welcome to our full year results presentation for 2025. I'm Eric Lakin, CEO, and I'm joined today by our interim CFO, Richard Webb. Very happy to be with you all again for my first full year announcement at TT. 2025 has been a year of transition for TT Electronics. It was a year where we faced clear operational challenges, but also one in which we took swift action to address them. Our focus has been on restoring operational control, strengthening our balance sheet and creating a solid platform for future growth. While there is a lot of work still to do, I'm pleased that we have delivered a stable performance and we enter 2026 with a much stronger operational and financial foundation. Let's start with a look at the headlines for the year. Despite the macro headwinds we faced, we delivered results in line with expectations with momentum notably strengthened in the second half. We saw improved operating profit, margins and cash flow, driven by better execution and strict cost discipline across the group. Notably, our cash generation was very strong. We have significantly reduced our net debt and strengthened the balance sheet, which Richard will detail shortly. We have successfully restored operational control following the conclusive actions we took earlier in the year, particularly at the Plano and Cleveland sites, and I'll cover this in more detail later. Performance was mixed by region, but for clear reasons. Europe performed strongly, driven by structural growth in aerospace and defense. Meanwhile, North America materially improved, and we have ceased production at Plano, as we complete the closure of that site. Asia was impacted by softer macro driven demand in EMS, but we view the region as better positioned operationally as we enter 2026. The next slide breaks down the specific actions taken during the year to build the stronger platform. First, Plano, production is ceased and the site was closed according to plan. We saw a benefit in the second half from last time buy activity, but importantly, the closure removes a significant drag on our earnings going forward. Second, Cleveland optimization. We deployed specialist operational support to the site and results are clear. We have improved yield, productivity and customer service levels, including quality and on-time delivery. The site is now stabilized and on track to return to profitability, more on this shortly. Third, our components review. We conducted a strategic review, which concluded that the components business could potentially be worth more under different ownership. So we'll be testing that. We have separated its management to ensure more focus and oversight, and the Board is currently evaluating a value-led disposal process, but it is not a commitment to divest as it is subject to market conditions. This is a solid business. And with the changes implemented, we are confident that it will be a positive contributor to the group. And finally, balance sheet stability. Working capital discipline has materially improved, and we delivered strong cash conversion in part due to successful inventory reduction initiatives in 2025. This work culminated in a significantly reduced year-end net debt and leverage positions. Focusing specifically on our Cleveland site on the next slide. In 2025, we launched a business improvement project targeting operational performance with a focus on rework hours and productivity, and I'm pleased with the progress made. As the charts illustrate, we have seen sustained improvement with overall productivity levels now consistently above our higher target levels and rework much better than expectations. On-time delivery, yield and cost of poor quality have also all improved. Crucially, the Cleveland site is stabilized and its financial and operational performance has materially improved throughout the second half. There is still opportunity to drive further improvements and the current focus is on the sales growth from existing and new customers to utilize the capacity available and further absorb overheads. Turning now to our next phase. As we look to the year ahead, our focus shifts from stabilizing the business in 2025 to a more proactive agenda for value creation. On this slide, we have outlined the four clear priorities that will define this next phase. We have established a disciplined framework designed to drive sustainable growth and margin expansion built around four key pillars, which are: one, a realignment of the business to focus on divisions as opposed to regions. Two, a targeted cost reduction program, delivering material savings. As announced this morning, we expect to deliver approximately GBP 3 million of net benefit in 2026 and annualized savings of double this figure to deliver significant benefit in future years. Third, a sales transformation plan to upgrade our commercial capabilities. And fourth, portfolio optimization to improve synergies and margins across the group. I will take you through each of these in turn in more detail later. But for now, I will hand over to Richard who will talk you through our financial results. Richard Webb: Thank you, Eric, and good morning, everyone. I'll now take you through our 2025 financial results. Starting with our group performance. Against the backdrop of mixed market conditions, we have delivered a resilient financial performance that highlights the benefits of the operational actions Eric just outlined. Revenue and profit figures are presented on an organic basis. This reflects performance at a constant currency and with the impact of the quarter 1 2024 Project Albert divestment removed from the prior year comparative. Revenue for 2025 was GBP 481.4 million, down 2.7% organically, reflecting the strong growth in European Aerospace & Defense, which largely offsets the softer demand we saw in the EMS markets for North America and Asia. Despite the lower revenue, adjusted operating profit increased by 2.2% to GBP 37.2 million, demonstrating in large part the success of the turnaround actions undertaken in North America. Consequently, our adjusted operating margin expanded by 30 basis points to 7.7%. This margin progression was driven by the turnaround in North America gaining traction, continued progress in Europe and tighter cost controls across the group, more than offsetting the decline in Asia. Adjusted profit before tax is up 5.5% to GBP 28.7 million benefiting from the lower interest costs associated with our reduced debt levels. Adjusted EPS is 6.9p, down 37.3% year-on-year, reflecting the impacts of the higher effective tax rate of 57% as we cannot currently recognize a deferred tax asset for the U.S. On a normalized basis, if we had been able to recognize deferred tax assets, the adjusted effective tax rate would have been 25.4%, and the adjusted EPS would have been 12p. Finally, we significantly strengthened our balance sheet reducing leverage to 1.1x from the 1.8x this time last year, driven by net debt being reduced by almost GBP 30 million. Turning to the revenue bridge and focusing on the organic performance in the year. Europe was the standout performer, delivering robust growth. This was driven by sustained demand in aerospace and defense, where we're seeing structural shifts that are supportive to the business. This was offset by North America and Asia, where we faced volume reductions. In North America, the decline mainly reflects the EMS and components end market softness. In Asia, the reduction was primarily due to ongoing geopolitical uncertainty impacting customer order timing, particularly for the automation and electrification sector. Now turning to operating profit. The operating profit bridge tells a positive story of execution. Despite revenue headwinds, adjusted operating profit increased to GBP 37.2 million, up 2.2% year-on-year. Overall, we delivered GBP 0.8 million of net organic profit growth. This is the result of operational gearing in Europe, where higher volumes and favorable mix dropped through to profits and the turnaround actions in North America where the stabilization of Cleveland and the elimination of losses from Plano were critical. These actions allowed us to return the region to profitability in the second half. Plano, which was significantly loss-making in the first half, generated around GBP 3.5 million of profit from last-time-buys in half 2 and contributed approximately GBP 1 million to the group adjusted operating profit for the full year. Revenue at the site was GBP 13 million in 2025. Production ceased at the end of the year, and this contribution will not repeat in 2026. The progress in North America helped offset the impact of lower volumes and transition costs in Asia, where we have been investing to support the transfer of production from China to Malaysia. Now I'd like to focus on the balance sheet, which is the highlight of these results. We've delivered a strong cash performance this year. Free cash flow increased to GBP 29.9 million, up 7.9%. This was driven by a significant step-up in cash conversion, achieving 150% compared to 117% last year. The primary driver here was our disciplined focus on working capital, specifically inventory reduction. We have successfully executed inventory initiatives across the group, resulting in a GBP 14.8 million contribution to cash flow. When combined with the GBP 12.8 million inventory reduction in 2024, that reflects the very pleasing GBP 27.6 million reduction over the last 2 years. This strong cash generation has directly strengthened our financial position as we've reduced net debt by almost GBP 30 million to GBP 50.3 million and leverage down to 1.1x. Balance sheet discipline will continue to be a key focus. Earlier this month, we extended the expiry dates of our revolving credit facility to June 2028 and reduced the size from GBP 162 million to GBP 105 million. This facility is only drawn by GBP 10 million currently and in the next few months will be completely undrawn. Before I move into the regional performance, I will reiterate that from our next set of results, we'll be moving to a divisional reporting structure, which better reflects how we manage the business. This means a realignment away from regions into 3 clear divisions, Power, EMS and Components. Eric will talk about this in more detail shortly. And you can also find pro forma revenue and adjusted operating profit under this new structure for 2024 and 2025 in the appendix. Turning now to regional performance and starting with Europe. Europe performed well during the year, continuing to be a structural growth engine for the group. Revenue grew 7.4% organically to GBP 144.4 million, driven by our sustained demand in our aerospace and defense markets. Adjusted operating profit increased 13.9% to GBP 22.1 million, with strong operational leverage, expanding margins by 90 basis points to 15.3%. We are seeing strong order intake across A&D, and the trends are set to continue into 2026. Turning to North America. Revenue declined 3.7% organically to GBP 173.1 million. This reflects the volume reduction both at Cleveland and in the Components businesses. However, operational performance improved during the year and the region returned to profitability. Adjusted operating profit was GBP 1.2 million compared to a loss of GBP 2.7 million in the prior year. Margins recovered to 0.7%, a 220 basis point improvement. The operational turnaround was driven by 2 main factors. As Eric highlighted earlier, actions taken to stabilize Cleveland, improved yield, productivity and execution, materially reducing losses in the second half. In addition, production at the Plano site ceased at the end of '25, removing a structurally loss-making site from the group with last-time-buy activity, also supporting regional profitability during the year. We entered 2026 with a recent operational base in North America, which positions the business in this region for further improvement. And finally, to Asia. Revenue declined 9.2% organically to GBP 163.9 million. This was due to ongoing reduced demand from EMS customers in the health care and A&D sectors with continued geopolitical uncertainties, delaying customer ordering. Operating profit fell to GBP 21.6 million, with margins compressing to 13.2%. This performance reflects lower volumes and some transition costs as we transferred a major customer from our facility in China to Malaysia, which is now complete. Completing this transfer strengthens our resilience against geopolitical uncertainty, better positioning the region moving forward. On the next slide, we have broken down revenue by our end markets. Aerospace & Defense was the standout, growing 12% to GBP 152.8 million. This highlights our increasing exposure to structurally attractive markets where defense spending continues to rise. Automation & Electrification softened by 13%, reflecting the macro intrapolitical uncertainty that caused customers to be cautious with order placement. Healthcare was down modestly by 4.3%, primarily reflecting reduced U.S. research grants and funding though our pipeline in medical and life sciences is healthy, and this remains an attractive market for TT. Distribution declined 4.7%, which was expected as component demand continues to normalize post-COVID. Overall, the strong growth and positive structural trends we are seeing in aerospace and defense give us confidence. Whilst other end markets have not performed as well as we would have liked, this largely relates to macro-driven softness of demand. We entered 2026 in a better, more stable position. Thank you, everyone, and I'll now hand back to Eric. Eric Lakin: Thank you, Richard. I think we can all see there is an improving picture and a stronger financial base for TT. I will now return to the 4 priorities for our next phase before touching our customer base and finally, look at the outlook for 2026. First, our divisional realignment. As we have mentioned, from this year, we are shifting how we organize and present the business away from our current regional structure managed as Europe, North America and Asia, to a product-led divisional structure. The group will be aligned around 3 clear divisions, Power, EMS and Components. Why are we doing this? It aligns us better with our customers' capabilities and markets. It enables us to develop and deliver more coherent strategies aligned to divisions that have different technologies, characteristics and routes to market. It also creates clear accountability for product development, sales and planning. As part of this reorganization, we will devolve further responsibilities to the operating companies to enable a more agile business with faster decision-making being made by those closest to the customer. This also facilitates a simplification of the organization structure including an element of delayering and increasing the accountability of performance to the sites. As mentioned, pro forma divisional breakdowns are available in the appendix. Second is our cost reduction program. To support this leaner operating model, we have initiated a targeted cost reset to permanently reduce our structural overheads. We expect this program to deliver around GBP 5 million of gross benefits in FY 2026, which will be a net benefit of approximately GBP 3 million after implementation costs. Looking further out, we anticipate annualized savings to be around double this year's level. This is a program that directly supports our margin progression goals, and we will share more information as the year progresses. Third is sales transformation. We're upgrading our commercial capabilities and bench strength, particularly in North America and Asia, and investing in business development talent, tools and processes aimed at delivering improved pipeline, order intake and pricing discipline. In particular, there is a renewed focus on new customers and new product introductions with these activities already bearing fruit as there's been a significant increase in new business wins in recent months, especially in North America. And finally, portfolio optimization. And as a management team, we continue to review the group's portfolio on an ongoing basis to ensure it remains aligned with our strategic priorities and areas of competitive advantage. Our strategic review of the components business is now complete. The Board is actively evaluating a range of options, including a value-led disposal process. But as mentioned earlier, we are not committed to a sale. Our current focus is on improving margin quality and returning the business to being a value accretive part of the group. Looking further out, we have restarted early-stage prospecting activity for targeted strategic bolt-on acquisitions that strengthen our core capabilities and reach, especially in the power electronics sector in which we have developed a strong capability and market position. All in all, we see these 4 priorities as being key to the next stage of TT's growth and delivering value for all our stakeholders. I would like to spend a bit of time looking at some of our customer relationships. During my first year at TT, I've been able to see our client relationships in action and understanding the significance of these relationships gives me great confidence. We serve some of the world's most respective and demanding companies across our core markets. And these companies choose us because we operate in the mission-critical space. Whatever the requirement, our customers rely on TT for precision, reliability, engineering capability and production excellence. These are not transactional relationships. They are deep multiyear engineering partnerships we seek to solve customer needs typically in regulated markets for demanding specialist applications. This diverse blue-chip customer base provides us with resilience against market cycles and is a foundation upon which we will build our future growth. I want to highlight what one of our partnerships looks like in practice on the next slide. So Edwards is a customer we have supported for more than 15 years. They supply solutions to the semiconductor capital equipment market and we provide a full tier EMS solution spanning PCB assembly through to complex high-level assemblies and specialist testing for vacuum technology. They operate in a highly demanding sector where precision and reliability are nonnegotiable. By providing everything, from comprehensive test development support to supply chain transparency, we give Edwards the confidence to meet their own commitments. It is this level of deep rooted reliability that allows us to grow alongside our most specialist global clients. I recently met with the team at Edwards, and they conveyed the importance of our ongoing relationship to their success and the future growth of the business. As this example illustrates, our partnerships with customers go well beyond the supply vendor dynamic, and we are deeply integrated with their processes to help create value over the longer term. Finally, turning to outlook. TT enters 2026 on a firmer operational and financial footing. We have taken swift action to improve operational performance and are aligned on a clear strategy moving forward underpinned by the growing strength of our balance sheet. We have high exposure to the A&D market, which supports growth and margins across Europe and North America in what will now become a significant portion of our Power division. While we do expect some continued softness in EMS markets, I remain mindful of the ongoing geopolitical uncertainty. Our focus is firmly on what we can control. The operational and cost actions we have taken are expected to continue driving margin improvement and better execution across the group. The North America turnaround is now becoming a tailwind with losses in the first half turning to profits in the second half. The significant improvement in the region, together with the cessation of production at Plano, give us a cleaner, more stable earnings base moving forward. Cash generation also remains a key priority. We will continue to focus on working capital discipline and operational efficiency to support strong cash conversion. With leverage now reduced to 1.1x and our financing facilities extended, we have significantly strengthened the balance sheet and increased our financial flexibility. So we expect 2026 revenue and adjusted operating profit to be in line with current market consensus. And this reflects a more stable, higher quality and more resilient business following the actions taken during the year. 2026 is about consolidating the operational progress we have made, maintaining margin discipline and continuing strong cash generation as we build a stronger platform for a return to growth better placed to capitalize on opportunities as they appear. While there is still more work to do and the remain external factors and market uncertainties, we entered the year with a more focused business, a stronger financial position and the greater confidence in our ability to deliver further progress. So thank you very much for your time this morning. I hope you'll agree that this is an exciting time for TT, and we are looking forward to showing our progress moving forward. Richard and I are now very happy to take any further questions you might have. Mark Jones: Mark Davies Jones from Stifel. A few things, please. On the change in divisional structure, does that effectively get us back to where we were before the move to the regionals? Or is there a difference in what allocation you do between those divisions? And if you're devolving more responsibility to the operating units, are there implications for the divisional management teams? Are you retaining the current team and new people coming in? And then the other one is the step-up in sales investment. Does that consume some of the benefits of the cost savings plans? And what sort of investment financially does that involve? Eric Lakin: Thanks, Mark. I'll take those 3. The new divisions are very similar to but not identical to the previous divisions. I think there's a couple of differences. For example, Sheffield is power, not components as it was before. And Fairford is also power not part of EMS, which it was before or GMS in the previous name, but broadly similar. But the divisional structure we've got now is really designed to put all the sites with similar characteristics together. And so it's much more coherent. And the Components division is, therefore, what we've separately been running internally already, but without the Plano production. Mark Jones: So the whole scope of that is within the review. Eric Lakin: Correct. correct. And in terms of the impact of what was the regional teams, I mean, in fact, it's part of -- the cost reduction program is separate, but partly facilitated or enabled by the divisional reorganization. So for example, with the executive team, we've gone effectively from 4 regions, so 3 components to 3 divisions. So that's 4 to 3. And the divisional teams will be significantly smaller than what was previously regional teams. So there's that element of delayering. So it puts a point around putting more responsibility to the site teams and leaders. Much of the saving is around what was previously the group functional costs. So support, particularly in the sort of non-primary functions, supporting what was the regions and the teams, those responsibilities are covered affected by the sites, and so there's been a lot of reduction in that area. And then your... Mark Jones: The cost of the investment on the sales? Eric Lakin: Yes. So I think there is some net increase in cost for BD. It's really important that we don't -- with all the short-term benefits of cost cutting, we don't forget really, our mission is to grow the top line and drive profitable growth. There are some -- so I mean overall, the actual change in the business development function, including sales, commercial teams won't be materially different from prior year because we've also had some evolution of the sales team. So part of the sales transformation is a high-performance culture. And so as you expect in that culture of sales team, there will be some people coming in, some people going out. There'll be a net increase in head though. And so there'll be a modest absorption of some of the net savings, but it's quite small compared to the headline savings. And it certainly should pay for itself. Andrew Simms: It's Andrew Simms from Berenberg. Just a couple of questions around pricing initially. I mean you talked about sales transformation. It would be good to get maybe a little bit of a feel for where you're seeing the benefits of pricing coming through? Maybe some examples of how that's coming through there, that would be great. And then following on from that, in terms of new business, in terms of new logos as well, how should we think about gross margins and that business coming through, how that supports medium-term operating margin ambitions? Eric Lakin: Thanks, Andy. On pricing, there's 2 parts to it. It's existing contracts and new contracts. So with the former, we've done a review of a large customer and contract margins, in particular, around Cleveland. So we did customer product profitability analysis covering close to 100 different contracts and that was quite insightful. And that revealed really, so you can pareto these things, a handful of opportunities where the margins are not what we need or expect and some are very low in a couple of cases, actually negative. There's a legacy there and part of it is getting the right standard cost and rigor around bids. With the visibility we have in some of these cases, a contractual ability to increase prices with existing contracts, particularly in the aerospace and defense, we've got the right to have a transparent cost review and apply appropriate margin. So we've had 2 quite significant successful price negotiations and outcomes at the back of last year, which will have ongoing benefit this year. So that's been helpful. And it actually shows -- these aren't easy discussions to have, but the customer chose their value and need our ongoing support. Going forward, it's a point around sort of bid and pricing discipline. We've got a good -- a rigorous bid, no-bid structure in place. And so we make sure that we make the right decisions. And it's much about pushing the highest prices. For components, for example, we had a sort of a particular mandate, not accepting margins below x percent. And actually, we turned away some business that would have been contributing to our bottom line. So in some cases, by exception, we take a different view for certain contracts where it's making a positive contribution. You certainly want to cover at least all the variable costs, direct costs, and actually and get some scale and cover the overheads. So it depends on the circumstance. But overall, we're tracking that and there's a big important part of it. In terms of new logos and the impact on margin, I mean, it varies, I mean, particularly some EMS contracts. I mean overall, the margins will never be as high as, say, in other parts of the business. And you'll see that come through in the new divisional structure, and that is the nature of it. I mean you look at our peer groups, typically in EMS margins, and they're typically mid- to high single-digit percent. And as we get new logos, we're still pricing them to ensure we get profits from day 1. We're not doing any sort of cost entries. A couple of examples recently. We've got our first new logo in North America in agricultural drones, another one in data centers. And we are quite well aligned to meet their needs and make profits. There is business out there. We could win, but we'd lose money out. And we've been very disciplined to focus on profitable growth, not just top line. Alexandro da Silva O'Hanlon: Alex O'Hanlon from Panmure Liberum. Just a couple of questions from me. Firstly, just on the Cleveland productivity improvement. It's a good chart that you have in the deck, and you can see how that's progressed over the year. It's interesting to see that the improvement has tracked the, I guess, better targets throughout the year. Are we at the target level that you want to see now? Or is there further progress to go? And the second question is just on capital allocation. You mentioned the possibility for bolt-on acquisitions in the future. I was just wondering, on the dividend, what do you still want to see in terms of progress before you're reinstated? Eric Lakin: Thanks, Alex. In terms of productivity improvements, I mean, right, it's very pleasing when you implement initiative and you can see the evidence of that. And so productivity, I mean, the way we define it is, it's total hours spent on a product divided by total standard hours expected. And you're always going to have -- we set it at 75%, we're excess of that, which is good. I mean in practice, the way that is measured, you're always going to have some element of training time, vacation, what have us. So the similar measures of efficiency, and it's equivalent to that as more like 90% or so. So it's where we expect it to be. Could we push it harder? We're always trying to do more and more. And by getting higher productivity, that manifests itself improved profits by either having more capacity to do more or we can reduce headcount. So I think it's where I'd like it to be. I think if we're; going to sustain at that level, it'll be a good outcome because there's many other factors as well, including quality and the ability to also -- there could be a period where we have a slight impact. So we're bringing in new product introductions, and that has an impact as we get the standard costs delivered. And then in terms of capital allocation, I mean, look, a priority last year was absolutely a focus on balance sheet strength, resilience getting the gearing down and the refinancing. And Richard and team and Kirsty is here with us as well, Head of Tax and Treasury, done an excellent job resolving that. So it's nice to be getting these questions now. Looking forward, I think we're very mindful, obviously, a lot of uncertainty at the moment, are very mindful of maintaining a strong balance sheet. So the dividend position, the Board will continue to review that going forward, and we may well have an update at the interims and make sure we're making the right decisions in the medium to long term as well for shareholders. So I mean there's other options available, of course, whether it's share buybacks or acquisitions. On the acquisition point, it's too early. We need to be good stewards of the business, prove that being more reliable and consistent in our delivery against promises and prove we are a good owner of businesses. But it's also true cultivating targets can take a long time. So we're right to start that now. And there's definitely a runway of opportunities out there that could be additive to our business. So it partly depends on opportunities that arise and then we make the best decisions at the time. Mark Jones: Sorry, can I come back for one more, which is around the moving parts of this year and the guidance you're giving, because obviously, there's a lot of underlying progress. But the guidance you sort of stood behind this morning, the top end of that is flat year-on-year in profit terms and the bottom end of it is obviously a step down. So you've got a GBP 1 million headwind in terms of the full year contribution from Plano, you've got strong growth in Europe in the A&D business ongoing. You've got presumably better underlying performance in the U.S. we should have year-on-year, and we've done the big transfer in Asia. So can you talk through the other headwinds? Is it just volume in EMS? Eric Lakin: Yes, Richard, do you want to pick that one? Richard Webb: So one aspect is margins in Europe is now power. So there was -- there's some beneficial mix within 2025 that won't repeat in 2026. There will be some softening of power margins as we go into next year. But yes, the ongoing softness in EMS continues to be an area where we're being cautious for the 2026 outlook. That is the kind of primary driver of why you don't see 2026... Mark Jones: And it could be by end market within the... Eric Lakin: I mean I'd just add, big picture, there's obviously a lot of uncertainty. And it's too early to call what the impact would be with the current situation in Middle East. There's likely to be some level of inflationary impact. We've not yet seen any constraints on raw material and supply chain, but they might occur and they could have an impact. Obviously, we've got energy price rises, which could ultimately impact some of our fabrication costs, particularly where we use furnaces and so on. But it's early days. We don't know, and it's unclear what the impact would be in terms of customer demand patterns as well. But I think there's a broader caution around inflation and the impact of that on the business, which we're obviously taking countermeasures to that with the cost reduction. I mean, by division, the components business, we're two months in, so it's early, we're showing signs of good resilience, which is encouraging, but the lead times there are quite short, so we don't get the visibility of that division as we get for power or EMS. But in terms of end markets, we're seeing clearly ongoing strength in A&D. I think we have good growth in '25, I think sort of continued growth in '26. But we're not -- a lot of the very large contracts we won last year, a multiyear contract, so it's just temper enthusiasm we're talking. Single-digit growth in '26, not necessarily double digit. And look at the various markets across EMS. Health care remains somewhat subdued, and we're expecting, hopefully, to pick up towards the second half of the year, particularly around health care spend and that feeds into R&D and specific programs. Semiconductor CapEx is a very interesting one. That was down last year, which might be surprising, given the trend in that sector, but there's two elements to that. One, specifically to us, there was some additional safety stock ahead of the transition from Suzhou to Kuantan. So that had an impact year-on-year for '24 to '25. And actually, our customers who provide equipment for fabrication facilities. It's a little bit of a soft market because it's really about upgrade to new facilities rather than the production itself rate of semi chips. But we are seeing signs of improvement in that sector with the conversation we're having now with a couple of our customers encouraging. So we should see a pickup in that. Obviously, it starts with pipeline and then orders and then that feeds into revenue. So I'd be interested how that pans out through the course of this year. And then other general industrials, it's a mixed bag, whether you're looking at specialist industrials, rail and a number of other sectors we have we serve in EMS. It's sort of a mixed bag. But a key point around EMS because I think we would -- overall, we're not expecting to see growth in EMS this year. But this pivot to regional supply chains and moving and investing in regional and domestic sales is looking like it will pay off, particularly for China, regional sales. So we'll see, hopefully, as we progress that through the year, but we're sort of cautious at this point in the year. Kate Moy: We've got a question from online from Joel at Investec. Can you quantify the costs associated with the customer transfer from China to Malaysia impacting the APAC division? Is that process now complete? And are there any signs that the rate of APAC revenue decline is stabilizing or are you planning on it being lower in 2026? Eric Lakin: Do you want to cover the cost base? Richard Webb: Yes. So the overall cost was around about GBP 1 million to OpEx and then some limited CapEx investment as well, and that transfer is now complete. Eric Lakin: Thanks for your question, Joel. And I think it's complete. We've had success. It was a crucial project last year for a large customer and all of the first article inspections have gone through well. So we're now in the process of spinning up volume production. So that will be key next stage of that process this year. I think overall, we still expect for APAC region a reduction in the decline we saw in '25. So as I mentioned earlier, we're not expecting a return to growth this year because APAC is really driven by the EMS market. But we're seeing a level of stabilization as in anticipating a reduced decline this year. And crucially, the lead indicators we have is what does the order intake look like in pipeline to drive growth, certainly beyond this year and potentially see that coming through in the second half. But overall, we're being conservative around our forecast assumptions for '26. Kate Moy: Thank you. There are no further questions from the webcast. So over to you for any closing remarks. Eric Lakin: Okay. Well, look, thank you all for coming. It's good to see a full room. Thank you for your interest and time, and appreciate it, and look forward to seeing you all at the interims, if not before. So thanks very much. Have a good day.
Unknown Executive: Good morning, investors and analysts. Welcome to the 2025 Annual Results Announcement of China Oilfield Services Limited. On behalf of the company, I would like to thank you all for taking the time to attend. First, allow me to introduce the representatives from the Board of Directors and Management attending this event. They are Mr. Zhao Shunqiang, Chairman and CEO; Ms. Chiu Lai Kuen Susanna, Independent Nonexecutive Director; Mr. Sun Weizhou, Executive Vice President and Board Secretary; Mr. Qie Ji, CFO. China Oilfield Services is one of the world's largest integrated oilfield service providers, boasting a comprehensive service chain and a robust fleet of offshore oilfield service equipment as well as a well-established R&D system and service support system. The company focuses on 5 key development strategies: technology-driven, cost leadership, integration, internationalization and regional development. During the 14th 5-year plan period, the company has achieved continuous breakthroughs in key core technologies, significantly enhanced the profitability of its large-scale equipment and continuously strengthened its core competitiveness in oilfield services. The company remains committed to reestablishing its cost advantage and strengthening its cost control capabilities. It is dedicated to deepening its expertise in the marine energy resources sector, firmly upholding the philosophy of creating value for clients. COSL excels at integrating its operations into clients' value chains to generate added value, thereby enhancing clients' investment efficiency and returns. Today's event is divided into 2 parts. First, Mr. Qie Ji, CFO, will present the 2025 annual results and the company's future development outlook, followed by a Q&A session. We now invite Mr. Qie to take the floor. Ji Qie: [Foreign Language]. Unknown Executive: Thank you, Mr. Qie. We will now move on to the Q&A session. [Operator Instructions] The consecutive interpreter will provide interpretation between Chinese and English for both questions and answers. Please allow sufficient time for the interpreter. Thank you. Unknown Analyst: My question is about the Middle East. Right now, we are in the middle of Middle East conflict. So I would like to know how much impact or what kind of impact has that been on your Technology segment and on your Drilling segment? And before the conflict in the Middle East, how many rigs or platforms were operating in the Middle East? And how many of them have been suspended because of the conflict? Unknown Executive: Let me talk about our current operation and equipment being used in the Middle East. So we are now in basically 3 countries in the Middle East. First of all, in Iraq, we have 23 equipment for maintenance and also operations. And then in Saudi Arabia, we have 3 jack-up rigs or platforms; in Kuwait, 2 jack-up platforms. Regarding our 5 jack-up rigs or platforms, there has been no impact on their operations. That means that there is no suspension or no termination of the operation of this equipment. As regards in the landlord site, well, they are still making arrangement in relation to the work and operations, and they are also continuing their payments of fees as well. However, in Iraq, in relation to the repair and maintenance machines and equipment, because in Iraq, basically, the business is integrated business. And so there has been 3 equipment and machines being affected by the integrated equipment suspension. Unknown Analyst: So first of all, my question is, under the current situation about geopolitics, well, how do you see the oil price trend in the year 2026? And also, I would like to know, in these circumstances, so what will be some adjustments or changes to your development plan? Unknown Executive: I believe that the question or issue about oil price is a big issue. And in fact, we are not an expert in this area, but I can still share a couple of points in my opinion. So first of all, in relation to the demand and supply situation, right now, there is still an excess capacity, whereas demand is relatively weaker and softer. Under the influence of geopolitics, there is an imbalance or a lack of balance between demand and supply on a regional basis. And that has led to the volatility or changes in the oil price. But then the overall trend is not really changing. In the future, we are still cautiously optimistic, and we are not going to change our internationalization strategy as a result. And we believe that we will continue to benefit from the insights and experience that we have already accumulated from the previous 5-year plan period. Despite all the geopolitical changes and also fluctuations, so actually, this year, because of that oil price has been affected. So right now, we are in the process of war. We don't know how long this war will last, and we don't know how intense or how severe this war is going to turn out. But then, of course, no country would like to see a war happening. We believe that this war may not really take a very, very long time, but we actually can't tell when it is going to end. So definitely, our internationalization strategy as a whole will stay. But the trend of our internationalization will be subject to some impact, especially during the short term. But in the long term, the direction is going to remain the same. Unknown Analyst: My question is about the drilling rigs. Actually, we have seen that there is an increase in profitability. So I want to understand the reasons behind the profitability growth. And regarding the domestic as well as overseas profit in this segment, how much is the relative contribution from domestic and overseas business? And in the future, in the coming 1 year, what kind of breakthroughs can we expect in this particular business segment? Unknown Executive: Before I answer your question, I would like to share with you 3 big trends. First of all, we have seen acceleration of our internationalization strategy. So this is reflected quite clearly, if you refer to our revenue, our profit and also our management work and efficiency. And the second trend is that the increase in production within our country is continuing. So we have already completed the previous 7-year action plan, and very soon, we are going to see the coming 10-year plan, which is a new one. And we can see that there is strengthening of domestic supply and expansion. And the third trend is that during the 14th 5-year plan period, our company has been increasing utilization of large-scale equipment. And in fact, in the year 2025, all large-scale equipment have been put into use. In the year 2025, there were 2 M&A projects. The first one is between ADS and Shell, and the second one is Transocean and another company. So in relation to the rig and platform operation, we can see that the overall integrated capability and also bargaining power for the larger companies have increased. So it is getting more and more difficult for the smaller companies to survive well. So for the large contractors and companies, we can see that the profit margin is rising. However, for the smaller contractors, many of their rigs and platforms have been suspended. So during the 15th 5-year plan period in relation to large-scale equipment, we believe that it is in a tight balance situation. So we will put in more effort to acquire or integrate with the equipment of the smaller contractors. So in the future, we believe that the oil companies will see quite a lot of difficulties in relation to technical development resources as well as spatial development. So they really need the more competent contractors with more capabilities and expertise to be able to deliver professional and expert services to them. Unknown Analyst: The first question is about the Marine Support segment in relation to the vessels. So all along, it has been based on market -- marketized pricing mechanism. So is there going to be any change to this pricing mechanism? And what will be the trend in the daily rates? The next question is, under the current situation and concern regarding energy security, many big oil companies, including CNOOC, is expanding the work in terms of exploration. So when it comes to offshore oil fields, in the coming few years, how much will be your CapEx? And then the third question is, given the decline in your gearing ratio, in the future, are you going to increase dividend payout? Unknown Executive: So in fact, the questions that you have asked have touched upon the pain points in our operation. Regarding the pricing of vessels, this has been an old issue that has been dwelling for 10-odd years. Well, basically, this is a matter which both parties have to reach an agreement. During the 15th 5-year plan period, we have changed our strategies. And we are of the view that it is better to put higher requirements on ourselves than to making requests with other parties. So first of all, given the current tight condition between demand and supply of resources, what we need to do is to change the structure. So we want to change customer base structure and also the structure of market revenue. We need to also make sure that we can achieve precise asset and resource allocation, and then we have to continue our internationalization strategy. So these are some strategies and measures to tackle this issue. So we are using the certainty of our own work to solve the uncertainty condition in terms of pricing. And then we are also expanding our fleet. We keep on making adjustments to our overall structure, hoping that demand can be used to determine pricing relatively more. So in the future, we can anticipate that the energy autonomy will be a more and more important strategy and policy of our country. So every year, when it comes to consumption of oil, it amounted to 750 million to 760 million tonnes, of which 500 million tonnes are imported. So this is the current situation. Unknown Executive: Let me answer your third question concerning optimization of our debt and liabilities. Basically, we now see 3 major opportunities. First of all, there is a swap in terms of our total existing debt because some of our debts are going to expire. And then the second point is that there is right now a gradual decline in terms of the high interest rates of U.S. dollar. And for RMB, interest rate is relatively lower. So there is a difference -- an interest rate differential. And then thirdly, in terms of the currency mix, in the past, basically, it is mainly about expenses overseas. Because there were some M&As overseas, so foreign currencies were used for these transactions. And right now, actually, domestic expenses account for a bigger percentage. So that is also the third opportunity in relation to optimization of debt. So actually, starting from 2024, we have been making plans and preparation for debt optimization, because in June to July 2025, there was the expiry of USD 1 billion debt. And then actually in mid-March, we had already issued a RMB 5 billion debt at 1.95% interest rate for a tenure of 3 years. So overall speaking, we have decreased the scale of our debt, and financing cost is also coming down. So what we have to do is that we need to continue to reduce the scale of our debt and optimize the structure. During the 15th 5-year plan period, we are going to increase our investment into equipment. And we want to make sure that our gearing ratio will maintain stable and sustainable. So in terms of our debt and liabilities, we will make long term -- we are going to make arrangements by considering our overall long-term development. Regarding dividend, we have to consider the operational needs of our company, the company's future cash position in making decision. And then we also want to make sure that we can seize future development opportunities. But then if you look at our dividend payout in 2025, in fact, it is in a very good position. Unknown Analyst: So my first question is concerning exchange rate gain and loss. So in the second half of the year, there was quite a large impact arising from that. So what are the reasons behind? My second question is about your Technology segment. So in terms of the profit from this segment, so its share has been quite big all along. And last year, in the first half of the year, there was some change to that trend. Is there going to be -- or was there some improvement in the second half of the year? And in 2026, how much will be the profit margin? Unknown Executive: During the 14th 5-year plan period, we have been continuously increasing our R&D expenses, and we have strengthened our R&D system as well. If you look at our R&D expenses every year, for example, in 2021, the amount was RMB 1.6 billion. And last year, it had already risen to RMB 2.2 billion. So it accounted for 4% of our total revenue. And in fact, the input/output ratio in relation to our R&D expenses and investment has been increasing. In 2021, it was RMB 1 to RMB 2.5. In 2025, it was RMB 1 to RMB 3.1. Technology coverage in 2021, it was 59%. In 2025, 86%. So we are strengthening the overall strength of our Technology segment. In the 14th 5-year plan period, our revenue strength and also the contribution into total revenue and profit is also big and increasing. In 2025, from the Technology segment, it accounted for 55% of revenue and 72% of profit. For overseas business, during the 14th 5-year plan, the strength of our Technology segment has also been enhanced. So the contribution to both revenue and profit has risen. In 2021, it accounted for 14% of total overseas revenue, and in 2025, 24%. So if we look at the operating profit margin of the segment in 2025, it was 16%. We are better than other peers in the industry, even though there is some slight decline on a year-on-year basis. However, we also need to exclude the nonoperating gains and losses. So for actually most of the segments, we saw very stable, even slight increased trend with only the exception of the cementing segment. So at the end of last year, we won a contract with our Shenzi with a Thai petrol company. So the total contract value was USD 8 million. So this shows that our self-researched and developed technology has won international recognition. This is because of our R&D investment over the years as well as the work that we have done to strengthen our overall R&D system. Recently, perhaps you are also aware that we have also won a contract from the Kuwait National Petroleum Company. Total contract value was actually RMB 400 million in terms of contract value. So you can see that we have achieved breakthrough in different regions and also different countries with our Technology segment. Our Technology segment is such that our value has been released on a continuous basis and our strength has been improving. We have won more and more recognition from customers. In the future, with our 1+2+N market layout of our company, right now, in terms of our overseas business, we are in the 5 major continents in 13 countries, and we have 120 operation sites. So in terms of both profitability and also revenue and shareholder return, we are seeing future improvements. So in 2025, actually, we have seen fluctuations and volatility in the exchange rate of RMB. Last year, at the beginning of last year, it was in the range of around RMB 7.1. And then in April, it became RMB 7.4. Towards the end of the year, it was at RMB 6.8, RMB 6.9 roughly. So all these fluctuations have caused much impact to our exchange rate loss or gains. During the 14th 5-year plan period, for our exchange rate loss, it was relatively flat. In the year 2022 to 2023, in fact, there was a year when there was a big exchange rate gain, but then there was also another year with a big exchange rate loss. For our country, it is actually trying its best to maintain a reasonable range in relation to exchange rate fluctuations. And in the short run, we believe that there are challenges in terms of exchange rate gain or loss. But then in the long run, we are going to put in more effort to strengthen management of our exchange rate loss and gain and also enhance the position, overall speaking. There's only limited time, so I can only briefly give some explanation to the technical dimension of this question. So on one hand, within Mainland China, the expenses are mainly in RMB. But then when it comes to overseas business and also external payment, the usual habit is for USD to be used. So that's why we will be subject to impact from the fluctuations and volatility. So just now we answered a question about debt structure optimization. So last year, we increased our RMB debt and we used it to repay some of the high interest rate USD debt. As a result, the interest rate has come down because of this swap. Well, for USD debt, the interest rate was 4% and we changed that into RMB debt at an interest rate of 2%. So there is this interest rate differential. But then at the same time, there is also depreciation in interest rates. So these 2 movements are offsetting each other. Unknown Analyst: I have 2 questions. The first question is concerning your rig platforms. Utilization rate has been high. And then we know that there is a tight demand and supply situation concerning the semisubmersible rigs. So do you have any plan to build new semisubmersible rigs? My second question is related to the Technology segment. So we understand from the market that there is overseas development plan for this particular business segment. And now that there is the war and conflict in the Middle East region, so will this plan about achieving breakthrough in the Middle East be affected? Unknown Executive: So first of all, in relation to large-scale equipment, during the 14th 5-year plan, we have seen a rapid development stage. And then we believe that in the 15th 5-year plan, it would be in a tight balance or tight equilibrium position. So we are actually expediting our development and also R&D in this regard, hoping to achieve low-cost construction and highly efficient construction as well. So our principle is one of productization. So we are going to capitalize on our self-developed design, our own R&D, our self-construction in our platform and rig construction work. So we will make sure that we can come up with our own design and own research and development. And we believe that there are a few characteristics of the rigs and platforms that we develop and construct, namely that they are reliable, they are highly efficient, intensive and also there would be a high degree of integration. So we believe that we are able to make quite a lot of improvement in such a way that all such equipment construction work can be replicated and can be further promoted, so that they would be enough to support our future development for the coming 5-year plan period. Unknown Executive: So let me comment on our Technology segment. During the 14th 5-year plan period, we have seen changes in the overseas market. First of all, in terms of regions, we have newly added Uganda, Kuwait, Brazil, Canada and Thailand. And then in terms of customers that we serve, we have also acquired new customers, including Kuwait National Petrol, customers in Saudi Arabia, in France and also in the U.S. As I mentioned earlier, we are operating in the 5 major continents in 13 countries, and we have 120 operation sites. So we have already diversified our market and also our customer mix. This is also a good testimony that our technology and our management is well recognized by our customers. We are even better able to withstand and control risk. During the 14th 5-year plan period, especially at the beginning of that period, we have already established our 5 major strategies, of which the strategy about being technology-driven and also the strategy of integration have helped us enhance our overall competitiveness, especially in our overseas market and overseas development. So these 2 strategies have already accounted for 40% to 50% of our revenue in the 14th 5-year plan period. For these 2 strategies, integration and technology-driven, we have also diversified our businesses. And as a result, we have enhanced our overall competitiveness, and we are able to balance out market risk as well. So we are of the view that the war is going to be temporary in nature and also it is rather local in nature. And we will keep on diversifying our market as well as our customer base. Our direction of technology development is already very clear. Competitiveness is improving. With the market foundation, technology foundation and management foundation that we have already built, we believe that our future development is going to get better and better. Unknown Analyst: The first question is about the optimization of structure. So just now, we heard from your answers that especially for overseas business, there is now industrial integration. And during the 15th 5-year plan period, you are going to increase your equipment resources. So regarding this increase in equipment resources, I would like to know how you are going to do it. Are you going to consider new equipment resources within China or the mature equipment resources, or are you going to consider overseas M&A? I think this is related to the structure optimization between domestic and overseas that you have been talking about. And my next question is that your current business model is already different from your old past business model. You have already got the long-term agreement in place in the North Sea area, and the daily fee rates are sort of fixed. And is there any mechanism for the passing on of the oil price increase back to, for example, the oil companies and other companies, because in the past, costs have been controllable. But now that there has been a big surge in oil price, is there any way that you can pass on such oil price increase impact? Unknown Executive: During the 14th 5-year plan period, as we are increasing our large-scale equipment resources, basically, there are 4 methods for us to do that: leasing, self-construction, transfer, and purchase or acquisition. So right now, we are increasing our development in our internationalization strategy. And as mentioned earlier, the large-scale equipment capability within China is also rising. So earlier, I mentioned the tight balance between resource demand and supply. So we have already commented on the self-construction of equipment. And for the buy or purchase strategy, we will consider that when we see resources with high value for money. And for leasing, it has to be left for a later stage, because right now, we believe that we are going to increase our self-owned vessel fleet in order to support our future development and growth. As regards to the price, pass-through mechanism for North Sea, if such mechanism can be put in place, it is good. But then right now, we believe that our customers also encounter much difficulty. We have got the long-term agreement signed for the North Sea region. It is actually because of the energy management system, we are able to lower cost for the operators. And at the same time, we can enhance efficiency. So it is actually a win-win situation for both the operators as well as ourselves. So this is also one of our key competitiveness when we operate in this particular segment. Last year was the final year of the 14th 5-year plan period, and this year, we will see the start of the 15th 5-year plan period. During the 14th 5-year plan period, our integrated overall capability, our innovation capability and our management capabilities have improved significantly. And we have the confidence that we will be developed into a global energy resources and technology company. So we have a lot of courage and confidence in achieving this goal. During the 15th 5-year plan, we have actually got 4 main points in relation to our overall development. First of all, even though there has been some changes in our strategy, but then we have already consolidated and solidified many of our development strategies. So our future development is going to be centered around all these established strategies. So even though there is a lot of uncertainty in our development environment, but we will still be firmly adhering to our strategy. Secondly, we will rely on the drive from our technology and equipment products and services to continue our business development. The third point is that there would be some solidification and changes in our development methods and approaches. In the past, we focused a lot on the major elements input. And this is going to be changed into a knowledge-based approach. And then finally, we will deepen our reform. Many of our reform initiatives started in the 14th 5-year plan period. And in the 15th 5-year plan period, we are going to refine them. So under the leadership of our Board of Directors, we believe that we will see many friendly customers with very close relationship. We will be focusing on our core strategies and business segments. We will also center around our efficiency improvement and value improvement. So with all these, we believe that we can gradually develop ourselves into a first-rate global energy technology management company. Thank you all for spending time with us today. Unknown Executive: Thank you for all the questions and answers. Thank you, investors, friends for attending COSL's 2025 annual results announcement today. The company will continue to maintain communication with you through various channels. Today's session is now concluded. Should any investors wish to engage in further dialogue, please feel free to contact our IR team. We look forward to seeing you again next time. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Unknown Executive: Good morning, investors and analysts. Welcome to the 2025 Annual Results Announcement of China Oilfield Services Limited. On behalf of the company, I would like to thank you all for taking the time to attend. First, allow me to introduce the representatives from the Board of Directors and Management attending this event. They are Mr. Zhao Shunqiang, Chairman and CEO; Ms. Chiu Lai Kuen Susanna, Independent Nonexecutive Director; Mr. Sun Weizhou, Executive Vice President and Board Secretary; Mr. Qie Ji, CFO. China Oilfield Services is one of the world's largest integrated oilfield service providers, boasting a comprehensive service chain and a robust fleet of offshore oilfield service equipment as well as a well-established R&D system and service support system. The company focuses on 5 key development strategies: technology-driven, cost leadership, integration, internationalization and regional development. During the 14th 5-year plan period, the company has achieved continuous breakthroughs in key core technologies, significantly enhanced the profitability of its large-scale equipment and continuously strengthened its core competitiveness in oilfield services. The company remains committed to reestablishing its cost advantage and strengthening its cost control capabilities. It is dedicated to deepening its expertise in the marine energy resources sector, firmly upholding the philosophy of creating value for clients. COSL excels at integrating its operations into clients' value chains to generate added value, thereby enhancing clients' investment efficiency and returns. Today's event is divided into 2 parts. First, Mr. Qie Ji, CFO, will present the 2025 annual results and the company's future development outlook, followed by a Q&A session. We now invite Mr. Qie to take the floor. Ji Qie: [Foreign Language]. Unknown Executive: Thank you, Mr. Qie. We will now move on to the Q&A session. [Operator Instructions] The consecutive interpreter will provide interpretation between Chinese and English for both questions and answers. Please allow sufficient time for the interpreter. Thank you. Unknown Analyst: My question is about the Middle East. Right now, we are in the middle of Middle East conflict. So I would like to know how much impact or what kind of impact has that been on your Technology segment and on your Drilling segment? And before the conflict in the Middle East, how many rigs or platforms were operating in the Middle East? And how many of them have been suspended because of the conflict? Unknown Executive: Let me talk about our current operation and equipment being used in the Middle East. So we are now in basically 3 countries in the Middle East. First of all, in Iraq, we have 23 equipment for maintenance and also operations. And then in Saudi Arabia, we have 3 jack-up rigs or platforms; in Kuwait, 2 jack-up platforms. Regarding our 5 jack-up rigs or platforms, there has been no impact on their operations. That means that there is no suspension or no termination of the operation of this equipment. As regards in the landlord site, well, they are still making arrangement in relation to the work and operations, and they are also continuing their payments of fees as well. However, in Iraq, in relation to the repair and maintenance machines and equipment, because in Iraq, basically, the business is integrated business. And so there has been 3 equipment and machines being affected by the integrated equipment suspension. Unknown Analyst: So first of all, my question is, under the current situation about geopolitics, well, how do you see the oil price trend in the year 2026? And also, I would like to know, in these circumstances, so what will be some adjustments or changes to your development plan? Unknown Executive: I believe that the question or issue about oil price is a big issue. And in fact, we are not an expert in this area, but I can still share a couple of points in my opinion. So first of all, in relation to the demand and supply situation, right now, there is still an excess capacity, whereas demand is relatively weaker and softer. Under the influence of geopolitics, there is an imbalance or a lack of balance between demand and supply on a regional basis. And that has led to the volatility or changes in the oil price. But then the overall trend is not really changing. In the future, we are still cautiously optimistic, and we are not going to change our internationalization strategy as a result. And we believe that we will continue to benefit from the insights and experience that we have already accumulated from the previous 5-year plan period. Despite all the geopolitical changes and also fluctuations, so actually, this year, because of that oil price has been affected. So right now, we are in the process of war. We don't know how long this war will last, and we don't know how intense or how severe this war is going to turn out. But then, of course, no country would like to see a war happening. We believe that this war may not really take a very, very long time, but we actually can't tell when it is going to end. So definitely, our internationalization strategy as a whole will stay. But the trend of our internationalization will be subject to some impact, especially during the short term. But in the long term, the direction is going to remain the same. Unknown Analyst: My question is about the drilling rigs. Actually, we have seen that there is an increase in profitability. So I want to understand the reasons behind the profitability growth. And regarding the domestic as well as overseas profit in this segment, how much is the relative contribution from domestic and overseas business? And in the future, in the coming 1 year, what kind of breakthroughs can we expect in this particular business segment? Unknown Executive: Before I answer your question, I would like to share with you 3 big trends. First of all, we have seen acceleration of our internationalization strategy. So this is reflected quite clearly, if you refer to our revenue, our profit and also our management work and efficiency. And the second trend is that the increase in production within our country is continuing. So we have already completed the previous 7-year action plan, and very soon, we are going to see the coming 10-year plan, which is a new one. And we can see that there is strengthening of domestic supply and expansion. And the third trend is that during the 14th 5-year plan period, our company has been increasing utilization of large-scale equipment. And in fact, in the year 2025, all large-scale equipment have been put into use. In the year 2025, there were 2 M&A projects. The first one is between ADS and Shell, and the second one is Transocean and another company. So in relation to the rig and platform operation, we can see that the overall integrated capability and also bargaining power for the larger companies have increased. So it is getting more and more difficult for the smaller companies to survive well. So for the large contractors and companies, we can see that the profit margin is rising. However, for the smaller contractors, many of their rigs and platforms have been suspended. So during the 15th 5-year plan period in relation to large-scale equipment, we believe that it is in a tight balance situation. So we will put in more effort to acquire or integrate with the equipment of the smaller contractors. So in the future, we believe that the oil companies will see quite a lot of difficulties in relation to technical development resources as well as spatial development. So they really need the more competent contractors with more capabilities and expertise to be able to deliver professional and expert services to them. Unknown Analyst: The first question is about the Marine Support segment in relation to the vessels. So all along, it has been based on market -- marketized pricing mechanism. So is there going to be any change to this pricing mechanism? And what will be the trend in the daily rates? The next question is, under the current situation and concern regarding energy security, many big oil companies, including CNOOC, is expanding the work in terms of exploration. So when it comes to offshore oil fields, in the coming few years, how much will be your CapEx? And then the third question is, given the decline in your gearing ratio, in the future, are you going to increase dividend payout? Unknown Executive: So in fact, the questions that you have asked have touched upon the pain points in our operation. Regarding the pricing of vessels, this has been an old issue that has been dwelling for 10-odd years. Well, basically, this is a matter which both parties have to reach an agreement. During the 15th 5-year plan period, we have changed our strategies. And we are of the view that it is better to put higher requirements on ourselves than to making requests with other parties. So first of all, given the current tight condition between demand and supply of resources, what we need to do is to change the structure. So we want to change customer base structure and also the structure of market revenue. We need to also make sure that we can achieve precise asset and resource allocation, and then we have to continue our internationalization strategy. So these are some strategies and measures to tackle this issue. So we are using the certainty of our own work to solve the uncertainty condition in terms of pricing. And then we are also expanding our fleet. We keep on making adjustments to our overall structure, hoping that demand can be used to determine pricing relatively more. So in the future, we can anticipate that the energy autonomy will be a more and more important strategy and policy of our country. So every year, when it comes to consumption of oil, it amounted to 750 million to 760 million tonnes, of which 500 million tonnes are imported. So this is the current situation. Unknown Executive: Let me answer your third question concerning optimization of our debt and liabilities. Basically, we now see 3 major opportunities. First of all, there is a swap in terms of our total existing debt because some of our debts are going to expire. And then the second point is that there is right now a gradual decline in terms of the high interest rates of U.S. dollar. And for RMB, interest rate is relatively lower. So there is a difference -- an interest rate differential. And then thirdly, in terms of the currency mix, in the past, basically, it is mainly about expenses overseas. Because there were some M&As overseas, so foreign currencies were used for these transactions. And right now, actually, domestic expenses account for a bigger percentage. So that is also the third opportunity in relation to optimization of debt. So actually, starting from 2024, we have been making plans and preparation for debt optimization, because in June to July 2025, there was the expiry of USD 1 billion debt. And then actually in mid-March, we had already issued a RMB 5 billion debt at 1.95% interest rate for a tenure of 3 years. So overall speaking, we have decreased the scale of our debt, and financing cost is also coming down. So what we have to do is that we need to continue to reduce the scale of our debt and optimize the structure. During the 15th 5-year plan period, we are going to increase our investment into equipment. And we want to make sure that our gearing ratio will maintain stable and sustainable. So in terms of our debt and liabilities, we will make long term -- we are going to make arrangements by considering our overall long-term development. Regarding dividend, we have to consider the operational needs of our company, the company's future cash position in making decision. And then we also want to make sure that we can seize future development opportunities. But then if you look at our dividend payout in 2025, in fact, it is in a very good position. Unknown Analyst: So my first question is concerning exchange rate gain and loss. So in the second half of the year, there was quite a large impact arising from that. So what are the reasons behind? My second question is about your Technology segment. So in terms of the profit from this segment, so its share has been quite big all along. And last year, in the first half of the year, there was some change to that trend. Is there going to be -- or was there some improvement in the second half of the year? And in 2026, how much will be the profit margin? Unknown Executive: During the 14th 5-year plan period, we have been continuously increasing our R&D expenses, and we have strengthened our R&D system as well. If you look at our R&D expenses every year, for example, in 2021, the amount was RMB 1.6 billion. And last year, it had already risen to RMB 2.2 billion. So it accounted for 4% of our total revenue. And in fact, the input/output ratio in relation to our R&D expenses and investment has been increasing. In 2021, it was RMB 1 to RMB 2.5. In 2025, it was RMB 1 to RMB 3.1. Technology coverage in 2021, it was 59%. In 2025, 86%. So we are strengthening the overall strength of our Technology segment. In the 14th 5-year plan period, our revenue strength and also the contribution into total revenue and profit is also big and increasing. In 2025, from the Technology segment, it accounted for 55% of revenue and 72% of profit. For overseas business, during the 14th 5-year plan, the strength of our Technology segment has also been enhanced. So the contribution to both revenue and profit has risen. In 2021, it accounted for 14% of total overseas revenue, and in 2025, 24%. So if we look at the operating profit margin of the segment in 2025, it was 16%. We are better than other peers in the industry, even though there is some slight decline on a year-on-year basis. However, we also need to exclude the nonoperating gains and losses. So for actually most of the segments, we saw very stable, even slight increased trend with only the exception of the cementing segment. So at the end of last year, we won a contract with our Shenzi with a Thai petrol company. So the total contract value was USD 8 million. So this shows that our self-researched and developed technology has won international recognition. This is because of our R&D investment over the years as well as the work that we have done to strengthen our overall R&D system. Recently, perhaps you are also aware that we have also won a contract from the Kuwait National Petroleum Company. Total contract value was actually RMB 400 million in terms of contract value. So you can see that we have achieved breakthrough in different regions and also different countries with our Technology segment. Our Technology segment is such that our value has been released on a continuous basis and our strength has been improving. We have won more and more recognition from customers. In the future, with our 1+2+N market layout of our company, right now, in terms of our overseas business, we are in the 5 major continents in 13 countries, and we have 120 operation sites. So in terms of both profitability and also revenue and shareholder return, we are seeing future improvements. So in 2025, actually, we have seen fluctuations and volatility in the exchange rate of RMB. Last year, at the beginning of last year, it was in the range of around RMB 7.1. And then in April, it became RMB 7.4. Towards the end of the year, it was at RMB 6.8, RMB 6.9 roughly. So all these fluctuations have caused much impact to our exchange rate loss or gains. During the 14th 5-year plan period, for our exchange rate loss, it was relatively flat. In the year 2022 to 2023, in fact, there was a year when there was a big exchange rate gain, but then there was also another year with a big exchange rate loss. For our country, it is actually trying its best to maintain a reasonable range in relation to exchange rate fluctuations. And in the short run, we believe that there are challenges in terms of exchange rate gain or loss. But then in the long run, we are going to put in more effort to strengthen management of our exchange rate loss and gain and also enhance the position, overall speaking. There's only limited time, so I can only briefly give some explanation to the technical dimension of this question. So on one hand, within Mainland China, the expenses are mainly in RMB. But then when it comes to overseas business and also external payment, the usual habit is for USD to be used. So that's why we will be subject to impact from the fluctuations and volatility. So just now we answered a question about debt structure optimization. So last year, we increased our RMB debt and we used it to repay some of the high interest rate USD debt. As a result, the interest rate has come down because of this swap. Well, for USD debt, the interest rate was 4% and we changed that into RMB debt at an interest rate of 2%. So there is this interest rate differential. But then at the same time, there is also depreciation in interest rates. So these 2 movements are offsetting each other. Unknown Analyst: I have 2 questions. The first question is concerning your rig platforms. Utilization rate has been high. And then we know that there is a tight demand and supply situation concerning the semisubmersible rigs. So do you have any plan to build new semisubmersible rigs? My second question is related to the Technology segment. So we understand from the market that there is overseas development plan for this particular business segment. And now that there is the war and conflict in the Middle East region, so will this plan about achieving breakthrough in the Middle East be affected? Unknown Executive: So first of all, in relation to large-scale equipment, during the 14th 5-year plan, we have seen a rapid development stage. And then we believe that in the 15th 5-year plan, it would be in a tight balance or tight equilibrium position. So we are actually expediting our development and also R&D in this regard, hoping to achieve low-cost construction and highly efficient construction as well. So our principle is one of productization. So we are going to capitalize on our self-developed design, our own R&D, our self-construction in our platform and rig construction work. So we will make sure that we can come up with our own design and own research and development. And we believe that there are a few characteristics of the rigs and platforms that we develop and construct, namely that they are reliable, they are highly efficient, intensive and also there would be a high degree of integration. So we believe that we are able to make quite a lot of improvement in such a way that all such equipment construction work can be replicated and can be further promoted, so that they would be enough to support our future development for the coming 5-year plan period. Unknown Executive: So let me comment on our Technology segment. During the 14th 5-year plan period, we have seen changes in the overseas market. First of all, in terms of regions, we have newly added Uganda, Kuwait, Brazil, Canada and Thailand. And then in terms of customers that we serve, we have also acquired new customers, including Kuwait National Petrol, customers in Saudi Arabia, in France and also in the U.S. As I mentioned earlier, we are operating in the 5 major continents in 13 countries, and we have 120 operation sites. So we have already diversified our market and also our customer mix. This is also a good testimony that our technology and our management is well recognized by our customers. We are even better able to withstand and control risk. During the 14th 5-year plan period, especially at the beginning of that period, we have already established our 5 major strategies, of which the strategy about being technology-driven and also the strategy of integration have helped us enhance our overall competitiveness, especially in our overseas market and overseas development. So these 2 strategies have already accounted for 40% to 50% of our revenue in the 14th 5-year plan period. For these 2 strategies, integration and technology-driven, we have also diversified our businesses. And as a result, we have enhanced our overall competitiveness, and we are able to balance out market risk as well. So we are of the view that the war is going to be temporary in nature and also it is rather local in nature. And we will keep on diversifying our market as well as our customer base. Our direction of technology development is already very clear. Competitiveness is improving. With the market foundation, technology foundation and management foundation that we have already built, we believe that our future development is going to get better and better. Unknown Analyst: The first question is about the optimization of structure. So just now, we heard from your answers that especially for overseas business, there is now industrial integration. And during the 15th 5-year plan period, you are going to increase your equipment resources. So regarding this increase in equipment resources, I would like to know how you are going to do it. Are you going to consider new equipment resources within China or the mature equipment resources, or are you going to consider overseas M&A? I think this is related to the structure optimization between domestic and overseas that you have been talking about. And my next question is that your current business model is already different from your old past business model. You have already got the long-term agreement in place in the North Sea area, and the daily fee rates are sort of fixed. And is there any mechanism for the passing on of the oil price increase back to, for example, the oil companies and other companies, because in the past, costs have been controllable. But now that there has been a big surge in oil price, is there any way that you can pass on such oil price increase impact? Unknown Executive: During the 14th 5-year plan period, as we are increasing our large-scale equipment resources, basically, there are 4 methods for us to do that: leasing, self-construction, transfer, and purchase or acquisition. So right now, we are increasing our development in our internationalization strategy. And as mentioned earlier, the large-scale equipment capability within China is also rising. So earlier, I mentioned the tight balance between resource demand and supply. So we have already commented on the self-construction of equipment. And for the buy or purchase strategy, we will consider that when we see resources with high value for money. And for leasing, it has to be left for a later stage, because right now, we believe that we are going to increase our self-owned vessel fleet in order to support our future development and growth. As regards to the price, pass-through mechanism for North Sea, if such mechanism can be put in place, it is good. But then right now, we believe that our customers also encounter much difficulty. We have got the long-term agreement signed for the North Sea region. It is actually because of the energy management system, we are able to lower cost for the operators. And at the same time, we can enhance efficiency. So it is actually a win-win situation for both the operators as well as ourselves. So this is also one of our key competitiveness when we operate in this particular segment. Last year was the final year of the 14th 5-year plan period, and this year, we will see the start of the 15th 5-year plan period. During the 14th 5-year plan period, our integrated overall capability, our innovation capability and our management capabilities have improved significantly. And we have the confidence that we will be developed into a global energy resources and technology company. So we have a lot of courage and confidence in achieving this goal. During the 15th 5-year plan, we have actually got 4 main points in relation to our overall development. First of all, even though there has been some changes in our strategy, but then we have already consolidated and solidified many of our development strategies. So our future development is going to be centered around all these established strategies. So even though there is a lot of uncertainty in our development environment, but we will still be firmly adhering to our strategy. Secondly, we will rely on the drive from our technology and equipment products and services to continue our business development. The third point is that there would be some solidification and changes in our development methods and approaches. In the past, we focused a lot on the major elements input. And this is going to be changed into a knowledge-based approach. And then finally, we will deepen our reform. Many of our reform initiatives started in the 14th 5-year plan period. And in the 15th 5-year plan period, we are going to refine them. So under the leadership of our Board of Directors, we believe that we will see many friendly customers with very close relationship. We will be focusing on our core strategies and business segments. We will also center around our efficiency improvement and value improvement. So with all these, we believe that we can gradually develop ourselves into a first-rate global energy technology management company. Thank you all for spending time with us today. Unknown Executive: Thank you for all the questions and answers. Thank you, investors, friends for attending COSL's 2025 annual results announcement today. The company will continue to maintain communication with you through various channels. Today's session is now concluded. Should any investors wish to engage in further dialogue, please feel free to contact our IR team. We look forward to seeing you again next time. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help you. Thank you for your continued patience. Your meeting will begin shortly. Any member of our team will be happy to help you. Operator: Good morning, and welcome to Paychex, Inc.'s third quarter fiscal 2026 earnings call. Participating on the call today are John B. Gibson and Robert Lewis Schrader. Following the speakers’ prepared remarks, then the number 1 on your telephone keypad. If you would like to withdraw your question, please press 2 on your telephone keypad. As a reminder, this conference is being recorded. Your participation implies consent to our recording of this call. I would now like to turn the call over to Robert Lewis Schrader, Paychex, Inc.'s Chief Financial Officer. Robert Lewis Schrader: Thank you for joining us to discuss Paychex, Inc.'s third quarter fiscal 2026 results. Our earnings release and presentation are available on our Investor Relations website and we plan to file our Form 10-Q within a couple of business days. This call is being webcast live and will be available for replay on our Investor Relations portal. Today’s call includes forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ from our current expectations. We will also reference non-GAAP financial measures. A description of these items, along with the reconciliation of non-GAAP measures, can be found in our earnings release. I would now like to turn the call over to John B. Gibson, Paychex, Inc.'s President and CEO. John B. Gibson: Thanks, Bob. Hello, everyone. I will cover this quarter's operational highlights, and Bob will come back and discuss our financial results and outlook, and then we will open it up for your questions. We delivered a strong quarter with revenue up 20% and adjusted operating income up 22% year over year, driven by effective execution and progress advancing our strategic priorities, most notably the Paycor integration and acceleration of our transformational AI initiatives. In this very dynamic environment, financial strength is important, and our free cash flow generation continues to be robust, as Bob will highlight later. Amid a dynamic macro backdrop, our clients’ workforce levels remained stable, supported by our solutions that help manage costs and source talent in a tight labor market. In a highly regulated industry, our compliance depth, advisory expertise, and award-winning platforms provide a clear competitive advantage in navigating a constantly changing and complex regulatory environment. As we embed AI into our expert-enabled technology, we are strengthening that advantage by leveraging our vast data to scale our expertise, enhance productivity, and elevate client outcomes. As you all know, we operate in HR, benefits, and payroll, some of the most mission-critical aspects of a business. And we are honored that 800,000 clients rely on us for trusted support and advice. For many of our clients, we effectively serve as their HR department, managing a foundational part of their business. Their people. Errors paying employees, withholding taxes, and administrating benefits carry significant regulatory and reputational risk, driving demand for trusted compliance solutions where accuracy matters most. Demand for our comprehensive advisory and benefit solutions remains strong, differentiating us from the tech-only providers. Clients are increasingly turning to our HR professionals for strategic advisory expertise and assistance over routine transactional support. Robust revenue growth in retirement, ASO, and PEO highlights the durability of our model and reinforces our expectations of a long secular growth runway for these businesses. Our ASO and PEO worksite employee growth continues to outpace the industry, reflecting our value in navigating regulatory complexity and ensuring compliance, often for clients with no or, as I said, limited HR support. Our PEO business remains strong with high-single-digit worksite employee growth, driven by robust demand and record retention rates. Our PEO solution empowers small businesses to offer competitive benefit packages on par with Fortune 500 companies, aiding talent attraction and retention in a tight labor market. January enrollment in our at-risk 40 MPP medical plan went well and in line with our expectations, helping drive sequential revenue growth. We received positive feedback on the new AI-driven benefits intelligence we embedded in the enrollment workflow this year. It leverages employee-specific data to recommend plan choices and streamline benefits selection. We continue extending our SMB benefit leadership with Paychex Perks, our award-winning digital marketplace offering affordable, transferable benefits to our clients’ employees. Perks is a compelling growth opportunity that empowers our clients to offer meaningful benefits with no added cost to the employer or administrative burden. In the first 18 months, Perks has grown to over 25 benefit offerings, with purchases from nearly 350,000 unique employees, creating a direct end-user relationship with portable benefits that they can keep if they change employers. By bringing enterprise-level benefits down market, we are enabling our clients to better compete for talent and addressing a historically underserved market. The Paycor integration continues to progress well. We remain on track to exceed our fiscal 2026 synergy targets we discussed last quarter. Leading indicators such as bookings and broker referrals have reaccelerated to pre-acquisition levels, and we are adding sales headcount to capture the demand we see. We are gaining momentum cross-selling Paychex, Inc. ASO, PEO, and Retirement Solutions to Paycor's clients, and we continue to win larger-than-expected ASO deals and broker-referred PEO opportunities. This momentum reflects the hard work and alignment of our teams and positions us well going into fiscal year 2027. Our Paychex Flex and Paycor platforms were recognized as industry-leading HCM solutions with two 2026 Lighthouse Tech Awards. This achievement underscores our commitment to empowering businesses with modern AI-powered solutions that simplify HR processes and drive business outcomes. Integral to our growth strategy, we continue to accelerate embedding AI into our workflows. This amplifies our expertise with human-in-the-loop oversight and strong governance. We now have over 500 AI-powered capabilities and agents that can drive higher productivity and smarter decisions and outcomes. Our generative AI-powered employment law and compliance platform processed tens of thousands of inquiries this quarter, helping clients and Paychex, Inc. HR experts navigate complex and always-changing wage and employment law. Internally, we are expanding AI use cases to enhance the client experience and sales effectiveness. Following successful pilots last quarter, we are scaling the use of our voice and email agents for payroll processing, enabling service teams to focus on proactive higher-value advisory support. We also expanded our agentic AI sales and service tools to the entire sales team with a goal to drive revenue growth and efficiency. AI agents orchestrated real-time information across service and product systems, equipping thousands of service personnel to support clients more effectively. This agent swarm architecture really removes prior friction and serves as a foundational capability to future agentic developments. Our strategic AI investments are bolstering our leadership in HCM innovation. We are moving from insight and efficiency tools to proactive agents that leverage our vast and growing dataset to complete work to drive business success. Payroll and HR, as we know, are mission critical and highly regulated functions where accuracy and compliance matter more than automation alone. We believe Paychex, Inc.'s proprietary payroll data, regulatory expertise, and advisory relationships create a sustainable advantage that will enable us to responsibly embed AI into our solutions while maintaining a durable competitive moat. In our business, trust is critical. It is not just what you do, but how you do it that matters to prospects, clients, partners, employees, and key stakeholders. That is why I am proud that Paychex, Inc. was once again named one of the World’s Most Ethical Companies by Ethisphere for the eighteenth time. This rare achievement highlights our unwavering commitment to ethical operations and corporate responsibility. Supporting communities is also integral to our identity, and I am pleased that Paychex, Inc. was recognized as a leading corporate partner by United Way Worldwide, reflecting our commitment to making a positive impact where we live and work. Lastly, I would like to thank our team for the exceptional hard work during this busy year-end season and through a very, very challenging year of integration. The work that they have done to support our clients to come together is truly exceptional and I think really is positioning us well as we move into fiscal year 2027. I will now turn the call over to Bob to discuss our financial results and outlook. Robert Lewis Schrader: Thank you, John. I will start with our third quarter financial results, then provide an update on our outlook. Total revenue increased 20% over the prior year to $1.8 billion. This represents an acceleration in the organic growth of the business relative to the first half of the year. Management Solutions revenue grew 23% to $1.4 billion driven by product penetration and price realization. Paycor contributed approximately 19 percentage points to growth. PEO and Insurance Solutions revenue increased 9% to $398 million, driven primarily by strong growth in the number of average PEO worksite employees as well as an increase in PEO insurance revenues. Interest on funds held for clients increased 33% to $57 million, largely due to the addition of Paycor balances. Total expenses increased 24% to just over $1.0 billion, primarily driven by the Paycor acquisition. Excluding Paycor, we estimate that expenses grew in the low single digits during the quarter. Operating income margin was 43.8%, and adjusted operating income margins increased approximately 80 basis points to 47.7% driven by increased productivity and cost discipline while increasing our investments in AI. Diluted earnings per share increased 9% to $1.56 per share, and adjusted diluted earnings per share increased 15% to $1.71 per share. Our financial position remains strong with cash, restricted cash, and total corporate investments of $1.8 billion and total borrowings of approximately $5.0 billion as of the quarter close. Our cash flow generation continues to be a strength of our model. Operating cash flows were nearly $2.0 billion year to date, and our free cash flows increased 27% year over year. After the quarter closed, we repaid the initial $400 million tranche of debt from our Oasis acquisition that matured in March. Our recent $1.0 billion stock repurchase authorization underscores our commitment to delivering long-term shareholder value. We returned $463 million this quarter and over $1.5 billion year to date to shareholders in the form of cash dividends and share buybacks, and our 12-month rolling return on equity remains robust at 41%. Shifting to our guidance for FY 2026, which is based on current market conditions, we reaffirm our prior fiscal 2026 outlook except for raising our interest on funds held for client expectations. Interest on funds held for clients is now expected to be in the range of $200 million to $210 million. All other guidance metrics remain unchanged. Turning to the fourth quarter to provide you a little bit of color, we would anticipate fourth quarter growth to be approximately 12% with an adjusted operating margin of 41% to 42%. The fourth quarter growth rate reflects a couple of dynamics. First and foremost, I think most of you know we anniversary the Paycor acquisition during the quarter, and to a lesser extent Q3 benefited modestly from the timing of certain items relative to Q4. However, our second half outlook remains consistent with our expectations and the organic revenue growth acceleration we saw in Q3. We believe Paychex, Inc. has never been better positioned to succeed in the AI era of HCM to deliver shareholder value. Our business fundamentals remain strong. As the best operators, we have unrivaled operating and free cash flow margins with an opportunity for further expansion. Our financial strength and the durability of our business model are evident in our consistent performance as a Rule of 50 company. We are committed to returning capital to shareholders and confident in our ability to deliver sustained value through continued revenue and earnings growth. I will now turn the call back over to John for questions. John B. Gibson: Thank you, Bob. We will now open the call to questions. Operator: Thank you. If you would like to ask a question, press 1. To leave the queue at any time, press 2. We do ask that you limit yourself to one question and one follow-up. Once again, that is 1 to ask a question. And our first question comes from Bryan C. Bergin with TD Cowen. Your line is now open. Please go ahead. Bryan C. Bergin: Hi, guys. Good morning. Thank you. Bob, can you put some finer points, just first on the level of organic growth in the third quarter and then bridge that forward to your commentary on the fourth quarter. If you can kind of unpack that 12% growth across the business, I think that would help. Robert Lewis Schrader: Yeah. Bryan, I think consistently, even if you go back to Q4 of last year, the organic growth of the business has been a bit weaker. I think a lot of that had to do with comparability issues, particularly in the PEO business with our MPP plan in Florida. But if you go back to Q4 of last year, I think we have seen sequential improvement each quarter in the organic growth of the business. So if you look at first half total revenue organic growth, it was roughly 4% and that improved from Q1 to Q2. And then when you look at the back half, whether it is Q3 or Q4 combined, we would expect it accelerated in Q3, and we would expect to see similar organic growth performance in Q4. And so you are now getting to a back half organic growth rate that is closer to 6%. And then when you put the two of those together, it is roughly 5% on a full-year basis. And so again, I think there are a couple drivers of it. One, to be fair, is the easier compare on the PEO business. I mean, I think you will see that the headline PEO number sequentially went from 6% last quarter to 9%. There are some timing things there, but there is certainly a strength in the underlying operating performance of the business, particularly in the PEO, and we can get into that probably in maybe some later questions. But we did anniversary the headwind from the MPP enrollment. So that is why you are definitely seeing the combination of an easier compare and stronger operating performance driving accelerated organic growth in the back half of the year. Bryan C. Bergin: Okay. As far as the 4Q exit rates that are implied, as we think forward into fiscal 2027, any important considerations that you want to share? Robert Lewis Schrader: Yeah. I will maybe head off the question that I am probably going to get. As it relates to next year and guidance, we are in the early stages, I would tell you, of our operating plan and are going to finalize that over the next six to eight weeks. And I know we kind of established a precedent coming out of COVID in providing maybe some more details around what we were thinking for the year. I think we needed to do that given some of the uncertainty in the environment back then. Our preference now is to build the plan, come out in Q4 like we historically did and consistent with what our competitors do, and provide guidance at that point in time. That being said, we obviously have visibility to what is out there in the models and FactSet. And when I look at that, I really do not see any reason that I need to steer you in one direction or another. I am fairly comfortable with what is out there. And I think, Bryan, what you will see is the organic growth rate, whether it is Q3 or Q4—we are really looking at the back half because there are some timing differences, particularly in the PEO, between Q3 and Q4—when we look at the organic growth rate in the back half of this year, it pretty much aligns with what is assumed from a consensus standpoint for next year. Operator: Thank you. And we will take our next question from Mark Steven Marcon with Baird. Your line is now open. Mark Steven Marcon: Thanks for taking my questions, and nice performance this quarter. I am wondering if you could talk about a couple of things. One, you did mention that Paycor was seeing new broker engagements or a renewal of some of the broker engagements and that pipeline. I was just wondering if you could talk about new sales, generally speaking, during the core selling season. What did you end up seeing this year, and how would you describe the competitive environment, win rates, etc.? John B. Gibson: Hey, Mark. This is John. I would say the competitive environment is stable and the same. It is competitive. I would not say I have seen much change there. From a sales perspective, I am very pleased with our performance in Q3, not only in line with our expectations but, quite frankly, we were accelerating PAR and bookings growth in the third quarter. And we have kind of seen that sequentially as we come out of the disruption, as you know, at the start of the year with the integration of teams, continuing to grow there. PEO, double-digit bookings; Paycor, double-digit bookings as well. We actually see bookings in the PAR referral continuing to accelerate back to pre-acquisition levels. We are actually adding headcount in the enterprise space. Again, remember, Paycor for us is a brand for the enterprise market, 100 plus, and we think that is a great opportunity for our HR outsourcing services as well as technology solutions. And so we are going to continue to go after that as well. So we continue to gain momentum, I think, across the board, and we feel good about where we are positioned going into 2027, both in terms of our competitive positioning and our headcount. And I think you really look at it. We are entering 2027 with all of the integration work behind us that we did early in the beginning of this fiscal year, and we are entering with not only an aligned team, but really the most comprehensive and, I think, flexible and innovative set of solutions in the marketplace, and so I feel good about where we are. Mark Steven Marcon: That is great to hear. And then I thought the gross margin performance was particularly impressive. You know, when we take a look before defining gross margin as revenue minus the direct costs, and part of that was obviously the higher interest income off of the float. But beyond that, it looks like it is doing extremely well. How much of that is related to some of the AI initiatives that you have put in place in terms of embedding AI across your service infrastructure and making them more productive versus, you know, other initiatives that you put in place in terms of perhaps shifting some of your costs to lower-cost labor markets like India, and how much more can we do there? Because it has been fairly impressive. I am wondering if this is basically setting us up for, you know, continued margin expansion for multiple years. John B. Gibson: Mark, I think that we have a long track record of being able to drive, as the best operators, margin expansion as we grow revenue in the business. And I think you are going to continue to see that. We use every lever imaginable to do that. I think that when you look at AI, as you know, we have been using AI in predecessor-type models for many, many years, since I have been here. And now with this new technology that almost every day something new is coming out, what we are seeing is pretty impressive. It is pretty incredible. Some of the things we are doing in terms of generative AI models, which we have now released to scale after the pilots—doing voice payroll, doing email payrolls. What we are seeing early stages in our beta groups in sales using our sales guru tool and what we are seeing from a service perspective. So I feel good about what the opportunities are. Look, if we grow the top line, we are going to be able to grow margins and expand margins over time. Then when you look at these new tools that we can put in our arsenal, as the best operator I really feel good about where we are. And I would say that on 2027, we are just getting in. That is a big debate right now. I think that is the big question—how do you begin to quantify the real positive impact from sales productivity, the way we are using it in marketing, what the potential is from a service perspective. So I can assure you we are going to have some very lively discussions next week during our planning sessions about exactly the potential that this technology has both to drive the top line but also to continue to expand margins. So I think there is more room ahead. And every year, something new comes out. And we are innovators in that regard. We are going to grab every tool we can to continue to drive efficiency. Thank you. Operator: We will go next to Tien-Tsin Huang with JPMorgan. Your line is now open. Tien-Tsin Huang: Hey, thanks. Hi, John and Bob. I wanted to ask on the advisory work that you talked a little bit about. I think that is probably underappreciated in terms of what Paychex, Inc. does there. How AI-proof is the advisory side of the business? You know, because I get the question quite a bit that, you know, can rules-based advice from AI come in and supplant what Paychex, Inc. does on the advisory side? But I am guessing that a lot of your advisory work is centered around compliance and very complex data issues that only Paychex, Inc. has. Can you maybe elaborate on that? John B. Gibson: Yeah. Look, Tien-Tsin, I think this is something I think is extremely interesting for people to understand. For the vast majority of our clients, we are their HR department. Right? So not only do we provide them the advice, we literally are talking to them and holding their hand when they are making some of these decisions and supporting them. You look at our PEO, the most comprehensive part of our model, we are actually in a co-employment arrangement. We are actually helping represent them and deal with their employee situations, which are numerous, I may add, in today’s world. And so we are actually doing so much more that there is no way that I think technology is going to replace that, at least that I see in the short term. Now to your point, we actually own the patent on using agentic AI in a mesh form and structured and unstructured data to answer HR and compliance status. Why is that? Because we have a huge compliance regulatory team that is constantly keeping that system up to date. What I will tell you is the changes in Akron, Ohio are not automated. Someone has to go onto Akron’s website, has to look at it, has to interpret it, has to watch what is going on in Ohio courts to understand how it is being interpreted, and then put that into a system to be able to respond to a client who is asking a question about whether or not they can terminate a client in Akron, Ohio or not. So I think that part of it—both the AI-embedded tools, now we have actually launched those tools inside of our HR generalists—we are actually seeing pretty significant productivity improvements since we have done that. Our clients—we are embedding that into our platforms so our clients can gain access to that. I think that is going to drive more efficiency. But at the bottom line, for most of our clients, and increasingly upmarket, we are becoming the HR department and HR partner for helping people manage people. So as long as our clients have people, they are going to need Paychex, Inc. holding their hand and helping them understand how to work with those people, in my opinion. Tien-Tsin Huang: Yeah. Well, I will say your opinion is very important, John. That is why I am asking. And so thank you for going through that. Maybe just as a follow-up, thinking about these agents as they get deployed and, as you said, the proprietary data that you have, does this get monetized through your normal way—pricing that you typically would put through in the spring—or do you think of this as a new monetizable opportunity for Paychex, Inc.? John B. Gibson: Well, I think we have been monetizing our data and providing insight going back to the early days. We won the 2022 best use of AI in HCM with our retention insights. That was before all this AI madness fell us. And the fact of the matter is that we have been doing that. We monetize that with our clients and actually provide them insights about how to retain their clients. I think what you are seeing today is we are applying it into our products and services to improve the user experience. We are putting it in there to be able to improve insights that we can provide in other areas such as benefits. We mentioned what we are doing in the PEO, which was just phenomenal—the way the tool helped advise clients’ employees on what benefits package was right for them. So I think you are going to continue to see us use it to really drive better outcomes. And you made a critical point. In order for AI to work, you have to have a large, robust dataset. And the other thing that we have learned, particularly when we are building the agentic AI models for payroll, you had to have a constantly moving set of data. And so the way I look at it is this flywheel effect. Now that we are capturing every interaction that we have from an HR, payroll, and compliance perspective with our clients through every form of communication, every interaction we have with them or one of their employees adds to our dataset. And with our tools constantly looking and doing the analysis around what are common trends, we are getting more insights. And those insights are allowing us to be more proactive with our clients. So as the transactional work gets automated, it frees up our time to be able to gain more insights, and then the system is proactively giving our HRGs a list of insights that they can then call clients and make recommendations on, whether that is compensation, whether that is retention, whether that is workplace trends that we are seeing in specific geographies that they need to be aware of. So I think it is just going to continue to improve the value that we have, and I think it is also going to improve the outcomes that our clients see. Operator: Thank you. We will move next to Brian Keane with Citi. Your line is now open. Brian Keane: Yeah. Hi. Good morning. Was hoping you guys could just talk a little bit about the strength of PEO insurance. It jumped above the range at 9%. Can you talk a little bit about some of the drivers and some of the sustainability as we head into the fourth quarter? Robert Lewis Schrader: Yes. Maybe I will start and then John can add some color. I think it is twofold, Brian, as I alluded to earlier. Think strength in the underlying operating performance of the business. So we saw double-digit demand for PEO. We continue to see record WSE retention in PEO. We saw high-single-digit worksite employee growth. You know, this business is all about worksite employees, and we continue to outpace the competitors in that space with our ability to drive worksite employee growth. So the underlying operating performance is strong. January is the big annual enrollment, so we anniversary two things. We anniversary the tougher compares from the prior year when MPP was down. We got through that annual enrollment. And I would tell you, enrollment in our MPP is up modestly. So you have an easier compare, we drove the enrollment. And then when you zoom out a little bit, and you look at medical enrollment across all the PEO—not just the at-risk business in Florida, but across the entire PEO space—our medical enrollment was up high-single digits, near double digits, as we went through this annual enrollment period. And I think that is the strength of the PEO value proposition: the ability for us to offer to our small business clients the ability to offer medical insurance and workers’ comp insurance, leveraging our scale to be able to offer affordable benefits to them. You know, we had a pretty good year-end enrollment related to that. So it is really a combination of all those factors. I would also just say, and I have alluded to this a little bit, on the agency side we had some timing benefit. You get some timing between Q3 and Q4 between carrier bonuses. SUI revenue can be a little bit stronger in Q3, a little bit weaker in Q4. And so relative to our expectations, there was a little bit of timing that came into Q3, but all in all, really strong performance and pretty much what we planned in the back half of the year, and it is nice to see that coming to fruition. John B. Gibson: Yeah. I just want to add to this. I mean, the PEO performance is amazing, outpacing the industry, I think, rather significantly. Double-digit revenue growth, double-digit bookings, seeing success upmarket. I think this is another point—again, I will make it. It is going to be interesting. We are having success with the Paycor sales team into the broker channels positioning PEO upfront. So this is one of those what I call revenue geography problems. So a Paycor rep is out and they are talking to a broker. What would have normally been, because all they have was HCM to sell, an HCM sale— all of a sudden, the discussion comes about what the problem is, and we have got multiple solutions. And now we are selling a PEO. And we had some, and it is larger deals than what we typically would see coming in. So in January, that was another big positive that, quite frankly, I think is going to continue to help us and move forward. I would also say, because I do want to say this, look, the agencies were certainly still a drag in the quarter to the segment. But we saw sequential improvement. And I would actually say even in bookings, which is the precursor to revenue moving, we actually saw solid bookings there in the quarter. And so I am pleased with the teams—made a lot of changes there. We have made some changes in the agency. We are trying to be more innovative because the market is the market. Health care issues are health care issues. Soft workers’ comp is soft workers’ comp. We are building strategies to work around those situations, and the team is making some progress there. So that also contributed a little bit as well. Other thing that I think is that I would point out for you guys to go back and look at, and I think it is probably a story that we plan on duplicating in the enterprise space. If you go back and look at our PEO success, and you go back to 2020 to 2025 and look at those five years, I think you are going to find that our CAGR of worksite employee growth is in the double digits and far surpasses any of the other providers that I am aware of, both public and private, in terms of growth. Now what was the setup for that? 2018, we make an acquisition of Oasis. Prior to that, we made a decision that strategically we were going to position the company as an HR advisory company, that we believe there was more than technology that our clients were going to need and want. We started to really grow our business organically. We then went and made an acquisition. One year after that acquisition, we are growing that business at industry, and we are gaining share in that industry. I think that is exactly what you should expect us to try to do, and we are doing, with the Paycor acquisition. We saw the opportunity to take HR advisory solutions upmarket. We wanted more capability to be able to do that, more distribution. And now we are a year into it, and I think we are well positioned to duplicate the story that we did in PEO in the enterprise space. Brian Keane: Got it. Got it. And just a quick follow-up, Bob. The 12% revenue growth you called out for Q4, I think that is a point below the Street. Yeah. But it sounds like some timing—maybe there was a slight benefit, some of the stuff you just talked about, obviously, in the PEO business from Q3 to Q4. But organically, the organic growth does not move much. Maybe just talk about some of the benefit maybe if Q3 should be stronger organically than Q4. Robert Lewis Schrader: No. I think you would probably see a slight uptick, a continued acceleration in the organic growth of the business in Q4 relative to Q3. So we should see sequential improvement there. And I mean, as you guys know, we do not give quarterly guidance. I am trying to give you some color each call to help you with your models going forward. I would tell you, we were intentionally conservative last quarter when we kind of provided some color on Q3. Obviously, Q3 is a big quarter for us. You have year-end. You have selling season. We have our year-end processing fees, which is a lot of money and margin that hits in the month of January. We had our large enrollment in the PEO. So we were intentionally conservative. I would tell you Q3 was in line and a bit better than our expectations. And as I mentioned, there were some puts and takes between Q3 and Q4, and largely the back half of the year was in line with our expectations. And again, you will continue to see some sequential improvement in the organic growth of the business, assuming we deliver the forecast and guidance. You will continue to see some sequential improvement in the organic growth of the business, which I think positions us well, as John mentioned, as we move into FY 2027. Operator: Thank you. We will move next to Andrew Owen Nicholas with William Blair. Your line is now open. Daniel Jester: Hi, guys. Good morning. This is Daniel on for Andrew today. Thank you for taking my questions. Real quick, just turning back to the revenue timing. It sounds like that was mostly concentrated in PEO. Is there any way you can size how large that was, and looking forward, can sequential growth in PEO specifically continue into the fourth quarter off of that? Robert Lewis Schrader: Yeah. I think the growth rate in Q4 will be lower because of some of those things. I do not have the exact percentage. And I think, again, if we look at it, the two quarters combined, Daniel, you will see a sequential—or if you look at back half—because of some of those puts and takes between the quarters, you will see a fairly significant lift in the organic sequential growth of the PEO and Insurance in the back half relative to the first half. But the overall growth rate, I think, when you start doing the math, you will see that the math is going to show you that the growth rate is going to be a little bit lower in Q4 than Q3. But when you put the two of them together, it is a fairly big step up in the sequential organic growth relative to the first half of the year. Daniel Jester: Great. And then for my follow-up, going back to the mention of a reacceleration of referrals and bookings to pre-acquisition levels. Can you add any incremental detail on specific areas of momentum there and maybe just level set, after a few quarters of integration, where the lion’s share of the synergy opportunities now sit, whether that is on the revenue or the cost side. John B. Gibson: Yeah. Yeah, Daniel. What I would say is very pleased with the acceleration we have seen each quarter. As we came through the first quarter when we did all of the reorganization, as we talked about, we made a conscious decision when the deal closed almost a year ago now—April a year ago—that we were going to get the hard work out of the way. And we saw the opportunity rather than dragging it out. So we took—we did that. And, of course, from the time you announced the deal in January of last year to the time that we closed the deal in April, as you can imagine, a lot of competitive noise in the market, a lot of questions from brokers about what is going to happen, and we could not say much. As we have gotten our story out there and gained momentum, continued to build momentum each of the quarters. And as we said, we have gotten ourselves back to where we were pre-acquisition, both in terms of bookings volume—was double digits, again, year over year—and broker engagement. So I would say it is getting back to kind of where we were, except for now we have the cross-sell opportunity. So I would say expense synergies are pretty much behind us at this point in time. We have taken those actions. We have exceeded the expectations that we laid out. Part of the deal model. Now you are in what I call normal DNA, best operators, continuing to improve the model of both companies and look for opportunities. Where the opportunity is now, and we continue to build momentum, is around the cross-sell inside the client base—401(k)s, ASO, PEO, all of our other products and services. You will be seeing us putting our Perks product into the Paycor ecosystem as well. So that is where we see the opportunity as we roll into fiscal year 2027. Operator: Thank you. We will go next to Kevin McVeigh with UBS. Your line is now open. Kevin McVeigh: Great. Thank you so much. Hey, I wonder, can you just remind us what the initial Paycor revenue and expense synergies were and where we are today on those? Because it seems like you have been doing a nice job on the integration. But just remind us what, again, the revenue and expense synergies were—I guess we are bumping up on a year. I think that that would help. Robert Lewis Schrader: Yeah. Kevin, if you go back to, I think, when we originally announced the deal—and now I am kind of losing track of the quarters—but at one point in time, I think the expense synergies were in the $80 million to $90 million range. I think the last update that we gave was that we expected those to be in the $100 million range. And as John said, now we are kind of moving into BAU. We will continue to look for opportunities, and we have not stopped even though we kind of exceeded our target. And I think we have ideas, certainly in areas around procurement and things like that. I think there are additional opportunities. But that was kind of the last update on the expense synergy. And then I think the update we gave on revenue synergies was a current-year update. We expected it to contribute 30 to 50 basis points of growth this year. I would say we are probably on the high end of that. And as John said, we are building momentum. And really, listen, I think that the expense synergies are not why we did the deal. I think they probably justified the purchase price, but really the value creation opportunity longer term with this deal is the cross-sell. We know we are extremely effective and have driven a lot of growth in our model selling and expanding the share of wallet within our existing client base. When we look at where that growth has come from—our higher-value solutions, ASO, PEO, retirement solutions—those, as John mentioned, play well more upmarket. And so, listen, I think we are excited about the opportunity. Paycor average client size is quite a bit larger than ours, and those clients are more apt to have some of the needs that those solutions meet. We are trying to be intentional and cautious and thoughtful in going after the opportunity. We know that we are extremely effective at doing it. It might not always be the best client experience, and so we are trying to go after it the right way, and we are building a lot of momentum there. And as we move forward, we expect to continue to be able to capitalize on that opportunity. Kevin McVeigh: Helpful. And then just a real quick follow-up. John, you had some great commentary on AI opportunity. As you think about AI across a 100-person client as opposed to an 8, is the go-to-market strategy on that different in terms of the consumption patterns, or how are you positioning for—because, obviously, you serve a terrific market from kind of micro to medium. Just any thoughts on the shift in the go-to-market through an AI lens? John B. Gibson: Well, I think, Kevin, I will take a shot at it. As I said, for the vast majority of our clients, we are their HR department. And you mentioned the eight-man company—they do not have an HR director. Right? Probably do not have any payroll person. I think the thing that you find with our ASO and our PEO business is that a lot of the clients are foregoing building that capability. Right? So what they are saying is, why would I build a department when I can leverage Paychex, Inc. at scale—their technology, now you get their datasets and our insights and our HR expertise and depth of knowledge—and, oh, by the way, we have actually employment lawyers on staff that support those people. So you are getting a lot more capability. So people are avoiding building HR departments. So I think the value proposition there is I am going to leverage something at scale. And AI really makes—if you are a scale player—really makes a big difference, is what I will tell you. Because I have a lot more insights about what restaurants are paying in Rochester, New York or San Francisco. I have got that data. I can bring that together and now present it in a way to give you advice. If you had your own HR director, you are not going to get that. So those are things we can do. When you get into 100 plus, and I would actually say even larger than that, what has been a pleasant surprise to us as we have had more conversations with the Paycor client base is how much they are looking for our support. So now you are talking at a 250- or 500-person company that does have an HR department that is probably understaffed and underequipped, and we can bring our expertise, our technology, our additional support staff, and begin to augment their HR organization and allow their people to spend more time on strategic HR activity. So I think when you start looking at companies trying to figure out how do I become more efficient, what I think you are going to find companies ask themselves is, yeah, do I apply AI into my HR department and try to make it a little more efficient? Or should I really radically think about my HR department differently? Right? Should I go and leverage someone who can provide both the tools and the people and have the breadth of the data we have to provide the insights? Is that a better alternative? And that is a, you know, traditional enterprise HR outsourcing value proposition. I think AI allows us to do that at scale. And do it at all sizes of market. So one of the things we have actually begun to introduce at Paycor that they have is a managed payroll and a managed benefit offering. So now, you know, where typically the tech players say, here is the tool, knock yourself out, we are now—and we are getting clients that are asking us—would you mind doing it for us or doing it with us? And so now we are approaching that market with either you can buy our tech and get technical support, or you can come and we can do it for you. So I am really excited about the opportunity here. And I think at scale, AI takes large datasets. We have large datasets, and I think we can add value to our clients and their HR departments regardless of whether they are eight people or 100 people. Operator: Thank you. Our next question comes from Samad Saleem Samana with Jefferies. Hi, good morning, and thanks for taking my questions. Samad Saleem Samana: Good to hear it sounds like trends are getting pretty good. You had mentioned recently that maybe the initial land per client was a little bit smaller than historical or fewer add-on modules at the point of sale. I am curious if you have seen that trend change as well. Was that a onetime kind of occurrence—what you saw last quarter—and if that has improved. And then I have one question. Thank you. John B. Gibson: Yes. So I would say that the market has been relatively stable in that regard. I think we probably had higher expectations going into the year about the number of modules that we would be able to add, and I would say that did not change much in Q3 selling season from what we saw before. Samad Saleem Samana: Understood. And then in the PEO business, I think that as we all try to figure out what is happening under the hood in terms of different verticals and what the employment outlook looks like there. Can you remind us what the kind of vertical exposure inside of the PEO business is broadly speaking versus, let us call it, white collar, blue collar? And then related, just as you think about that high-single-digit PEO WSE growth, how much of that is driven by net new deals versus headcount growth within the installed base? Thank you again. John B. Gibson: Yeah. So on the industry thing, again, as big as we are, we take every—we are very broad in terms of where we are. Now I would say that when you look at our aggregate business, because we did an analysis on this, and you look at the actual job codes of our employee bases across the business, I would say there is not a major variance in the PEO business. We skew a little bit more towards the blue and gray than what you would see in the general workforce. Again, some of that has to do with your large enterprises are more white collar. So get above 5,000-10,000, you have more white-collar type of jobs. So a little bit more blue and gray across the business, and I think that applies to the PEO. We had good net new client and worksite employee gain in the PEO. Robert Lewis Schrader: I would say that is the entire driver. I mean, headcount within the installed base has been relatively flat, and it is most years. I mean, it is driven by the double-digit demand that we talked about, Samad, as well as the record retention. So it really is net new that is driving the growth in worksite employees. Operator: Thank you. We will go next to Ramsey El-Assal with Cantor Fitzgerald. Your line is now open. Ramsey El-Assal: Hi. Thank you for taking my question this morning. I wanted to ask about something you mentioned, which was that Paycor bookings had reaccelerated to pre-acquisition levels. How should we think about the bookings conversion to revenues for Paycor relative to legacy Paychex, Inc.? Do the larger clients translate into sort of a slower conversion process or not so much? John B. Gibson: Yeah. It is a little longer than what we are used to. I think that that is a fair—so there is a couple-quarter lag, as near as I can tell. Again, just what I see in the data is a couple quarters. Obviously, depends on the size of the client, but it is much longer than ours where you could sell them and implement them in the same day, same week. So yep. Ramsey El-Assal: And is that the same for—I mean, I would understand that would be the case for sort of a new client implementation, but does that also apply to cross-sell or new product attach? Or is that something that you can kind of turn on more quickly? John B. Gibson: Yeah. That is far more quickly. I mean, again, those cadences—if you recall, one of the things again that we did is to drive all the disruption upfront. And we integrated all of our ancillary products within, I think it was probably the first quarter post the acquisition. So those things are very similar to the legacy Paychex, Inc. Operator: Thank you. Our next question comes from James Eugene Faucette with Morgan Stanley. Your line is now open. James Eugene Faucette: Great. Thank you very much. I wanted to ask a quick macro question and I guess tie it to a margin question. You mentioned that you still see kind of a tight labor environment. Just wondering if you can provide any anecdotes or color on that comment. And then as it relates to margins, I know you said that you expect there is some margin expansion to go. Just wondering how we should think about the Paycor integration and how that matures and, you know, getting past some of these acquisition-related costs because they still look elevated. Just looking for a little color on the timing around those couple things. Thanks a lot, guys. John B. Gibson: Okay. Well, I think on the macro side, what we said is and what we see is that it has been relatively stable. It is really a low-fire and a low-hire type of environment right now. We have not seen a significant change in this fiscal year in terms of the small business index that we report. And, again, I think we are in a dynamic environment right now where, again, what we hear from clients—particularly in the small end of the market, less than 50—is continued inability to find qualified people for the jobs that they have open. We are doing a lot of things to try to support them there. Then I think you have got a degree of potential hesitancy to add in this uncertain environment as you move upmarket. But, again, when we look across the business, it has been relatively flat in payment levels. Robert Lewis Schrader: Yeah. And just on the integration-related stuff question as it relates to margin, James. I mean, we are backing a lot of stuff out, so that is really not included in the adjusted operating margins. You know, I think if you were to look at our margins from a GAAP standpoint, they are still pretty high, probably in the 40% range. But I think John hit on it. I think we still think there is room as we move forward as we continue to embed AI in all of our processes across the company. We feel like there is still plenty of room to expand margins. That is certainly part of our DNA, and we are always trying to make that trade-off of trying to find ways to be more productive and more efficient so we can expand margins, continue to deliver the strong earnings growth that our investors have become accustomed to, and at the same time make sure that we are investing back into the business, which is a priority for us to make sure we have a sustainable model as we move forward. So, you know, we will continue to—that has been our model. That is how we go about our business here. And I think today, adjusted margins are high from a non-GAAP standpoint, but given some of the advancements in technology, we feel like we still have a runway to be able to shuffle all those different priorities and expand margins. James Eugene Faucette: Thanks so much, John. Thanks, Bob. Operator: Yep. Thank you. Our next question comes from Daniel Jester with BMO Capital Markets. Your line is now open. Kyle Aberastri: Hey, good morning. This is Kyle Aberastri on for Dan Jester. Thank you for squeezing me in here. Just a quick one from me. I was wondering if you guys quantified how much impact the annual form filing revenue had on the business in the quarter? Thank you. Robert Lewis Schrader: How much impact they had? I mean, it is always a large number in Q3. I would say probably consistent with maybe where it was in prior years. Obviously, it is pretty high-margin revenue, so that is why you see the higher margins in Q3 relative to the rest of the year. I would say the one comment related to the year-end filing, definitely saw a little bit better price realization. The discounting on that was better than what we had seen historically and certainly a little bit better than what we had assumed in our forecast. That is a lever that sales reps can use, particularly as they are getting towards the end of the calendar year and selling new deals. That is kind of a discounting lever that they use. And we fly a little bit blind in finance because we do not really know how that is going to come through until it actually bills in January. I would tell you that the discount on it and the price realization was a bit better than what we assumed. But not a big growth driver year over year and similar performance probably to what we have seen in past years. Operator: Thank you. Our next question comes from David Grossman with Stifel. Your line is now open. David Grossman: Good morning. Thank you. I think last quarter, your bias was the low end of the revenue growth range. And I am just wondering, in reiterating the guide, are we still favoring the low end? Or just given some of your commentary about the third quarter and going into the fourth quarter, are you feeling better about the business and feeling maybe we are better than the low end? Robert Lewis Schrader: Yeah. I think we would stay where we are at, David. That is why we reiterated, as we mentioned. Listen, I think we were a little bit conservative in what we guided towards in Q3. There were some puts and takes. I mean, obviously, we feel good about the business. We felt good about the business last quarter as well. It is nice getting through Q3 and putting up the quarter that we had. John mentioned a lot of positive momentum. I would have to say it is probably one of the stronger selling seasons that I have seen in a while, and we have a lot of momentum in a number of businesses. So we feel good. Obviously, that translates into the P&L further down the road, particularly when you are talking about the enterprise space. And so I would say largely the back half, as I mentioned, is in line with our expectations, and that is why we are kind of leaving it where we had said it was going to be last quarter. David Grossman: Got it. And sorry to kind of stick on the financials here, but just—you did make a general comment about a certain level of comfort with where consensus was for next year. And I know you do not want to make any specific comments about next year, but is there anything now that you are a combined company about how we should think about pays or pricing in Management Solutions going into next year? Particularly given now that we have got Paycor in the base? I know it sounds like pays look like they are, you know, pretty stable, but I thought I should just ask the question. Anything you want to call out there in either pays or pricing? John B. Gibson: No. David, I do not think there are any changes that we are making in any of our assumptions. I think, as you know, we had clients of all sizes before we had Paycor. We have added more upmarket. But I think relative to our assumptions and what we are expecting, we are expecting a very similar macro environment that we are seeing right now in a very uncertain time. And that is the other thing that I am sure Bob and I are going to be having a lot of conversations about. And by the time we consult with the board in a few months, and we come back to you, hopefully, we have even more certainty about the external environment and what the risks are going into 2027. So we are trying to be prudent here. As you can imagine, this is a very unique time on a macro basis. And every day something could change that could impact where we are. Right now, we feel in good shape. What we are seeing is a stable macro environment, no signs of recession in any of our data or indicators—nothing that would indicate that we would change what we are thinking in terms of pays on any of our segments at this point in time. Operator: Thank you. Our next question comes from Jacob Smith with Guggenheim Securities. Your line is now open. Jacob Smith: Quick one—just, you are a second company in the mid-market through Paycor really talking about expanding headcount to capture opportunity. Just what are you seeing out there that is giving you conviction? John B. Gibson: Well, I think the key thing is going into that, we have a list of—we know who the clients are and prospects are, and we have territories, and we have open territories that we want to fill. And we are continuing to expand that. I think before we bought Paycor, they were expanding headcount because they saw more opportunity. And we believe now with our comprehensive offerings that we have, the opportunity has expanded. And so that is what gives us confidence to be able to expand the headcount and go after and capture the upmarket not only for HCM, but as I said, really bringing our entire HR advisory value proposition to the enterprise market. Jacob Smith: Great. Thanks for taking my question. Operator: Thank you. Our next question comes from Ashish Sabadra with RBC Capital Markets. Your line is now open. Ashish Sabadra: Thanks for taking my question. I was wondering if you could provide some color on the year-on-year growth in Paycor in the quarter. And if you could quantify the contribution for form filings for Paycor in the quarter? Thanks. Robert Lewis Schrader: Yeah, Ashish. I mean, I think as we have talked about in the past, the lines are somewhat blurred and have become increasingly blurred between what is Paycor and what is Paychex, Inc., based on our early-on decision to integrate those two businesses. And so I think if we look at it, our best estimate is if you were to look at the organic growth of the Paycor business, it was consistent in Q3 with what we saw in the first half of the year, which is in that upper-single-digit range. I would tell you what is less blurred—and this is how we will talk about the business as we move forward—is when we look at our enterprise business. So when we look at our client base above 100, irrespective of which sales organization sold it, which platform that it was on, that business has been growing. I would tell you in the first half of the year, it was growing upper single digits. And in Q3, it grew around 10%. And so that is how we are managing the business. That is how John and I are thinking about it. That is how we are going to market. And as we move forward, after we anniversary the acquisition and we provide color on the different areas of the business and how they are performing, that is how we are going to be looking at it. And, again, I think that is similar and maybe not too different than what the other assets in that space are growing at. And our expectation would be that we would prospectively be growing at or above the other assets in that segment of the market. And that is currently where that space performed in Q3. Ashish Sabadra: That is very helpful color. I was just wondering if you had some initial thoughts on pricing for next year and how does that trend compare to your historical range? And also maybe a quick one on discounting. You made some comment around discounting was much lower—I think that was specifically for forms filing. I was wondering if you could comment on discounting for ASO in general. John B. Gibson: Thanks. Yeah. So I want to say this. We are going into our budget meeting. This is where we discuss competitively how we want to position ourselves going into the next market. We have a tradition of being able to drive value to our clients and get price accordingly. So I am not going to make any comments on how we are going to set pricing going into next year at this time. So I do not want to give anybody a heads up. But I think our model and our long-term model is still in existence and viable. But we are not going to talk about the exact ranges we are looking at. Operator: Thank you. Our next question comes from Scott Darren Wurtzel with Wolfe Research. Your line is now open. Scott Darren Wurtzel: Hey, guys. Thanks for squeezing me in. I will limit it to one. Just going back to the PEO—I mean, it sounded like your commentary on enrollment sounded pretty positive. And I remember, I think, you guys made some changes to benefits offerings and everything. But I also wonder, is there any element of—you think that employees are maybe just sort of adjusting to this higher health care premium inflation environment, and that could also be, you know, kind of helping to drive some of this enrollment growth that we have seen as well? Thanks. John B. Gibson: Yeah. Yeah, Scott. I think everyone is adjusting. I think we adjusted our plan designs. I think employees are adjusting in terms of what they are going to do, and employers are adjusting how they are going. You know, I mentioned the use of AI. I will say this. In tests where AI was used and where it was not, the choices that employees made, I think, improved their outcomes and improved our outcomes. So what do I mean by that? As you know, you can immediately go to the cheapest plan. But given your circumstances or what you spent last year or changes that may have happened in your life relative to dependents, that may not be the most economic plan for you to participate in. These AI tools’ ability to model that for you—to maybe make the middle plan choice versus the lower plan choice—is, like I said, a better outcome for the participant and, of course, that impacts benefit for us as well because it is a higher-priced plan. Scott Darren Wurtzel: Great. Thanks, guys. Operator: Thank you. Our next question comes from Kartik Mehta with Northcoast Research. Your line is now open. Kartik Mehta: John, you talked about Paycor revenue synergies as we go into FY 2027 and the opportunity to really take advantage of that. I am wondering how the Salesforce alignment is going because I am guessing that is part of the revenue synergies that you would be able to capture. John B. Gibson: Yeah. So on the alignment question, just so everyone is kind of clear, Kartik—and this is, I think, the challenge and that, you know, hopefully, we do not talk about Paycor anymore going forward—because Paycor for us is a brand that we are using to go and target the enterprise market, as we are designing 100 plus. And we have taken all the assets of the company regardless of where they were, and we have placed them in that business unit for that unit to focus on that particular market. We are doing marketing there specifically for that target segment. So now we are spending marketing money in that segment. We are putting sales reps into that segment to go after that segment. And we are going to capture as much of the market as we can at 100 plus. Now once, let us say, a lead comes in digitally from marketing spend at Paycor, and we look at that lead and we go, hey, that looks like a great PEO opportunity, we are going to move that over to the PEO. Right? And so now all of a sudden, you have got an expense that is on the Paycor side of the equation. Same thing is happening with our reps as well. So we have got this segment—if this is your question—the segmentation of the Salesforce is clear. How we are going to market from a brand perspective is clear. And then what we are doing is, both in terms of using our AI and also our incentives for all of our sales reps, making sure we have every sales rep in the market looking and representing the entire capabilities of the company. And so that goes back to every rep is representing the comprehensive capabilities of the company, whether that is technology, whether that is the platform, whether that is do it yourself, do it for you, or do it with you. We are offering every rep in every market the capability to do that, if that makes sense. Kartik Mehta: Yeah. And then just a follow-up question, Bob. And this might be crazy considering it is Paychex, Inc., but I thought I would ask anyway. Any thought about potentially using a little bit of leverage to buy back stock considering the stock price is? Robert Lewis Schrader: Yeah. I mean, Kartik, listen. I think you saw—we just recently announced a new share buyback authorization significantly larger than what we have had in the past. And when you look at—you know, there is obviously, at least in my opinion, a disconnect between the underlying fundamentals of the business and the valuation, and that obviously, you know, I was always taught to buy low and sell high. And so you have seen us be a little bit more opportunistic there. I would tell you, I do not think we have necessarily changed our overall philosophy around share buybacks, but we know we are going to have to buy shares back in the future to offset dilution. And we have done more of that this year than what we normally would have, as you guys can see in some of the disclosures. So, you know, I do not ever want to say never. Our leverage is pretty low. That is obviously a board-level decision. And as you can imagine, I am assuming a lot of CEOs and CFOs in this market are having these conversations with their board on a regular basis, and John and I are certainly doing that. And so we will continue. We have lots of priorities from a capital allocation standpoint. Certainly, we want to continue investing in the business. But we will continue to have those conversations. So I do not want to say never, but it is something that we will continue to evaluate. Operator: And our next question comes from Jason Alan Kupferberg with Wells Fargo. Your line is now open. Jason Alan Kupferberg: Thanks, guys. Good morning. I wanted to ask about Management Solutions specifically. I think the organic growth was 4% in the quarter. I think that is the same as we saw last quarter. Do we expect that to accelerate in Q4? And if so, is that because you will start to lap Paycor during the quarter? Or would there be other accelerants we should be considering? Thanks. Robert Lewis Schrader: Hey, Jason. Yes. I would say, you know, I think it was 4% in Q2 and 4% in Q3. I would tell you, one was around up and one was probably around down. So you are also seeing sequential improvement in the organic growth of Management Solutions as well. Part of it is when you get to Q4, we would expect that to continue and maybe accelerate a little bit. To the point that you are making, you are anniversarying the acquisition, so now we have a scale business that is growing faster than the overall growth of the business. So that would be accretive to the organic growth. And then we are continuing to build momentum on the synergy opportunity, and I think that showed up in the Q3 selling results, and that will eventually make its way into the P&L. And so you should see improvement in Management Solutions organic growth as we move into Q4 as well. Jason Alan Kupferberg: Okay. Understood. And then just a clarification. I know we are not changing EPS guidance, but we did up interest income guide a little bit, which I would have thought would have lifted the EPS—I do not know—maybe a percent or so. I mean, there is only a quarter left in the year. So just curious, is it just some conservatism there leaving the EPS guide as is? Or are you going to reinvest some of that upside? Slight combination of both? Robert Lewis Schrader: I think we are certainly going to look for opportunities as we move through the balance of this year to invest. We want to get out of the gate strong when we get into next fiscal year. So it is always balancing those trade-offs, Jason. You know, John and I will manage through that as we go through the quarter and see where the opportunities are. But it is really a combination of maybe a little conservatism and where we may potentially want to take advantage and make some investments as we end the year. John B. Gibson: Yes. The great position we find ourselves in is we have plenty of opportunities for investment coming out of the third quarter that have the opportunity to both accelerate growth and accelerate margin expansion. And that is—you know, we have got a lot of decisions to make over the next couple weeks as we go through our planning process. And anything that we are thinking is a good investment in the first quarter in 2027, I do not think we want to wait to make that investment. So we are certainly trying to contemplate that as we go into our planning session next week. Operator: Thank you. At this time, there are no further questions in queue. I will now turn the meeting back to John B. Gibson. John B. Gibson: Okay. Well, thank you, everyone. Just to highlight, we delivered strong double-digit revenue and earnings growth, continuing to reflect, I think, very strong execution and focus of the teams. I do want to call out, you know, we are approaching a one-year anniversary mark of the acquisition of Paycor. And I want to call out the Paycor team in particular. The group has been through a lot. If you think back a year ago this day and what we were starting to prepare for and take the organization through, and I think the way that we have responded and the way we have continued to come together and build momentum at this fiscal year has come together has been just really impressive. I said it a year ago: we will be better together. And we are better together. And, you know, I point you to the example of what we did in the PEO industry and how we focused on that strategically many years ago. I think that is a good model for us to replicate as we go into fiscal year 2027 and beyond in the enterprise space. So I think Paychex, Inc. has never been better positioned than it is today. I think we have differentiated ourselves in the marketplace repeatedly. I think in this new AI era, our scale, our breadth, our capabilities from an expertise perspective, and the fact that we are dealing in mission-critical type of work where errors are costly—I think that you are going to continue to find more and more clients of all sizes turn to Paychex, Inc. to be their HR department and to provide them leading-class technology and advisory solutions in the years ahead. So I like where we are positioned, and I want to thank you for your interest in Paychex, Inc. Thank you. Operator: This brings us to the end of today’s meeting. We appreciate your time and participation. You may now disconnect.