加载中...
共找到 17,628 条相关资讯
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Adamas Trust First Quarter 2026 Results Conference Call. [Operator Instructions] This conference is being recorded on Thursday, April 30, 2026. I would now like to turn the call over to Kristen Mussallem, Investor Relations. Please go ahead. Kristi Mussallem: Good morning, and welcome to the First Quarter 2026 Earnings Call for Adamas Trust. A press release and supplemental financial presentation with Adamas Trust first quarter 2026 results was released yesterday. Both the press release and supplemental financial presentation are available on the company's website at www.adamasreit.com. Additionally, we are hosting a live webcast of today's call, which you can access in the Events and Presentations section of the company's website. At this time, management would like me to inform you that certain statements made during the conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Adamas Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in the company's filings with the Securities and Exchange Commission. Now at this time, I would like to introduce Jason Serrano, Chief Executive Officer. Jason, please go ahead. Jason Serrano: Good morning. Thank you for joining us today to discuss our first quarter 2026 results. With me is our executive leadership team, President, Nick Mah; and CFO, Kristine Nario. We entered 2026 with strong momentum on what we described last quarter as a strategic inflection point for the company. And I'm pleased to report that our first quarter results reflect both the continuation and acceleration of that trajectory. Let me begin with the macro environment. The first quarter was defined by heightened volatility defined by geopolitical developments in the Middle East resulting in increased rate volatility, periodic spread widening and shifting monetary policy expectations. The Iran conflict introduces the potential for another supply-driven stagflation shock, further complicating the Fed's dual mandate as upside risk to both inflation and unemployment remain elevated. Despite this backdrop, we maintain a positive outlook on the broader fixed income environment. We continue to see a Fed bias towards rate cuts later this year, notwithstanding near-term inflation pressure, also improving technicals for Agency MBS as volatility begins to normalize and attractive value across residential credit on a solid demand base. The current environment reinforces our strategy, pairing stability with scalable earnings growth. Against this volatile backdrop, -- we delivered strong performance across all aspects of our business, generating meaningful book value growth alongside solid earnings expansion, further validating the strength and durability of our business model. The earnings profile of the company continues to build. We delivered GAAP earnings per share of $0.41 and EAD of $0.29 per share, representing a 26% increase from prior quarter and well in excess of our $0.23 dividend. This reflects a clear step-up in earnings power. Based on our earnings trend over the past year, we believe we are operating from a position where EAD is scaling ahead of distributions, demonstrating the operating leverage of the company, durable long-term earnings capacity and the potential for supporting future distribution growth. On the balance sheet side, in the first quarter, GAAP book value increased 4% quarter-over-quarter with adjusted book value up 1.6% -- despite wider spreads into the quarter end, performance was supported by stable trends within our credit assets, improving profitability at constructive, continued positive results and payoffs of our mezzanine lending portfolio and strategic hedges that outperformed as macro conditions evolved in the quarter. Importantly, we were able to grow both earnings and book value in a challenging market environment. The outcome was by design. Our flexible capital allocation framework enables us to actively navigate volatility and optimize risk-adjusted returns relative to more static portfolio structures. Our investment strategy remains anchored in three core pillars: Agency RMBS representing 56% of the equity capital, providing stable earnings and strong downside protection, continued growth in our single-family credit portfolio through BPL rental loans under a disciplined underwriting framework and scaling of our constructive platform, -- as anticipated, we have transitioned constructive to profitability from integration in the fourth quarter to an earnings contributor in the first quarter as operating efficiencies were realized. Our evolution from pairing agency exposure, mortgage credit assets and now a scaled origination platform positions the company to perform through volatility while capturing value as conditions normalize. A diversified allocation strategy is a core strength of the company. Despite this performance and trajectory, our common stock continues to trade at a meaningful discount to what we consider its intrinsic value. Shares began the quarter trading at approximately 32% discount to adjusted book value and notably, a 15% discount to the value of our equity capital invested in agencies alone. We believe this price disconnect sales to reflect the strength of our earnings growth over the past 5 quarters, represented by a 31% year-over-year increase in EAD, the scaling of origination platform for EAD expansion and the durability of our portfolio as illustrated by book value growth. We believe continued execution of our strategy can drive convergence between market price and intrinsic value, which support our decision to repurchase shares during the quarter. We are highly optimistic about the year ahead. Our priorities remain clear: EAD growth through scaling the constructive platform and our loan investment portfolio to expand reoccurring income, grow book value with disciplined investment selection and active portfolio management. And as Jose mentioned, we are focused on closing the valuation gap of Adamas' shares with consistent execution and disciplined capital allocation. We believe Adamas today is positioned for sustainable growth under a more diversified and stable earnings profile. We see several factors that are supportive of our capital allocation plan, which include a meaningful increase in demand for mortgage credit, particularly from insurance capital, alongside renewed GSE MBS purchase activity and a more accommodative capital framework supporting bank demand. Against this backdrop, our balance sheet flexibility positions us to capitalize on the strength of the market to continue delivering exceptional value. I'll now turn the call over to Nick to discuss our portfolio investment activity. Nicholas Mah: Thank you, Jason. We took advantage of the first quarter's market volatility to deploy capital steadily across our residential investment strategies, surpassing $1 billion in acquisitions. In terms of product mix, we invested $510 million in our agency strategy and $502 million in residential credit, with BPL rental making up the bulk of residential credit purchases at $400 million. Our quarterly investment activity in BPL rental reached a record high, reinforcing the strategy's expanding role within our core asset portfolio. It also demonstrates the value of Constructive's integration into our broader organization with its origination and underwriting capabilities providing a direct pipeline of investment. Under current market conditions, we expect to allocate a higher percentage share of capital to BPL rental given its relative value advantage. Our investment portfolio reached $10.9 billion at the end of the first quarter, with further growth expected as we continue to deploy capital through the remainder of 2026. The agency market saw significant volatility in the first quarter. Agency current coupon spreads to treasuries reached multiyear tights of 94 basis points in late January, driven by the administration's mandate for the GSEs to ramp up MBS purchases. The dynamic reversed sharply in late February as the conflict with Iran came to the fore. Agency spreads peaked at 131 basis points in late March before settling back down to 124 basis points by quarter end. Our agency portfolio expanded from $6.6 billion to $6.8 billion. Agency leverage was at 7.8x, slightly above the prior quarter's 7.7x. Within our Agency [ capital ] investments, all purchases this quarter were in 6.0 coupon pools. We rotated up the coupon stack early in the quarter to reduce duration, taking a more defensive posture given especially tight spreads and low rates at the start of the year. That positioning benefited the agency book as rates backed up and spreads widened in the second half of the quarter. Going forward, we are returning to our original stance of adding current coupon spec pools at minimal pay-ups. As Jason mentioned, our expectation is that volatility will eventually moderate, while we aim to opportunistically increase our capital deployment during episodic bouts of price dislocation. At quarter end, Agency MBS comprised roughly 56% of our investment portfolio's capital, and we expect that allocation to remain relatively stable in the near term. Following the rapid repricing of agency spreads quarter-to-date, our view on the agency basis has become more neutral with more attractive relative value emerging in residential credit. We nonetheless anticipate continued agency purchases, albeit at a slower pace than in residential credit. From a hedge positioning perspective, we rotated out of longer tenure swaps into treasury futures in January, a trade that contributed positively to returns under the developing macro backdrop in the quarter. Treasuries underperformed swaps during the quarter, driven by ongoing treasury supply concerns alongside inflation fears. With swap spreads now tightening, we are reversing a meaningful portion of treasury futures hedges back to swaps in the second quarter for more cost-efficient hedging. Alongside our rate hedges, we also employ a range of additional hedge strategies to protect book value against tail events. Amidst softening structural demand for U.S. treasuries and escalating geopolitical tensions, these hedges performed favorably in the first quarter. The price movements of these hedges resulted in positive realized gains contributing to the company's overall quarterly performance. BPL rental remains our largest residential credit asset exposure at $1.8 billion. The portfolio is built on the strong underwriting standards that anchor our purchase program, resulting in minimal tail risks across key credit metrics. Loans with DSCR below 1x represent less than 2% of the portfolio as to those with LTVs above 80%. FICOs below 675 account for less than 3% of the portfolio. Securitization execution was volatile during the quarter, moving in tandem with broader risk markets. Our first BPL rental deal of the year priced in January at around 105 basis points blended AAA spread. Generic non-QM AAA spreads widened to as much as 145 basis points at the end of the first quarter before settling at 120 basis points to 125 basis points today as volatility has since subsided. Despite these larger market fluctuations, the securitization markets have remained well functioning throughout with a broad investor base continuing to allocate capital into bonds backed by residential credit. We are taking advantage of stable capital markets to be on pace to issue 5 BPL to 6 BPL rental securitizations this year, supported primarily by collateral originated by constructive. Our securitization program is supported by a deep and loyal investor base and is well recognized in the market for its underwriting discipline and consistent performance. Collectively, these factors have allowed us to price securitizations at the tighter end of the execution range. Moving to the origination business. Constructive originated $422 million of business purpose loans in the first quarter, modestly below the $439 million produced in Q1 of last year. The slight decline reflects Adamas' influence of a more selective origination posture to better align with our investment program rather than any pullback in capacity. Since onboarding Constructive, we are focused on further aligning production with Adamas' underwriting standards, building on an existing foundation of strong credit quality while maximizing secondary market liquidity. In the quarter, Adamas purchased approximately 2/3 of Constructor's overall loan production. We continue to balance the development of Constructor's third-party distribution channels alongside Adamas' investment portfolio objectives. Constructive's distribution model emphasizes locking loans with end investors early in the process rather than aggregating for bulk sale. This approach reduces monthly pricing risk and enhances our ability to adapt as market conditions evolve. Close coordination with Adamas' trading team to surmise real-time visibility into securitization execution and secondary pricing enables dynamic adjustment of forward pipeline coupons as the market shift. This responsiveness proved particularly valuable amid the rate volatility experienced during the quarter. As we are nearing the end of Constructive's integration into Adamas, our focus has shifted from transition management to optimizing technology, capital and processes across the origination business. We expect these initiatives to translate to improved operating results over time. In the multifamily portfolio, the redemption activity has been substantial with an annualized payoff rate of 30% experienced in the first quarter, higher than the historical average of 26%. During the quarter, one property in our cross-collateralized mezzanine lending portfolio sold and netted a realized gain of $13.8 million to Adamas, a successful execution outcome. Given the seasoning of the portfolio and the stable performance, we expect heightened resolution activity for the remainder of the year, providing us additional capital to reinvest into our core strategies. I will now turn it over to Kristine for commentary on our quarterly financials. Kristine Nario: Thank you, Nick, and good morning, everyone. Jason and Nick touched on some of the major items that contributed to our strong results this quarter, so I will focus on a few additional highlights. For the first quarter, we reported GAAP net income attributable to common stockholders of $36.9 million or $0.41 per share and earnings available for distribution of $0.29 per share, which increased by 26% quarter-over-quarter and 45% year-over-year. After accounting for a $0.23 dividend, we generated a 6.35% economic return on GAAP book value and a 3.76% economic return on adjusted book value. Our GAAP book value increased 4% to $9.98 and adjusted book value rose 1.6% to $10.80 during the quarter. These results reflect continued momentum across our investment portfolio and origination platform. Adjusted net interest income increased to $48.2 million in the first quarter from $46.3 million in the fourth quarter, and net interest spread was at 145 basis points, down from 152 basis points in the fourth quarter. The change in net interest spread reflects the continued transition of our portfolio toward Agency RMBS and BPL rental loans, which carry a lower yield than higher coupon BPL bridge loans that continue to run off, partially offset by improved financing costs. Turning to Constructive. The platform delivered a strong performance this quarter. Mortgage banking income was $15.3 million for the quarter, driven by $9.2 million in gains on residential loans held for sale and $6.1 million in loan origination and other fees. Constructive also generated net interest income of $0.5 million. After direct loan origination costs of $4 million and direct G&A expenses of $9.3 million, Constructive generated approximately $2.5 million profit for the quarter on a stand-alone basis. This marks a meaningful improvement from approximately $2 million stand-alone loss in the prior quarter and reflects the near completion of our integration efforts. We are pleased with Constructive's progress this quarter with ROE of approximately 13%, representing a significant improvement from the prior period and moving closer to our original underwriting target of 15% Total consolidated Adamas G&A were $24.5 million for the quarter, down slightly from $25.1 million in the last quarter. We estimate our quarterly G&A ratio to be approximately 7% to 7.5% in 2026, depending on Constructive's origination volumes. From a capital markets perspective, we continue to strengthen our balance sheet. During the quarter, we issued $90 million of senior unsecured notes due 2031 and redeemed our $100 million senior unsecured notes due 2026 at par, fully retiring the obligation ahead of maturity. We now have no near-term corporate debt maturities, which provides meaningful flexibility and positions us to focus our capital on growing the investment portfolio. At quarter end, we maintained $199 million of available cash and approximately $418 million of total liquidity capacity, including financing available on unencumbered assets and underlevered assets. Our company recourse leverage ratio was 5.2x and portfolio recourse leverage was 4.9x, with leverage primarily concentrated on agency financing. Overall, our first quarter results reflect the continued execution of our strategy and our growing earnings power. We remain focused on disciplined portfolio growth, increasing Constructive's earnings contribution and prudent capital allocation as we look to build on this momentum through the balance of 2026. We are committed to delivering sustainable long-term returns for our stockholders. That concludes our prepared remarks. Operator, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Marissa Lobo of UBS. Marissa Lobo: On your EAD trajectory, can you give us a framework on how you're thinking about dividend coverage relative to EAD going forward? And you mentioned increasing distributions, but is that on the table near term? Or will you continue accumulating retained earnings? Jason Serrano: This is Jason. Look, we're pleased by the EAD performance exceeding dividend by 26% in the first quarter. We recognize dividend growth is a key priority for shareholders. With the Board, we evaluate a range of factors in assessing appropriate distribution levels. And our focus is sustainably growing earnings while preserving book value. So we delivered on these objectives in the first quarter and look forward to continuing this momentum alongside with our ongoing Board discussions regarding our distribution rate. Our goal is to keep stability and sustainably increase the EAD, which is going to be the discussions that we have with the Board on the dividend discussion. So that's as far as I can go in that direction. Marissa Lobo: Appreciate that. And on the book value gain, what was the relative contribution from? Was it mostly the multifamily sale? Or was it the strategic hedge performance? Just a little color on the drivers. Kristine Nario: Yes. We had a strong quarter across the board. EAD came in at $0.29, up 26% quarter-over-quarter, which reflects really our earnings power through continued portfolio growth and improved financing costs in the quarter. On top of that, we benefited from two additional items that drove net income and book value higher. As you mentioned, we generated -- as you've seen, we generated about $87.8 million in derivative gains, both from mark-to-market due to higher valuations on our hedges as well as realized gains on settlement of derivative instruments during the period. We also recognized gain on sale on a property within our cross-collateralized mezzanine lending, of which $13.8 million is attributable to Adamas. And it was a quarter where both recurring income or EAD and nonrecurring items worked in our favor. Operator: Our next question comes from the line of Bose George of KBW. Bose George: Just a follow-up on the book value question. What's -- any changes to the book value quarter-to-date? Jason Serrano: We estimate adjusted book value being up between 2% to 2.5% quarter-to-date. Bose George: Okay. Great. And then on the multifamily portfolio, actually, how much is the capital that's remaining? Jason Serrano: I saw the assets, but I might have missed how much the capital... The capital and the assets are very similar. We have -- these assets are unlevered on our balance sheet. One of the back pages of our supplemental will show you those numbers. So that's a -- yes, it's generally dollar for dollar. Bose George: Okay. And have you given sort of the time line in terms of the potential runoff of that portfolio? Jason Serrano: Yes. So we've mentioned this on previous calls where it's a very seasoned portfolio. We control rights within many of the assets to -- in the mezzanine loan portfolio to accelerate maturity. So in utilizing those rights, given the seasoning and the ability for the sponsors to pay off the loans to refinance or sale of the property, we can help shorten our duration on these assets, which we've been effectively doing over the course of the last year, 1.5 years. Nick mentioned that the prepayment rate was accelerated in the quarter, and we do expect to continue seeing that through the course of the year. Operator: Our next question comes from the line of Jason Weaver of JonesTrading. Jason Weaver: I wanted to ask, as it pertains to constructive, what's sort of the right baseline for quarterly mortgage banking income for the rest of the year? How much of that is gain on sale versus origination fees? Kristine Nario: Well, majority of it is going to be gain on sale, as you've seen, and that's always been the case for Constructive. We are 13% return on a stand-alone basis, we're pleased with that performance. And as Jason mentioned, our priority is really to increase volume to increase earnings. So that's really our goal for 2026. Jason Weaver: Got it. That makes sense. And then on the BPL rental securitizations, I could be wrong on these numbers, but I think the 1Q deal priced at about 490. And then subsequently, the April deal priced at around 550, quite a bit wider. Is that just market volatility? Or is it sort of deal-specific nature, pool quality? What can you tell me there? Nicholas Mah: Yes, this is Nick. The majority of it is market movements. So rates were higher at the point that we executed the second transaction as well as spreads. So in terms of AAA spreads, for example, in our first securitization, the weighted average AAA spread was around 105 basis points. I mentioned in my prepared remarks, it went out to as much as 140 basis points, 145 basis points. We priced at the tighter end of that range. But still, it was more market conditions. But we were happy with the fact that there was still a well-functioning securitization market, number one. And number two, that our story resonated with the fact that we have strong underwriting quality and performance, which allowed us to price at the tighter end of the range. Operator: Our next question comes from the line of Doug Harter of BTIG. Douglas Harter: You mentioned looking to grow the volume at Constructive. Can you talk -- does that need more capital? Or can you be efficient -- more efficient in turning over the existing capital for Constructive? Nicholas Mah: Doug, so Constructive, we expect the volumes to first stabilize and then continue to grow. As I mentioned in my remarks earlier, the decline year-over-year in terms of Q1 volume was really driven by our influence in terms of making sure that the credit box better aligns with what we put into our securitizations and what the market expects of us. Now Constructive already has a very, very strong collateral profile, which is why the differential wasn't that meaningful. On a go-forward basis, a lot of it has to do with better efficiencies. I would say capital is less of a concern there. Constructive is, at this point, not even utilizing all the capital that is available to them to continue to grow. They continue to expand their broker network. They continue to expand their retail origination platform. They continue to drive more cost efficiencies through better processes. And then also the integration with Adamas has also been helpful in terms of just better capital efficiency in terms of the speed by which trades occur, but not only that also setting up better financing lines and just improving their capital structure and their cost of capital just generally. So there's a few things that we're pushing on. We're going to continue to look at the overall makeup of their originations. The one thing that is very true today is that there is an exceptionally strong institutional demand for this paper and not only the volume, but in particular, the stronger parts of the market and the better credit profiles get stronger bids. And there's going to be an opportunity for us to be able to deliver into that by us growing our platform. That's one of the reasons why we also believe that having a strong distribution network away from just selling to Adamas is an exceptionally important thing, and we hope to capitalize that more in the future. Douglas Harter: Yes. Just a follow-up on that last point. Nick, as volume kind of ultimately grows there, how do you think about the right balance between retaining and selling the production? Nicholas Mah: Yes. So it does fluctuate over time. Last quarter, we purchased about 2/3 of their overall production. I would say in the next couple of quarters, that's a good baseline in terms of where it will be, although obviously, market conditions can change and obviously, the volume can change as well. We expect to continue to sell to the market. We're going to be on the upper end above 50%, but there are other strong relationships that Constructive has with the market, and those relationships have been important in the past, and we believe will be important in the future, and it's -- we're going to make sure that there is some carve-out of volume that is available to them. Operator: I am showing no further questions at this time. So I would like to turn it back to Jason Serrano for closing remarks. Jason Serrano: Yes. Thanks, everybody, for joining us today. We appreciate your time and continued support. We look forward to speaking with you on our July second quarter update. Have a great day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning, and welcome to the Bel Fuse First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the call over to Jean Marie Young with Three Part Advisors. Please go ahead. Jean Young: Thank you, and good morning, everyone. Before we begin, I'd like to remind everyone that during today's conference call we will make statements relating to our business that will be considered forward-looking statements under federal securities laws, such as statements regarding the company's expected operating and financial performance for future periods, including guidance for future periods in 2026. These statements are based on the company's current expectations and reflect the company's views only as of today and should not be considered representative of the company's views as of any subsequent date. The company disclaims any obligations to update any forward-looking statements or outlook. Actual results for future periods may differ materially from those projected by those forward-looking statements due to a number of risks, uncertainties or other factors. These material risks are summarized in the press release that we issued after market close yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations is discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and our quarterly reports and other documents that we have filed or may file with the SEC from time to time. We may also discuss non-GAAP results during this call, and reconciliations of our GAAP results to non-GAAP results have been included in our press release. Our press release and our SEC filings are available in the IR section of our website. Joining me on the call today is Farouq Tuweiq, President and CEO; and Lynn Hutkin, CFO. With that, I'd like to turn the call over to Farouq. Farouq? Farouq Tuweiq: Thank you, Jean, and good morning, everyone. We appreciate you joining our call today. We delivered a strong start to fiscal 2026. First quarter performance reflected broad-based momentum across the business and continued execution, both operationally and commercially. We also delivered solid profitability, supported by disciplined operational performance and favorable mix. Before we get into the quarter in more detail, I want to highlight an important step we took during Q1 to better position Bel for continued growth. We completed a business unit realignment designed to align our teams around how our customers buy and how we win, enabling greater customer intimacy, faster decision-making and a more coordinated approach to delivering our full portfolio of solutions across connectivity, power and magnetics. This structure strengthens our ability to bring more of Bel to each customer, expanding share of wallet through integrated selling, improved program execution and tighter alignment between engineering, operations and the commercial teams. Accordingly, Bel now operates 2 focused business units. First one, Aerospace Defense & Rugged Solutions, or ADRS, which combines our legacy connectivity business with Enercon, focused on mission-critical applications across commercial aerospace, defense, space and rugged industrial environments, and Industrial Technology and Solutions, or ITDS, which integrates our pre-Enercon power and magnetics businesses, focused on data solutions, transportation and industrial markets where performance, reliability and scale matter. This structure sharpens accountability, accelerates decision-making and increases the speed at which we translate engineering into customer wins but also enables product-agnostic access to Bel's full portfolio, so customers engage with us as a solutions partner aligned to their end market requirements. In that context, I am pleased to share that we closed the acquisition of dataMate from Methode Electronics in March for $16 million. dataMate adds approximately $18 million in annual sales with margins in line with Bel and is expected to be immediately accretive. It will operate within our Industrial Technology & Data Solutions business unit. Strategically, this expands our ethernet and broadband portfolio in a highly complementary way and positions us to grow in data centers, industrial automation, smart buildings and broadband deployment. It also strengthens our U.S.-based manufacturing and engineering footprint. We're excited to welcome the dataMate team. They bring new customers, differentiated technology and strong talent, and we look forward to what we'll accomplish together. Turning to business performance. Within ADRS, results were driven by robust demand in defense and commercial aerospace with continued strength across key platforms and programs, supported by strong demand and stable OEM build rates. We also saw ongoing progress in space as production schedules and program content continue to expand. Robust bookings during the first quarter within ADRS were driven by both sustained program demand and continued traction with our channel partners, resulting in a strong foundation heading into the back half of the year. We're also beginning to see the fruits of our organic growth initiatives over the past year. In Slovakia, for example, we secured 2 new defense design wins that are progressing through final certification steps and remain on track to complete in the second quarter. The win was initiated by Enercon with ramping up the Slovakia entity to produce an Enercon design, highlighting our global ability to deliver to our customers locally. In addition, we achieved our first bundled Cinch and Enercon win on a new design in Israel, which is a great early proof point of that -- of what this broader integrated portfolio can do when our teams collaborate across the organization. Within ITDS, we continue to see healthy demand signals across networking and data infrastructure with momentum improving in data center connectivity and high-performance compute applications. Customer activity remains elevated as the industry invests in AI-oriented architectures, driving opportunities for power conversion and protection as well as high-speed interconnect solutions that support next-generation switching and server platforms. We are expanding our design win funnel and investing in engineering and operational capabilities to support these growth vectors, including manufacturing resilience and multisite capacity to serve global data center customers. As we think about the broader environment, we remain mindful of trade policy and tariff dynamics as well as demand variability by end market. We continue to work closely with customers to manage these conditions, including pricing and supply chain actions where appropriate. We are seeing some general upward pressure in certain material and logistics inputs, and we remain prepared to use the levers within our control, procurement actions, pricing discipline and operational execution to support the overall direction we've laid out. With that overview, I'll turn it over to Lynn to walk through the financial results in more detail. Lynn? Lynn Hutkin: Thank you, Farouq. From a financial standpoint, we had a solid quarter with continued sales growth, margin expansion at the gross profit line and healthy cash generation. Before walking through the results, I want to cover a couple of points of clarification related to our new segment structure. First, the realignment that Farouq mentioned became effective March 31, 2026. And as a result, our Q1 reporting and all prior periods presented have been recast to reflect the new structure. Further, we filed recast segment information by quarter for 2024 and 2025 in an 8-K filed on April 6 for reference. Second, beginning in Q1 2026, our end market sales figures will capture all sales into a given end market, including both direct-to-customer shipments and sales through the distribution channel. In the past, distribution channel sales were called out separately in total rather than allocated to individual end markets. We will provide prior period comparable figures where appropriate to help investors evaluate performance on a consistent basis. With those points in mind, let me turn to the quarter. In the first quarter, total sales were $178.5 million, up 17.2% from the prior year period. Gross profit margin was 39%, up 40 basis points from Q1 '25. The gross margin performance improved leverage of our fixed costs on the higher sales volume, partially offset by higher material costs and impacts from foreign currency fluctuation. Below the gross profit line, GAAP operating income was $23.7 million compared to $25 million last year, while adjusted EBITDA was $34.5 million versus $30.9 million in the prior year period. Now turning to results by reportable segment. In the Aerospace Defense & Rugged Solutions, or ADRS segment, sales for Q1 '26 were $99.8 million, up 20.1% versus Q1 '25. Growth was led by a $9.4 million increase in defense market sales, up 19% from Q1 '25 and a $3.9 million increase in commercial aerospace sales, up 22% from Q1 '25. ADRS gross profit margin was 41.5%, an improvement of 140 basis points from Q1 '25. This margin expansion was largely driven by improved leverage of fixed costs on the higher sales volume and a favorable shift in product mix. These benefits were partially offset by unfavorable foreign exchange movements, primarily related to the weakening of the U.S. dollar against the Israeli shekel and the Mexican peso. Within the Industrial Technology & Data Solutions segment, or ITDS, sales amounted to $78.7 million, up 13.8% from Q1 '25. Growth was primarily resulted from AI-driven strength in data solutions, coupled with the continued year-over-year recovery of sales into our enterprise networking customers. This growth was partially offset by lower transportation sales versus Q1 '25, particularly within the rail and e-mobility markets. ITDS gross profit margin was 36.6% compared to 37.3% in Q1 '25. The margin decline was primarily driven by higher material costs, particularly related to gold, copper and PCBs and unfavorable foreign exchange movements, particularly with the Chinese renminbi. Turning to operating expenses and cash flow. R&D expense increased to $8.5 million from $7.2 million last year, reflecting continued investment in technologies aligned with our targeted end markets. Of this increase in cost, we estimate approximately $400,000 related to foreign currency movements as we have a large engineering population in China and Israel. We anticipate R&D will run in the range of approximately $8 million on a quarterly basis going forward. SG&A increased to $36.7 million, up from $29.5 million in Q1 '25. Of the $7.2 million increase, we are estimating approximately $3 million was onetime in nature, including acquisition-related costs related to dataMate, segment leadership transition costs and a prior year benefit which was nonrecurring in the 2026 quarter. The remaining $4 million of the increase reflects targeted commercial and infrastructure investments to support growth in addition to an increase in commissions on higher sales and unfavorable foreign exchange impacts. On a go-forward basis, we expect SG&A expense to run at approximately $33 million to $35 million per quarter. We ended the quarter with $59.4 million of cash and securities. Net cash provided by operating activities was $13.8 million, up from $8.1 million during the first quarter of 2025. Capital expenditures were $2.6 million, generally in line with the prior period. During the quarter, we closed the dataMate acquisition, investing $15.2 million. To help fund that transaction while maintaining balance sheet flexibility, we had $7 million of net borrowings from the credit facility during the first quarter of 2026. To close on the financials, we delivered a very strong quarter, driven by solid execution and healthy demand across the business. Looking ahead, we see continued strength and momentum for the balance of the year and remain confident in our ability to perform. We are also operating in an environment of higher input costs, and we're actively managing that pressure by focusing on the levers we can control, pricing discipline, procurement actions and operational efficiencies. At the same time, we're enhancing our focus on the cash conversion cycle, improving inventory turns, receivables and payables discipline as a key enabler to generate cash, strengthen flexibility and accelerate Bel's growth strategy. With a strong quarter behind us and clear priorities in front of us, we're executing with urgency and discipline. With that, I'll turn the call back over to Farouq. Farouq Tuweiq: Thanks, Lynn. As we look forward ahead, our focus remains on executing our commercial and operational priorities while navigating the external environment, including ongoing tariff and trade-related uncertainties and demand variability across our various end markets. Looking ahead, we have a strong outlook for the second quarter. We are guiding sales in the range of $195 million to $215 million with gross margin in the range of 38% to 40%. This outlook is supported by robust bookings across the business in recent quarters and is driven by higher demand from our defense, commercial aerospace and data solutions customers. Before we open the line for questions, I want to recognize Pete Bittner on his retirement after 35 years with Bel. Under Pete's leadership, we strengthened our connectivity platform and delivered meaningful profitability improvement while deepening customer relations. We are grateful for Pete's contributions and wish him and his family all the best. With that, I'll turn the call back over to Kerri to open up the line for questions. Operator: [Operator Instructions] And our first question will come from Luke Junk with Baird. Luke Junk: Farouq, maybe hoping you could just provide some comments on book-to-bill trends. You mentioned robust bookings were one of the things that is supportive of the guidance. And within that, if there'd be any end market highlights you want to call out as well? Lynn Hutkin: So on book-to-bill trends, I would characterize them as robust in the first quarter here. And that was really seen across the full business, both in both segments and across most of our subsegments. I think the only exception would be in transportation. But when it comes to aerospace, defense, data solutions, a very robust book-to-bill in Q1. Luke Junk: Got it. Second, you mentioned that the ITDS growth was primarily AI-driven with strength in data solutions. Just hoping you could provide a little more color on what you're seeing. And I don't know if you're going to be speaking out the AI dollars specifically going forward. And Farouq, you mentioned serving global data center customers as well. I was hoping we can maybe double-click on that trend too. Farouq Tuweiq: Yes. I think we obviously have seen our customers benefit from all things, data center build-out, obviously, AI and data generation and everything that we're reading out in the world is additive to that effort. And we're seeing that across our portfolio. Specifically on the AI customers that we service, we're definitely seeing a very healthy pickup in their bookings and customers and orders, and therefore that downstreams to us. So I think we would say that we characterize it as a very, very healthy environment. The bookings continue to be more robust. The outlook continues to strengthen and all the good things. And I'll defer to Lynn here on more specifics around that. Lynn Hutkin: Yes. And Luke, so I know in the past we had called out AI-specific sales. As we're entering 2026 here, things are getting a little more blurred, and we had alluded to this last year where we had AI-specific customers, but also selling into our regular way enterprise networking customers where their demand was increasing due to AI demand as well. So I think going forward, we will be talking more generally about data solutions. But we did see it across both of those platforms, I would say, the AI-specific customers and into our more general enterprise networking customers where we saw strength in Q1 that, that was AI-driven. Luke Junk: Understood. Last question for me. Just curious to get your perspective on posture right now at U.S. and Israeli defense trends. It seems like there's a fairly obvious replenishment opportunity. Just how much of that is baked into the 2Q guidance sequentially. And as you look into the back half of the year, just qualitatively, the potential for some additional upside or just clarity on that opportunity. Farouq Tuweiq: Yes. And we talked about, obviously, the geopolitical events for us from an A&D business is helpful and additive. And we've said this in the past where we tend to be levered and a fair amount of exposure to all things on the missile side of the business. So whether it be things that are deploying or the launchers themselves, that's all additive to us. So as you had alluded to here, with the replenishment and the talk about national stockpiles and all that kind of discussion points, that is all additive to us. We agree that we think there has been a replenishment cycle going on starting out back in kind of the Ukraine days, it never felt like we caught up. And now we saw a lot of more usage of the stockpile. So we agree this will probably be a medium-term vector of growth and replenishment. Obviously, we are also seeing more overall investments going into new business and new platforms as the whole industrial A&D complex is being challenged to step up across the technological spectrum. So that all is additive to us. And we see in our business, whether the funneling and the opportunities are becoming a little bit more, a little bit bigger. So we do see more shots on goal. So whether it be the replenishment on existing platforms or new, we think that that's all additive. And also, as a reminder, we're not just seeing that, obviously, in the U.S. side of the business, but we're also seeing that in our European Israel business as well. Operator: And our next question comes from Bobby Brooks with Northland Capital Markets. Robert Brooks: It was great to hear about the first Cinch Enercon package win. Could you just discuss more how that win came about? And maybe what you felt was the piece that pushed the customer to give you that order? Farouq Tuweiq: Yes. I mean, I think, listen, it's -- I'm not sure -- I don't believe in one magical solutions in the sense that we didn't change one thing and it all worked out, right? We sell highly engineered complicated systems, whether it be on the components or on the system side of things. So we -- I would say, people are very busy, right? As we can imagine, A&D is -- our organization is very stretched in. And on top of that, we started partnering to make sure we deliver holistic solutions. So we were alluding to a couple of opportunities here to maybe just kind of expand the point. We had talked when we acquired Enercon potentially using our Slovakia facility to become our A&D footprint into Europe. And obviously, that takes a while to get certifications and sharing the drawings and ramping up the skill set. We had to invest in some CapEx. So we did do that. In conjunction with that, we were able to move some of the products. We had a European customer that wanted to have manufacturing done on the continent. That's where Slovakia came in. So all that effort, we were able to get the customer out to Slovakia. They saw the facility, they saw a signal capacity. Obviously, they know the products from the Enercon and engineering. So it was a very good team effort, both from engineering and operations and Enercon supporting Slovakia to get that facility up and going. And the customer saw it and was thoroughly impressed and we got a couple of POs thereafter. Now with the first one here, obviously, is the win, this becomes a very great one. On the other opportunity I was talking about basically -- can you hear me, Bobby? Robert Brooks: Just curious, is that like, first, is that a specific drone company or... Operator: Bobby, your line is open. Robert Brooks: -- making drones second... Operator: I think he's taking a phone call. Farouq Tuweiq: I'm not sure what's going on, so no worries. You can all appreciate how this goes. But I'll continue to answer your question. The other opportunity was taking an Enercon box, a power unit, and we put a Cinch component on it on the connector and cabling piece of it. So we're able to do the connectivity there. Now we end up solving obviously a few problems because we had both the power supply and the cable solution. So I think we got very good compliments from the customer. I think more importantly, it showed the team the art of the possible. And more importantly than these 2 wins, to be honest, is we are definitely seeing a more robust collaboration across the organization of ADRS. So when we hear the discussion that they're going through and the opportunities, I think people are significantly much more aware of the whole portfolio and going after it. I would also take a step further and say that we're seeing some of the A&D customers looking for more hardened industrial solutions. And now with our non-Enercon products, it's able to fill that gap. So we're able to fulfill the customer needs from a few different angles, I would say. But the discussion bottom line was significantly ahead of where it was, I would say, in the recent memory. I don't know if you're back, Bobby, but hopefully that answers your question. Operator: Our next question comes from Christopher Glynn with Oppenheimer. Christopher Glynn: I'm going to ask a question and try to stick around. Just if there's background noise, just tell me to mute it, please. So just continuing with the defense because it's such a large proportion of your business in such a dynamic area and then you're generating your own dynamism within that. I'd say with these initial kind of greenfield design wins in the defense sector in Europe, is that kind of consistent with the time line you would have anticipated from an integration pathway or maybe pulling ahead a little bit? Just kind of curious of the actuals versus your expectations. Farouq Tuweiq: Yes. I'd say maybe a little bit ahead/on time. If you recall back to kind of Q4 2024, when we did do the Enercon acquisition, we said I don't think we're going to see anything probably until at least '26, probably towards the end of '26. So if that is the correct metric, we said back then, here we are roughly in Q1, we're seeing some of the early wins. I would say what took a little bit longer than anticipated was getting all the certifications and facility approvals. Obviously A&D is a heavily, heavily, heavily regulated market. You can't just be moving things around globally and in e-mails and so on. So as a result of that, the approval process from the local authorities in Slovakia was longer than we anticipated, partially because they're seeing a lot more investment in the overall country. But putting that aside, we're sitting here, let's call it, April, we had some nice wins. We had customers come through this. So like I said, I would say we're probably slightly ahead of schedule on schedule, somewhere in the middle of that. Christopher Glynn: Okay. Makes sense. And just given the obvious dynamism in defense procurement and everything and hot regions, these kind of design wins to revenue, are they pretty quick? Farouq Tuweiq: I would say a lot of good things about defense, but quick might not be the characterization of the world. I would generally say, right, because also when you win a program, you got to prove it out, they got to do all their testing and then it kind of scales over time. But the key is when there's a lot of investment and, let's say, spotlight and all things defense, you got to make sure you're getting into these things early. So as they scale, you're there. I would say if we were to paint a very potentially let's say, range, if it's an existing product, I'd say you generally get an initial order, but I would probably say before you start seeing kind of volumes 12 to 18 months. And if it's a brand-new kind of product or technology that's being developed by the customer, then it could be a little bit longer. But the key is being getting the award side of it, right? Because then you're going to there -- it might go through a couple of iterations along the way. But if it's an existing product or slightly existing, maybe it's a modified, I'd probably say 12 to 18 months before you start seeing some real dollars. That's just the nature of defense design cycles. Christopher Glynn: Right, right. So the replenishment orders are more kind of the quicker lead time drivers that you're seeing right now? Farouq Tuweiq: Correct. And I will also caveat is my earlier commentary on defense, not necessarily the fastest movers, I would say that is probably still true. I would say we are seeing areas where things are moving faster, right? So there it seems to be some buckling of maybe the historical norms. I'd also say there's regional nuances, right? So I think maybe we're seeing some different speeds in Europe versus the U.S., maybe Israel will be the fastest. So I think it's changing a little bit, but I would say, largely speaking, it is a slower moving industry. Christopher Glynn: Okay. And yes, just a quick check on how we think about the back half. Second quarter is obviously a pretty striking step change upward in the run rates. And I think you had some nice latency to some market trends that's showing through. So I'm not particularly thinking that the second quarter guide has some surge demand kind of factored in. Maybe there's a little onetime, but you talked about almost $30 million sequentially and is just a sliver of that. So is that really just a fundamental step in the -- how the run rates are developing with your end market exposure? Farouq Tuweiq: Yes. As Lynn said, we are fortunate to play in a lot of great end markets. So much more than not are in moving in growth mode. And as we closed out the quarter and headed into April, we're just seeing that continued robustness across the portfolio. I would also say that distribution is one of the things we're talking about. It started off very good in April. So as we look at backlog, customer chatter, outlook and the kind of nature of the world, we think we'd expect a very healthy second half. Obviously, keeping in mind, we do hit with some seasonality in Q3 and Q4, right? So Q3, we hit kind of the European slowdown a little bit throughout the summer months and some Labor Day and 4th of July type events. And then we head into Q4, we start getting into some of the holidays, whether it be Golden Week or some of the ones in Israel and overall holidays. But putting that aside, we expect a very healthy second half and continued strength. Operator: And our next question will come from Greg Palm with Craig-Hallum. Jackson Schroeder: This is Jackson Schroeder on for Greg Palm. I want to start out with -- you guys talked on gross margin a little bit and the cost there, but curious how you're feeling about the levers you're pulling on that. I don't know if there's any kind of timing-related things on that, how we might see that play throughout the year, especially as it relates to new bundled design win in Israel and some of the organic initiatives that you have. So curious if you're doing anything within those new contracts or investments to kind of offset that going forward? Lynn Hutkin: Yes. So I think as we look across the full year of 2026, we're a little bit of a disconnect. As just mathematically, as sales grow, we will have better leverage on our fixed costs within COGS, leading to margin expansion. That's with all other things staying consistent. What we're seeing this year is a rise in input costs, primarily related to material costs. We do have some minimum wage increases around the world. And we are in an unusually unfavorable, I would say, FX environment where all 3 of the currencies that impact Bel are all moving in the wrong direction for us. So that's the Mexican peso, the Israeli shekel and the Chinese renminbi. So we do have things moving against us as sales are increasing. We are taking actions that are within our control, whether it's through pricing discipline or procurement initiatives or operational efficiencies, but those things take time to put in place. So what we're seeing is probably Q1, Q2, where there's more of a disconnect where we're paying those higher input costs, and we have not yet seeing the benefits of the initiatives that we're doing to offset those, so. Farouq Tuweiq: And then I'd also say, as we -- obviously we have done some pricing actions to offset these input costs. One of the things we got to be mindful about is touching the backlog. To some extent, to Lynn's point, we got to work through the backlog. So anything new, we've put price increases through. So we'll start seeing the benefit of that as -- maybe we might see some of that in Q2, but I think about it as Q3, Q4, where we'll start offsetting some of that. So I think that's a testament to the business here. We got a higher margin given the operational leverage and things we can control. And then the pricing elements that we did put through, we'll start seeing the benefits of those into Q3, Q4. Jackson Schroeder: Got it. Super helpful. And then I also wanted to talk on the new business structure here, strategic realignment. Curious how you're processing that as it goes through the P&L as you look at inorganic -- sorry, organic growth specifically as we lap Enercon, looking at like the geographic breakdown where we can kind of size where we should be seeing growth here by segment, by geography, if you could do that. Farouq Tuweiq: Yes. I'd say we haven't given forward guidance on the growth piece of it. We, at the end of the day, are in a very unusual environment. So we haven't given any kind of long-term guidance on that. I think the overall message, we expect -- we've always said we're an end market-driven business, and we obviously want to be a little bit ahead of that. So as we think of the end markets, we think there's robustness in there. I would also say that when we look at our A&D business, it's been growing for a bunch of quarters sequentially, right, from a growth rate perspective, and we expect some of that to continue. But by definition, right, maybe some things, the hot percentages start to go up. But overall, we expect robustness and continued top line growth. So I'll leave it at that. On the ITDS side, the data solutions, data centers, AI, kind of all the infrastructure around data generation and transmission and some of the broadband and kind of the other things we've talked about just now, we also expect robustness there. Obviously we have a little bit more nuanced game and strategy in that market where we can make sure we can drive margins and get good return on our business. I would say our industrial technology part of it, which would include some of our transportation and e-mobility type applications and other industrial, I would say that one is a little -- kind of a little bit later to the game, but we're seeing some nice things in that part of the ITDS business. So all in all, we expect the growth piece of it, but I'll leave it at that. Operator: And moving next to Hendi Susanto with Gabelli Funds. Hendi Susanto: Congrats on strong results. Farouq, I would like to understand more about your data center footprint and post the acquisition of dataMate. Like I think my first question is, is dataMate a growing business? What kind of sales trend? And then second one is when you talk about data center, AI data center, anything new, any new areas that you want to address, any new product portfolio that you want to develop? Farouq Tuweiq: Yes. So maybe the first question on dataMate, yes, we bought it with the expectation of growth. I would say we are a better home for it in terms of the end markets that they play in, the customers they serve and the kind of language that we do use. I would say, in certain of the products, which is their core products, they were the, let's call it, the dominant great reputation in our industry. So we're very excited for that team to join us. And when we look at the development product portfolio and things that they're working on, we're very impressed by. So yes, our expectation is that it grows or else I'm not sure we do the acquisition. And I think also what's the nice thing about dataMate, it gives us a footprint into manufacturing in the U.S. Obviously the team there, kudos to the dataMate team, it was a carve-out. So we had to relocate facilities, and those things are always bring a certain level of complexity, but we are in the new facility. We're up and going. The team did a great job. It was much more seamless than I probably had anticipated. So thank you to the team there. So that's the expectation of dataMate. I would say dataMate, there are some customers that they bring that we just haven't had inroads with historically that we hope to kind of land and expand the broader Bel portfolio. We have a much broader sales organization and reach globally that we think we can effectuate their growth. And I'd say more importantly, I think people are very excited internally to have access to that portfolio set and also just great engineering. The other thing I would say to your other question on the data centers, AI, I mean, look, we have a lot of SKUs that we're always seemingly winning new things. But at the end of the day, the drivers remain the same, which is AI build-out, AI deployment, data center build-out, data center deployment, routers and switches, right? That's kind of where we play. I would say that effectuates our legacy power and magnetics businesses from both sides. So I would say it's pretty broad-based. And as we've talked about, when we say AI, we think of that as a floor versus ceiling because sometimes we lose visibility to where our products are going. But when we look at the floor, which is the clear AI, we're seeing robustness in that growth. And so that's, let's call it the clear AI, if you will. Lynn Hutkin: And just to add on to that, so within Data Solutions, we've talked in the past how our AI exposure is largely within our power products. So if we isolate Data Solutions just within power products, that increased by $4.8 million or about 27% from Q1 last year to Q1 this year. And much of that was driven by AI. Hendi Susanto: Yes. And a then Farouq, a number of companies have talked about the possibility of price increases in the second half. You mentioned pricing action. What are the puts and takes in terms of expectation on price increase in general in your industries in the second half? Farouq Tuweiq: Yes. I mean, let's be honest, I don't think everybody welcomes us or anybody in the industry with open arms around price increases. But I think there's a general understanding and appreciation for the fact that things are going up. I would also say from an industry-wise, you are correct. It's become normal. I shouldn't say normal, but people have done it, and it's part of the world that we live in. So from our perspective, we need to do the right thing by our investors and make sure that we are passing on cost. Obviously, we try to mitigate where we can. But if not, then we will need to pass that on. And I think you hit on it correctly as we took pricing actions in Q1, but that's on the new business, right? So obviously, we have backlog, so we don't want to necessarily -- barring it being egregious or something really kind of crazy, generally, you want to update your price sheets and pricing for all the new stuff. So that's why we earlier said we'll start seeing the benefits of that, some of it in Q2, but we think about it more by Q3, Q4. Hendi Susanto: Got it. And then, Farouq, any insight into market recovery in industrials, especially on customers' and distributors' inventories? Farouq Tuweiq: Yes. So we're seeing -- I'd say distribution is a pretty broad -- obviously we touch a lot of end markets and a lot of customers, right? But I would say we've seen pockets of definitely robust strength, and we've seen pockets of still recovery side of things. So as a result of that, when we stitch it all together, we'd say it started getting a little bit more stronger as we can -- headed out of the quarter into April. So I would say we are seeing the strength in distribution, the recovery part of it, which I think is additive to our efforts and to earlier commentary as well. Operator: We'll go next to Theodore O'Neill with Litchfield Hills Research. Theodore O'Neill: Congratulations on the quarter. Two questions for you. The first one, last quarter you talked about weakness in the rail and e-mobility, and I'm wondering if anything has changed there? And my second question is about the strength in Q1. In the last 20 years, you companies reported a sequential growth in Q1 over Q4 only 3 other times. So what was driving the strength here in this sequential increase? Lynn Hutkin: So I'll cover the initial question first. So on e-mobility and rail, it's, I would say it's relatively more of the same from Q4. I think on the e-mobility side, Q4 was probably the bottom that we saw. There was a slight uptick from Q4 to Q1, but nothing meaningful. Both of those areas, I would call them still depressed in Q1, similar to Q4. And then what was the other -- I'm sorry, the other part of the question? Farouq Tuweiq: The broader industrial. Theodore O'Neill: The sequential increase in Q1 over Q4. Farouq Tuweiq: That's really rare. Lynn Hutkin: In general, right. So as our end market mix is changing, so you're correct that historically Q4 to Q1 we always saw a -- or generally saw a decline. And that was largely due to the Chinese New Year holiday and production interruption that we would see in the January, February time frame with our large dependence on the China workforce. As more of our business is becoming aerospace and defense-centric, we are less reliant on China. So it's just having less of an impact. So we're becoming less seasonal as our end market mix shifts more towards A&D. Operator: And we'll take a follow-up question from Bobby Brooks with Northland Capital Markets. Robert Brooks: I was just curious on diving a little bit more into the guide. Obviously really nice sequential growth. And even if you back out the benefit from dataMate, we're still looking at like really nice double-digit year-over-year growth. So could you just expand a little bit on the factors that underpin that outlook? And do you have a visibility with the strong bookings already year-to-date, that type of sequential growth can keep occurring in the back half? Farouq Tuweiq: Yes. So I'll just answer kind of generally before I turn it over back to Lynn, Bobby. Yes, our backlog continues to build and grow from year-end, strength to strength, Q1 was very healthy. Obviously delivery could be kind of spread out. From our perspective, yes, we're seeing that. We're also seeing the robustness of the funnel opportunity and new opportunities and also just general, let's say, industry chatter with whether it be our customers or distribution partners. But yes, we put a guide here based on some very good orders that need to be shipped and scheduled to ship in Q2. Obviously, not all of our backlog is for Q2. So we have backlog into Q3 and Q4. Obviously it starts to scale down post Q2, a quarter out roughly. So but when we look at again the forecast, the guidance, the discussions, what we have in the backlog, right, that's how we think about it. That's why we said, yes, we do expect robustness. Now to the specific level, I think it will be largely kind of very healthy, putting aside some of the seasonality that comes in Q3 and Q4. So we expect to have a very good year. I think I'll kind of leave it at that. Lynn, I don't know if you want anything to add. Lynn Hutkin: Yes. So Bobby, on the question about the Q2 guide, I think if you're comparing Q2 last year to what we're guiding for Q2 this year, the strength is really seen across both segments. Within ITDS, I would point to the Data Solutions portion, which is largely AI-driven. And then within ADRS, it's really commercial air, space, defense. We just have several of our end markets that are running very strong right now. So those are the key drivers, and it is supported by the orders received. Robert Brooks: Awesome. That's super helpful color. And then just one last one for me is you guys have done a really good job kind of finding strong acquisition targets. Obviously just the dataMate looks like more of that. Just was curious to get your -- get a feel on capital allocation and your appetite for more M&A moving forward? Or maybe is it a pause just to let the dataMate get the integration, or? Just curious to hear that. Farouq Tuweiq: Yes. No pause here. We are always out and active on the M&A front. Obviously, if you were to kind of set aside a little bit the dataMate acquisition, the cash flow even for -- usually Q1 is our biggest cash, let's say, usage of the year, given its bonus and we pay our big IT and insurance and all other kind of good stuff. But putting that aside, I think it was a very good cash flow, and we obviously were able to pay for dataMate. As we look out to the balance of the year, we expect healthy cash flow generation. We have a good amount of opportunity on the access to capital side of things. So when we look at that married up with internal bandwidth and ability to execute upon an acquisition, we like both of the sides. So we are open for M&A. We're actively looking at M&A. It feels like we always have some kind of discussion going on around M&A. So we are not hitting the pause by any stretch of the imagination. I think what we would need to be mindful of, maybe how messy it is and how much integration and the M&A needs to stand on its own merits. So from our perspective, we're wide open for M&A. Robert Brooks: And again, congrats on the great quarter. Operator: And this now concludes our question-and-answer session. I would like to turn the floor back over to Farouq Tuweiq for closing comments. Farouq Tuweiq: Yes. Thanks, Kerri, and thank you, everyone, for joining us today. A very important thank you to all of our team globally that delivered this outstanding Q1 and what we think will be a very healthy balance of the year starting out with Q2. So thanks, everybody, and looking forward to speaking again in July. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the First Quarter 2026 Earnings Call for FMC Corporation. This event is being recorded. [Operator Instructions] I will now hand the conference over to Mr. Curt Brooks, Director of Investor Relations for FMC Corporation. Please go ahead. Curt Brooks: Good morning, and welcome to FMC Corporation's 2026 First Quarter Earnings Call. Today's prepared remarks will be provided by Pierre Brondeau, Chairman, Chief Executive Officer and President; and Andrew Sandifer, Executive Vice President and Chief Financial Officer. After prepared comments, we will take questions. Our earnings release and today's slide presentation are available on the FMC Investor Relations website, and the prepared remarks from today's discussion will be made available after the call. Let me remind you that today's presentation and discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including, but not limited to, those factors identified in our earnings release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today's understanding. Actual results may vary based on these risks and uncertainties. Today's discussion and the supporting materials will include references to adjusted EPS, adjusted EBITDA, free cash flow, organic revenue growth and revenue, excluding India, all of which are non-GAAP financial measures. Please note that as used in today's discussion, CTPR means Chlorantraniliprole, earnings means adjusted earnings, EBITDA means adjusted EBITDA and sales refers to sales excluding India. A reconciliation and definition of these terms as well as other non-GAAP financial terms to which we may refer during today's conference call are provided on our website. With that, I will now turn the call over to Pierre. Pierre Brondeau: Thank you, Curt, and good morning, everyone. During the first quarter, we delivered results that exceeded the midpoint of our guidance range. In addition, we made good progress on our 2026 operational priorities, which are listed on Slide 3. These are strengthening the balance sheet through targeted debt reduction of approximately $1 billion, improving the competitiveness of our core portfolio, managing the post-patent transition for Rynaxypyr and supporting sales growth of new active ingredients, including Isoflex active, fluindapyr and Dodhylex active. I will start by providing an update on the progress of these 4 operational priorities, beginning with the debt reduction. We are continuing to target approximately $1 billion of debt paydown during 2026. The sale of our India commercial business continues to progress very well. We are in late stages with several potential buyers and expect to sign a definitive agreement in May. In addition, we are in advanced discussion with multiple potential partners regarding licensing of one of our new active ingredients, which we expect will include an upfront payment. We anticipate concluding talks in the coming weeks. The remainder of the debt paydown is expected to come from proceeds from the sale of noncore assets, including potential sales of noncore businesses and/or molecules as well as multiple sizable real estate opportunities, some of which are in advanced negotiations. Next, FMC continues to take decisive action to optimize our manufacturing cost structure and rebuild the competitiveness of a non-diamide core portfolio in a market increasingly impacted by low-cost generic competitors. We intend to shift production from high-cost plants to lower-cost sources in Asia. We expect this transition will be completed by Q1 2027 and that will result in a more competitive core portfolio. Additionally, in advance of the sale of our India commercial business, we have already completed the restructuring in Asia to account for the reduced size of the business. We continue to look for opportunities to further optimize our cost structure across the company in 2026. Regarding Rynaxypyr, we continue to advance our post-patent strategy with a clear focus, driving sales growth while keeping overall branded earnings that flat. Our strategy is progressing, and we are seeing early signals that give us confidence. For example, we are observing positive reaction to a price repositioning with strong volume growth for high load formulations and differentiated mixtures. In addition, we are already seeing some small early share gains from other classes of insecticides. On the earnings side, ongoing cost improvements are supporting margin that are in line with our expectations. We continue to pursue additional opportunities for cost reduction, which will further improve the competitiveness of the Rynaxypyr business. We are still in the early stage of a post-patent Rynaxypyr market and believe that some customers are adopting a wait-and-see approach as they gauge the availability and efficacy of CTPR generic offerings. Our strategy will pay out over the coming quarters as we implement our plan. And finally, regarding our new active ingredients, we are seeing solid growth. Sales of these products doubled year-over-year in the first quarter, highlighting the increasing demand from growers. The growth of this product is expected to build momentum, driven in part by new launches and additional registration. For example, we recently received regulatory approval for Isoflex active in the EU. This is a significant achievement as it is the first new herbicide approved in the EU since 2019. We expect product launches to begin in 2027, giving us new or expanded access to more than 55 million planted hectares of cereals, corn, oseedrape and potato in the EU. In addition, many of our customers have requested preregistration exemptions to use Isoflex in Italy, Germany, France and Spain this year. If granted, this will represent upside to outlook for the second half. We continue to concentrate on these 4 operational priorities as the basis for improved results. In parallel, the Board authorized evaluation of strategic alternatives announced in February 2026 is progressing and multiple options are being evaluated. Turning to our first quarter results. Slide 4, 5 and 6 provide details on our performance. First quarter crop protection market conditions were mostly in line with our expectations. Challenging margins and stressed liquidity for customers and growers led to cautious purchasing in most countries. Lower grower margins also increased the willingness to use generic products or skip some preventative applications. As expected, the regions with more pronounced competitive pressure were LatAm and Asia, where generics are more [indiscernible]. First quarter sales of $762 million were $12 million above the midpoint of the guidance, driven by better-than-expected FX and volume. While sales were 4% lower than prior year, sales were up 1% on a like-for-like basis after excluding India from both current and prior year periods. Sales made under the FMC brand grew 6% on a like-for-like basis and included strong volume growth in EMEA and North America in herbicides and Cyazypyr. This was mostly offset by lower sales to diamide partners. These partners accounted for nearly half of our overall price decline of 6%. The remaining drivers of lower price were branded Rynaxypyr price, repositioning to support our post-patent strategy and a competitive market for our legacy core products. Volume grew 2% and FX was a 5% tailwind. The growth portfolio significantly outperformed the core portfolio due to higher sales of branded salzypyr, new active ingredients and plant health. First quarter EBITDA of $72 million was $17 million higher than the high end of our guidance range with FX, cost and volume all favorable to expectations. Adjusted loss per share of $0.23 was $0.15 better than the guidance midpoint due to higher EBITDA. Looking ahead to Q2, our financial outlook is listed on Slide 7. We expect second quarter revenue to be between $850 million and $900 million. The 17% decline at the midpoint is almost entirely due to lower sales to diamide partners and the removal of India. Excluding these 2 factors, our results would be similar to prior year as branded volume growth in most regions and the low single-digit FX tailwind are offset by lower branded pricing due to competitive market in our core products as well as the brand Rynaxypyr pricing action. Adjusted EBITDA is expected to be $130 million to $150 million, down 32% at the midpoint to prior year. Lower sales are driving the decline, partially offset by favorable costs. Adjusted earnings per share is expected to be between $0.16 and $0.26. This represents a decline of 70% at the midpoint to prior year due mainly to lower EBITDA and higher interest expense. Turning to Slide 8. Our full year 2026 financial guidance ranges are unchanged from our last call. Sales of $3.6 billion to $3.8 billion represents a decline of 5% at the midpoint as a mid-single-digit price decline and the removal of India sales are partially offset by volume growth, including strong contribution from new products. EBITDA is expected to be $670 million to $730 million. At the midpoint, this is a 17% decline, mostly in the first half as lower price and FX headwind are partially offset by lower cost and volume growth. Adjusted EPS is expected to be $1.63 to $1.89, which is a 41% decline at the midpoint, mostly due to lower EBITDA and higher interest expense. We are maintaining our full year guidance despite the increased uncertainty related to tariffs and the conflict in Iran. We are beginning to see higher energy, transportation and petrochemical costs flow through to product costs. At the same time, current tariffs are lower, and there is potential to recover previously paid tariffs. At this stage, it remains difficult to forecast product costs or the magnitude and timing of future tariff impact of recoveries given the uncertainty around the duration of the conflict in Iran and potential additional U.S. trade actions. As a result, we are currently assuming that the Iran-related cost pressure and tariff-related benefits largely offset each other. We expect to provide an updated outlook at our next earnings call as we gain greater clarity on how these factors may affect full year results. Slide 9 provides our implied second half guidance using our first quarter results and our second quarter outlook. At the midpoint, we are expecting sales and EBITDA to be largely consistent with last year's second half. Sales, excluding India, are expected to be up 1% at the midpoint versus last year, with volume growth outpacing a mid-single-digit price decline and a minor FX headwind. EBITDA is expected to decline 6% at the midpoint as lower price and minor FX headwinds are partially offset by volume growth and lower costs. Adjusted EPS is expected to be down 15% due to lower EBITDA, higher tax and higher interest expense. Turning to Slide 10. I'll walk through the key factors bridging second half 2025 EBITDA to 2026, and why we are confident in our expectations for the second half. We expect volume contribution to EBITDA to grow with roughly 2/3, driven by new active ingredients, particularly in LatAm and EMEA. We anticipate a mid-single-digit price decline, which is consistent across the full year. An FX headwind is expected to be mostly offset by cost favorability. Our expectation for the second half volume growth are reinforced by positive signals we are seeing in LatAm. At the end of April, we already have orders representing 32% of our H2 direct sales in Brazil, which validates our confidence in the second half outlook. By the end of June, we are expecting orders representing about half of second half direct sales. We have a higher percentage of commitment on a higher sales number versus last year, reflecting the impact of the new direct sales organization put in place in 2025, which is now in full action. The positive signals we are seeing in LatAm, combined with the demand for new active ingredients, give us confidence in achieving our second half targets. By the end of Q2, we also expect to have more clarity on a review of strategic options as well as debt paydown progress. We anticipate communicating these updates at the next earnings call. I will now turn the call over to Andrew. Andrew Sandifer: Thanks, Pierre. I'll start this morning with a few income statement items. First quarter sales benefited from a 5% currency tailwind, primarily coming from strengthening of the euro and the Brazilian real. As we progress through 2026, we expect FX to move from being a tailwind in the first half to being a minor headwind in the second half, resulting in an FX impact on revenue for the full year that is roughly neutral. First quarter interest expense of $64.8 million was up $14.7 million. This increase is driven by 2 factors: the higher rate on the subordinated debt we issued last May and higher short-term domestic borrowing costs. We continue to expect full year 2026 interest expense to be in the range of $255 million to $275 million, up approximately $25 million versus the prior year at the midpoint due to higher borrowing costs of our senior and subordinated notes following the redemption of the notes maturing in October of '26. We continue to expect depreciation and amortization for full year 2026 to be between $160 million and $170 million. The effective tax rate on adjusted earnings in Q1 was 17%, in line with our expected full year effective tax rate of 16% to 18%. Moving next to the balance sheet and leverage. We ended the first quarter with gross debt of approximately $4.5 billion, up $459 million from year-end. Cash on hand decreased $194 million to $391 million, resulting in net debt of approximately $4.1 billion, up $652 million from year-end, consistent with our normal seasonal working capital build. Gross debt to trailing 12-month EBITDA was 5.7x at quarter end, while net debt to EBITDA was 5.2x. We've continued to work with our bank group to further evolve our revolving credit facility to be more in line with our current credit ratings. On April 16, a further amendment to the revolver became effective. This amendment transitions the revolver to being fully secured, moving away from the springing collateral concept included in the prior amendment. The amended agreement maintains the current capacity of $2 billion and the current maturity of June 2028. We added a collateral package to secure revolver lenders worth approximately $6 billion through direct liens and up to approximately $9 billion, including subsidiary guarantees and pledges of stock of subsidiaries. As a result, we are substantially over collateralized. With the latest amendment, we now have 2 maximum leverage covenants. The first is maximum allowable total leverage, which considers all of FMC's outstanding debt. This total leverage covenant will not be measured until December 31, 2026, when it will be reinstated at 6.75x through December 31, 2027. The second is the newly added secured leverage covenant, which limits the amount of secured borrowing allowable to 3.5x trailing 12-month EBITDA over the life of the credit agreement. On March 31, our secured leverage would have been about 1.3x, well below the new covenant. To be clear, while the maximum total leverage covenant was technically waived for the first quarter, we were in compliance with the previous covenant. Total leverage was 5.67x at March 31 as compared to the prior total leverage covenant limit of 6.0x. We are appreciative of the 100% support from our bank group for these changes. We intend to go to market this quarter with a secured high-yield bond offering to redeem $500 million of notes that mature in October, market conditions from renting. Should market conditions turn unfavorable, we have more than adequate available liquidity to redeem the maturing notes if necessary. As we move through the rest of 2026, we will use all proceeds from asset disposals, licensing agreements, real estate opportunities, et cetera, to pay down debt. Moving on to free cash flow on Slide 11. Free cash flow in the first quarter was negative $628 million, $32 million lower than the prior year period. Lower EBITDA drove a decline in cash from operations year-over-year, which was only partially offset by lower capital spending. We continue to expect free cash flow for 2026 to be in the range of negative $65 million to positive $65 million or breakeven at the midpoint. This includes approximately $150 million in restructuring cash spending. Compared to the prior year, lower EBITDA, higher restructuring spending, higher cash interest expense and modestly higher capital expense are expected to be offset by improved working capital performance in the ongoing business, the liquidation of India working capital and lower cash taxes. With that, I'll hand the call back to Pierre. Pierre Brondeau: Thank you, Andrew. I'll close by simply saying that we remain focused on improving the business and results through the 4 operational priorities. I am happy with the progress we have made so far, and I expect that starting 2027, we will see more meaningful benefits reflected in our sales, earnings and balance sheet. Based on the actions we are taking, I believe the first half will represent an earnings trough for the business with higher sequential earnings in the second half of this year, followed by improved full year results in '27 and 2028. With that, we are happy to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Mike Sison with Wells Fargo. Michael Sison: Good start to the year. Pierre, you gave good detail on your second half outlook. Where do you think the biggest challenges are going to be to sort of hit that? Obviously, Brazil is going to be the biggest part of that. And then I'm just curious, it sounded like you were more confident in racking up orders for the second half. Maybe a little bit more color on the new sales organization and why those orders are coming in maybe better than last year? Pierre Brondeau: Yes. Thanks, Mike. Let me try to do one thing because I think that maybe the most -- the best way to explain H2 is to tell why we do expect such a ramp-up coming from H1 and what are the very key drivers. So I'm going to try to put that into a few buckets and tell you why we are confident. I'm going to take -- if you think about it, our forecast in H2 at the midpoint is about $425 million of sales improvement in H2 versus H1. So I'm going to try to take the 3 main buckets allowing us to have the expectation of this $425 million increase. The first one is the non-diamide core. We are expecting $150 million to $200 million of improvement. And the main driver is direct sales in Brazil. As I said in our prepared comments, we already have a very significant number of orders in hand. By the middle of the year, we should have half of the orders required to deliver our H2 number in Brazil. And that is because the new sales organization is now in fully [indiscernible]. Remember last year, we made that decision that organization was ready to act by April, May. But as you can see with the numbers we are giving of the orders we have in hand, we missed a big part of the season, not this year, and our orders in hand are already much higher than last year on a much bigger target number. Number two, of the improvement, about $50 million to $80 million is Rynaxypyr. Number one driver, and we see that every year, there is nothing new to it. It's always the same sequence. There is significantly less partner headwind in the second half than what we see in the first half. We also have a stronger branded performance in the second half. And the last one, the third one, maybe the most important is our new active ingredients, which are accounting for about $175 million to $200 million, mostly LatAm, North America, but also remember, the cereal season in EMEA in Great Britain, where we sell Isoflex is in the third quarter. So non-diamide, $150 million to $200 million, Rynaxypyr, mostly with the less headwind from partners, $50 million to $80 million and new AI is about $175 million to $200 million. On the AI is very consistent with what we are seeing in the first quarter in terms of demand. Now that gives you a range of $375 million to $480 million for a guidance of $425 million. Puts and takes, obviously, will not be everything at the low end or at the high end. And we do have growth expected in [indiscernible] Plant Health. So that gives us a comfortable range versus a targeted number. If I would do the H2 to H2 '25, '26, that's a very simple story. That's what we had in the prepared remarks. Basically, direct sales are the driver with new active ingredients, and that's offset by FX and price. So Mike, that's about the -- as precisely as I can do of a bridge with much higher level of confidence in each of those 3 buckets with what we are seeing right now. Operator: Your next question comes from the line of Duffy Fischer with Goldman Sachs. Patrick Fischer: So a question on Rynaxypyr and in particular, the partner sales. I think you've talked about that being $200 million in revenue, which for the company would, let's say, be 5% or 6% of total sales. But last year in Q1, your price was down 9%. You called out partner sales as being half of that. You also called out this Q1 partner sales being half of your price decline of 6%. So it seems like collectively, on a 2-year stack, that's been like 7% of total company sales price down on something that's like only 6% or 7% of the company's sales. So the math doesn't triangulate for me at least. So can you talk about how big was that partner sales at the peak? How big is it on the run rate today? And roughly how much is the price fallen for partner sales in particular? Pierre Brondeau: Yes. I'm trying to reconcile those numbers, especially using '25 to '26, that's the easiest comparison. First, in '25 versus '24, remember, that's where we had the highest price drop because that is the time when we had the highest cost reduction in the manufacturing of Rynaxypyr. So we are still seeing an impact as we continue to lower price, but less in '26 than it was in '25. We do expect to keep on reducing cost in '27. So you will also see price down on partner sales, but it will be even less than it is this year. From a size standpoint, maybe to summarize, if you remember what we said last year, our total Rynaxypyr of sales were about $800 million. And that was made of $600 million of branded sales and about $200 million of partner sales. If we look at 2026, we are forecasting $700 million of Rynaxypyr sales. That will be $600 million of branded Rynaxypyr, flat number versus '25, but partner sales decreasing to a number lower than $100 million. So as you can see, partner sales because of price and also volume are going to be accounting in '26 for less than half of what it was last year. We believe that is a trend we're going to keep on seeing. At this point, the partner sales, $100 million going down next year is going to be a very small part of our company. And regarding the brand sales, I think we believe that earnings for this year will be similar to prior year on similar sales. And that's what we are seeing right now is, in fact, as we were expecting, the volume gain, the improved mix, as I said in the prepared comments, a significant move toward high-end mixtures and high load with the new pricing, lower pricing, the cost reduction compensate for the lower price. So flat branded sales at $600 million, flat earnings for branded Rynaxypyr is the target for this year. Partner sales going from $200 million to $100 million. Operator: Your next question comes from the line of Josh Spector with UBS. Joshua Spector: I'm curious if you could talk a little bit about your views around input costs and what that means, particularly out of Asia broadly for your second half and fourth quarter? Is that something that you're going to have to get additional pricing for to offset this year? Or is that more of a 2027 event? And I'm honestly not sure that if generic prices are going up and maybe supply is more constrained, is that a risk or an opportunity for you in the second half? Pierre Brondeau: Thanks, Josh. Listen, we we talked a lot about that when we are doing the forecast for the second half. And we felt we do not have enough information on the future impact on inputs for our business. I mean we all know the situation for fertilizers or for crop protection. Today, we are seeing some impact of the Iran war. We have impact at the level of the transportation, distribution, delays plus cost. There is higher energy cost in some of our plants, especially in India. And we are seeing some of the raw material price increase. But at this stage, we've put a number in a forecast, but left it not at a significant level. It's very hard. If the war stop in the next few weeks, we believe the impact on us will be fairly minor. If it lasts for a long time, then that's going to be another story, but we do not have enough information. So at this stage, we're looking at the impact being pretty muted. We see some impact, but nothing major. We're going to have to be watching very, very carefully how it's evolving depending upon the length of the conflict. Regarding generics, there is 2 aspects. One is the information we are getting the data we are given and what we see on the market. What we see on the market is pricing from generic leveling off. We do not have this pricing spiral down that we've seen over the last 2 years. So it seems like we are at a time at the market level where we are seeing a stable situation. Now information we have would tend to prove that there could be or there should be a price increase in the second half. We have not factored that in our H2 forecast because it's not reached the market yet. For example, I'm sure you've seen the announcement on Rynaxypyr moving from the low 20s to $47 to $50 a kilogram. Those are information which have not yet reached the market. We have not seen a significant jump, but all indication on exports and local pricing is that they are moving up. So to answer your question, we have not factored anything in the forecast, neither in terms of opportunity due to pricing of generics or significant impact of the war. Operator: Your next question comes from the line of Vincent Andrews with Morgan Stanley. Vincent Andrews: Pierre, you mentioned potential other assets for sale. You spoke about real estate. Is there anything else within the FMC portfolio, I don't know, plant health, just to throw something out there. What else are you thinking of monetizing? And can you give us an order of magnitude of roughly what you think potential proceeds could be? And if you could give us a little description of some of the noncore real estate or other types of assets, so just we can have an understanding of what you're looking at? Pierre Brondeau: Yes. I'm going to give you as much detail as I can because, of course, negotiations being ongoing. They are confidential as much the request of the people with whom we are negotiating than for us. But basically, where we are today on the target of $1 billion. Number one is, as I said, is India. We are expecting to close on the India deal in the month of May. We are very, very dense. There is not that many issues remaining with the -- we have a few players still in the race, but we are weeks, maybe days away from signing an agreement. That's number one. Regarding the licensing of an active ingredient, we are in negotiation with multiple parties. We also -- it's a matter of weeks before we make a decision which partner to go with. The negotiations are ongoing. Then there is some -- we've been establishing a list of molecules, which are noncore for us, but which are of significant interest to some companies either because of the market they serve or because they have a specific strength in some crops where we do not play. So we have a few of those, which are right now -- a few molecules, which are right now in negotiation. And finally, we do have a few negotiations which are going on and some are quite advanced on real estate deal, which would be sale and leaseback of sites we have where, first of all, we do not need to own them. Second of all, it's easier to lease back. And third of all, they are much bigger than what we would need. If I put all of these together, and I'm only listing the things which are in active negotiation and well advanced, we have about line of sight to $700 million, about 70% of our target. That's what is currently in a very active negotiation. Operator: Your next question comes from the line of Mike Harrison with Seaport Research Partners. Michael Harrison: I was hoping here that you could talk a little bit more about what you're seeing with Rynaxypyr taking share from other classes of insecticides? I know that's the strategy that you guys put in place by trying to reduce costs and take the price lower to make it more competitive. But maybe just give a little more detail on which specific classes you're seeing some share gains from, and if that gives you confidence that you're going to see further traction with that strategy? Pierre Brondeau: Yes. You will understand I'm going to be a little bit discrete around which specific class of insecticide because that would be talking directly the competitors who are leading those leaders in those different type of insecticide. But yes, we have seen that. Actually the only place where we are seeing concrete results right now of the extension of sales into different type of insecticides for Q1 is in North America. Indications we have is with what our sales force right now with the new pricing is targeting is a strong level of confidence that this is going to work. But North America was the place where we saw that the most in the first quarter. Now it's early stage, lots of players are taking a wait-and-see attitude. So the real proof of how well our Rynaxypyr strategy is working will be in Q3 and Q4. But yes, we have actual sales we have taken from other class of insecticides. The other thing which is going very well and maybe a bit better than we're expecting is the mix. With the new pricing we have for Rynaxypyr, we are seeing more and more of the growers moving toward the high-end part of our portfolio. Those are the high load and those are the advanced mixture. Now, it's always the same. It's Q1. It's not the biggest quarter for Rynaxypyr. It's an early stage, but I would say that the percentage of sales and the new mix for advanced technology is higher than we're expecting, which is very positive for us because it's despite the lower price, still a place where we have a solid price premium. I'd say, in the first quarter, about half of the sales move toward the high-end part of the portfolio. Operator: Your next question comes from the line of Chris Parkinson with Wolfe Research. Christopher Parkinson: Pierre, I'd really like to dive a little bit more into some of the new products, which haven't necessarily been the greatest focus, but seem to be progressing pretty well. Beginning with Isoflex with the new registration and the kind of the tangible market opportunity, can you just kind of give a framework on how you're thinking about the initial opportunity as well as kind of the longer-term opportunity there? And then understanding that Brazil is obviously challenging for pretty much everybody at the end of last season, what's the update of Rynaxypyr in terms of like -- in terms of how your order book that you've been referencing the progress there, how does fit into that as well? Milton Steele: Listen, Isoflex, Isoflex is going to be a very critical product, obviously, in Latin America, but it's going to be a very, very critical product in Europe. We believe that in not too long, that's what our team in Europe would say Isoflex will be very quickly bigger than Rynaxypyr and Cyazypyr together. Where are we on Isoflex, and that's a process which is a bit more complicated in Europe is, first, you need to obtain the registration of the active in the EU, which we just got a few weeks ago. So that's a very important step because only when you have that step, you can start to get registration for the product you would sell in each of the countries, the formulation you would sell in each of the countries. Great Britain is different. We obtained the registration for the formulation last year, and that's going to be the bulk of our sales in 2026. Now that being said, the product is working so well. We're going to have 100% of reorder and growth in Great Britain for this product. And our customers in multiple countries are asking for exemption to be able to use the product. So we don't know if that's going to happen or not. But all in all, going very well, confirming the performance of the product and the target numbers we've been giving so far are being confirmed. There is no showstopper here. fluindapyr, same thing. fluindapyr is growing fast. The only limitation to growth of fluindapyr, including in Brazil is the registration process. We do have 19 right now pending registration, which, as we get them, it allows the product to grow. It's a part of the direct sales. Also, it's one of the driver for the success of direct sales in Brazil. So as I said, Rynaxypyr, we're going to have to see and wait on Q3, Q4. We have a good level of confidence. Fluindapyr, a new product, the level of confidence is higher. I mean that's -- the demand is very strong, so there is no issue here, only the speed at which we are getting the registration. Operator: Your next question comes from the line of Jeff Zekauskas with JPMorgan. Unknown Analyst: In the first quarter, your prices on average were down 6%. If you exclude diamides, what would prices have done? And secondly, in the first quarter, were Cyazypyr prices up or down or flat? Andrew Sandifer: Jeff, it's Andrew. I'll take that one. Look in first quarter for the non-diamide products, prices were down in the low single digits percent on that sales. We saw significant price reductions in branded Rynaxypyr and the partner Rynaxypyr business. But across the non-diamide core portfolio, which is the bulk of the rest of it, it's in the low single digits. It was a very good quarter in terms of repositioning. Volume, not great. We'll keep working that. But I think as we continue to improve competitiveness of those costs, you'll start to see improvement there for the non-diamide core portfolio. For Cyazypyr, prices were relatively flat, but we did see good volume growth, particularly in Europe. So it's been -- it was a good quarter for Cyazypyr. Operator: Your next question comes from the line of Joel Jackson with BMO Capital Markets. Joel Jackson: Just following up on the partnering -- the licensing deal you're trying to do for the One AI with the upfront payment. If I heard correctly, it's One AI that you're looking at getting something close. I imagine you're looking at all of your new AIs. Could you maybe -- if that's correct, can you maybe elaborate a little bit on why one particular AI seems more likely with partners wanting to license it? Or is there something else happening? Or just talk about that dynamic, please? Pierre Brondeau: Yes. It is -- I'm going to give by answering that if you think about it more information maybe than I should. But actually, there is 2 different ways to think about licensing. When a product has full registration, you license the product or mixtures, but it's not a broad licensing of the molecule. For example, we take a product like Rynaxypyr -- sorry, fluindapyr. Fluindapyr is a product for which we have the active being registered and then people can develop formulations and get registration for formulation. So for this kind of product, you go with multiple licensing as you see opportunities. So for example, fluindapyr, we licensed part of the product to Bayer and to Corteva, Corteva last year and Bayer 2 years ago. So it's a very different approach. When you have the most advanced technology for which one of your partner is very interested, it's a broader licensing, which is done because you don't have yet the registration. This work still needs to be done. So it's a full access to the molecule, but it's a very different type of approach because the product is not yet at a point of being commercial. So that's why if you think about our product, there is 3 products for which we have a significant number or start to have some registration and one which is still away from commercialization and registration. It doesn't mean -- by no means does it say that we will not be licensing the other products, but it will most often be licensing without upfront payment and the royalty is being paid as the product is being sold. Operator: Your next question comes from the line of Laurence Alexander with Jefferies. Laurence Alexander: Just on the new product pipeline approvals, what do you need to see in the back half of this year to know that 2027 is on track? Which ones are still pending that you think are particularly important? Pierre Brondeau: I don't have the list on top of my mind. We have a road map with all of the registrations, which need to happen for '27. As I said -- and the number is 19. We have the exact road map. We know exactly where they are for the product. I could not go through the -- each of the country right now, but there is no place where we see specific delay, which would concern us in terms of 2027 target. Andrew Sandifer: Yes. I'll just build on that, Pierre. I think when you look at fluindapyr, a lot of that growth will be growth with existing registrations in existing countries. As we've said, we've gotten pretty much all the registrations for the active ingredient fluindapyr by country that we were targeting. So there's a lot more introduction of new formulations and just penetration of those countries to drive growth from '27 to '26 with fluindapyr. With Isoflex, it's really getting the product -- formulated product registrations in the EU. As Pierre commented earlier, we are seeing formal requests from growers in multiple European countries to try to get exemptions to use those products in advance of getting them fully registered. But certainly, in '27, we would hope to have full product registrations for all of the IsoPlex-based products for particularly EU 27 countries, and that's a big driver of growth. The only really other place where there's big growth in the new active ingredients, we do expect a little bit more growth from Dodhylex. We do anticipate a few new registrations for Dodhylex in 2027. It's not nearly on the same scale of year-on-year growth as the growth from fluindapyr and Isoflex. So I think as we look to '27, it's really a continuation of the trend of fluindapyr and Isoflex that will drive new active ingredient growth with a little extra spice thrown into the mix from first early introductions of Dodhylex in a few other countries. Pierre Brondeau: And as Andrew said, I mean, if you think about fluindapyr, it's going to be mostly in North America and Latin America, and that's where we're getting -- we should be obtaining new formulation registration. Isoflex, we have the EU. It's all of the major country where we should get early in 2027, the registration for Isoflex. And Dodhylex, its registration in Asia. That's what we -- for Dodhylex, I would say 90% of the market is in Asia. So that's where we are expecting and watching the new registration. Operator: Your next question comes from the line of Matthew Dale with Bank of America. Unknown Analyst: I am very far from being a tariff lawyer or anything like that, but is there any possibility that you get refunds that we're seeing kind of along the lines of some of these other companies that have been reporting that an opportunity set? And then you said you're seeing some positive signs on mix improvement in Rynaxypyr in 1Q. I'm assuming the hope is that continues in 2Q, in the second half? And ultimately, the point is it will be a bigger book of business in 2H. What drives the variance around the success of that 2H? Is it the same mix shift? Is there a risk that the price premium you have on the lower end doesn't hold up in Brazil? Like how do we gauge the upside, downside of what this 2H might look like for Rynaxypyr? Pierre Brondeau: Yes. Okay. Let me start with the tariffs and then I'll go to Rynaxypyr, Tariffs, I'm not a tariff lawyer either. There is 2 type of tariffs which we have paid. There is tariffs which have been what's called... Andrew Sandifer: Liquidated. Pierre Brondeau: Liquidated, which means tariffs which have been through the process of being paid, collected and transferred to different place of usage and they are out of the customer. For this, there is no process in place to even file to recover them. It does not mean that we will not recover them. But right now, there is not a defined process. The other tariffs, the one which have not been liquidated, which have been collected by custom, but which have not been gone through the process of being dispatched and are still there, there is a process in place by which you can apply. Applying doesn't mean you get it, but you can apply for it. Those seem to have a higher probability to be collected faster than the other. Ultimately, all of them should be -- with a court decision should be recoverable. One category seem to be faster than the other, but frankly, we do not know. We do not know. It's still something we are watching very closely. We're working with the lawyers who are giving us their input. As I say, one category is very likely. One is don't know if a process will be put in place. Regarding Rynaxypyr, I think when it's Brazil or North America in H2, all the strategy to be fully successful, I think the #1 criteria is how we are going to be performing in growing the percentage of sales on the high-end part -- which is higher the high concentration or the niches and positioning them at the right price to still be competitive. The reason for that is because Rynaxypyr has been on the market for a while, there is resistance very much in in China starting to be significant in Latin America. Those formulations very often help positioning the product and address the resistance issue or the efficacy issue. So I'd say a significant part of our strategy and maybe in H2, more important than the gain of volume against generic with a single is that piece, succeeding in growing as much as we can the high-end part of our portfolio, which we are selling at a premium. It is what happened beyond expectation in Q1, but of course, on a lower volume than what we will see in Q3 and Q4. Also because the patent just run out at the end of '25. generics are starting to be active in some countries like Brazil, North America, but let's face it, they will be more active in Q3, Q4 than they were in Q1. So the real test is in the second half of the year. Operator: This concludes the FMC Corporation earnings call. Thank you for attending. You may now disconnect.
Operator: Good morning, and welcome to the Hilton Grand Vacations First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mark Melnyk, Senior Vice President of Investor Relations. Please go ahead, sir. Mark Melnyk: Thank you, operator, and welcome to the Hilton Grand Vacations First Quarter 2026 Earnings Call. Our discussion this morning will include forward-looking statements. Actual results could differ materially from those indicated by these forward-looking statements. The statements are effective only as of today. We undertake no obligation to publicly update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of our SEC filings. Our reported results for all periods reflect accounting rules under ASC 606, which we adopted in 2018. Under ASC 606, we're required to defer certain revenues and expenses related to sales made in the period when a project is under construction, and then hold off on recognizing those revenues and expenses until the period when construction is completed. The aggregate of these potentially overlapping deferrals and recognitions from various projects in any given period are known as net deferrals. Please note that in our prepared remarks today, we'll only be referring to metrics that remove the impact of net deferrals, which more accurately reflects the cash flow dynamics of our financial performance during the period. To simplify our discussion today, we've uploaded slides to our Investor Relations site showing these metrics, which we'll be referring to on today's call. I'd urge you to view these slides on our website at investors.hgv.com. On Slide 2 of these materials, you can see the deferral adjusted metrics that we'll be referring to on today's call. Reported results for the quarter do not reflect $25 million of net contract sales deferrals under ASC 606, which had the effect of reducing reported GAAP revenue and were related to presales of our Ka Haku project, partially offset by a recognition associated with our Kyoto project, which opened in March. Also on Slide 2, we defer a net $7 million of direct expenses associated with these revenues. Adjusting for both these items would increase the adjusted EBITDA to shareholders reported in our press release by a net of $18 million to $267 million. With that, let me turn the call over to our CEO, Mark Wang. Mark? Mark Wang: Good morning, everyone, and welcome to our first quarter earnings call. We're off to a strong start this year. And overall, we're pleased with how the quarter came together. The results we delivered in Q1 reflect disciplined execution by our teams across the business and a consistent focus on our strategic initiatives. Contract sales met the expectations we laid out on our prior call and adjusted EBITDA exceeded expectations, growing 8% versus the prior year with 130 basis points of margin expansion. In addition, we drove great new buyer growth, along with cost efficiencies that supported healthy EBITDA flow-through. These results reinforce our confidence that we're on track to achieve our long-term algorithm of consistent growth in sales and EBITDA, and strong free cash generation, along with a commitment to returning capital to our shareholders. We repurchased an additional $150 million of stock during the quarter, bringing the total to nearly $2.3 billion we've returned since becoming a standalone public company. Next, taking a look at our consumer environment. Leisure travel demand among our members remained healthy. Arrivals were strong in the first quarter, and we see trends improving through the fall. And March was our strongest sales month of the quarter with momentum carrying into April. At the same time, we're carefully monitoring the impact of the conflict in the Middle East and the potential broader effects on the leisure travel landscape. But our business model carries several advantages that should help us to navigate the environment. Our members have prepaid their vacations for the year, making them less sensitive to travel costs and new buyers are attracted by the value proposition of our marketing package offerings. In addition, the efficiency initiatives that we already have underway, combined with the variable nature of our cost structure, leaves us well positioned. So while we keep a close eye on the external risks, our focus remains on executing our strategic initiatives and controlling what we can control. Given the results of the first quarter and our purchase of the remainder of the Elara JV to take full control of the project, which I'll cover shortly, I'm pleased to report that we're raising our adjusted EBITDA guidance for the full year. More broadly, the quarter and guidance reinforced the progress we're making as an integrated business and the consistency of our execution against our strategic priorities, which are operational excellence, attracting new customers, product evolution and innovation, and enhancing member lifetime value. Operational excellence drove strong execution in the quarter. While tours outpaced VPG and we saw a higher mix of new owners, our teams effectively managed costs to drive improved EBITDA contribution, and we remain confident in our guidance to grow EBITDA for the full year. We also did a great job of adding new buyers. The investments we made in our marketing pipeline last year supported high single-digit new buyer tour growth in Q1, maintaining the strong pace that we saw in the fourth quarter. In addition, solid conversion of those tours led to the highest level of first quarter new buyer transactions since 2023, up 8% versus the prior year, which is key to driving improved efficiency as well as growing our embedded value. Those new buyers helped to support 29% growth in our HGV Max member base over the prior year to 277,000 members. On the product front, I'm happy to announce that we reached an agreement to purchase the development rights of Elara, our flagship resort in Las Vegas, allowing us to take full control of the project by moving it from a fee-for-service JV to an owned property. As part of the natural progression with our fee-for-service projects, it provides us several significant benefits, including receiving the full economics of the real estate business as well as assuming the existing and future financing business associated with the project, along with providing additional inventory flexibility. Elara has always been very popular with new buyers. But this transaction also unlocks our ability to better sell the project across our entire sales distribution network outside of Las Vegas, enabling owners to upgrade out of the project while simultaneously allowing any of our members to upgrade into Elara. We're also making great progress with our inventory optimization initiative. We've identified a set of 8 properties that no longer fit with our portfolio. And we recently entered into an agreement with a third party for the disposition of our interest in these assets. At high level, dispositions allow us to proactively manage aging and noncore inventory, reduce long-term carry risk and ensure capital is continually recycled into higher-performing opportunities. This discipline helps us to balance between growth, flexibility and profitability. From a strategic standpoint, dispositions support our broader goals by improving the mix and quality of inventory over time, creating capacity to reinvest into priority markets, products and experiences, and reinforcing a proactive rather than reactive approach to inventory management. Taken together with the financial benefits Dan will outline, these dispositions help us to optimize the portfolio and position the business for sustained growth. Turning to the embedded value. We're continuing to expand our industry-leading HGV Max and HGV Ultimate Access offerings to enhance our value proposition and drive member engagement. We recently introduced additional enhancements to Hilton Honor points conversions within the MAX program to complement the suite of benefits that have proven so popular with our Max members. Lastly, our Ultimate Access teams continue to expand our best-in-class experiential platform. In just the past few months alone, our members have enjoyed private concerts with #1 billboard artist Ella Langley, the legendary Beach Boys, and Grammy Award winner Kelly Clarkson. Our partnership with the LPGA provided members in-person access to our tournament and champions to see this year's winner, Nelly Korda, which was televised on NBC and the Golf Channel. HGV will also continue as an official event partner of Formula 1's Heineken Las Vegas Grand Prix, where members have access to exclusive trackside HGV Clubhouse suites and entertainment at Elara. So HGV Ultimate Access is already the biggest and most comprehensive program of its kind, and this year will be even bigger and better. We've got new events planned for new members, including FIFA World Cup events, NASCAR and expanded summer concert series lineup and we'll also be announcing additional exciting programming to further enhance member experiences throughout the year. So to sum it up, I'm happy with the performance at the start of the year. Owners and new buyers continue to respond well to our value proposition. We delivered on our target that we laid out, which allowed us to increase our full year EBITDA guidance. We're continuing to make incremental progress in our evolution as an integrated entity, and we're focused on consistent execution against our strategic priorities as we move through the rest of the year. None of this would be possible without the dedication of our team members and leadership who have built such a strong, innovative and people-first culture. With that, I'll turn it to Dan for more details on the numbers. Dan? Daniel Mathewes: Thank you, Mark, and good morning, everyone. We had great results in the quarter, achieving our contract sales forecast while also exceeding our expectations for EBITDA growth through cost controls that drove margin expansion. As Mark mentioned, the strong performance, along with the momentum that we're carrying into the second quarter, gave us the confidence to raise our full year adjusted EBITDA guidance. Turning to our results for the quarter. Total revenue before cost reimbursements in the quarter grew 2% to $1.2 billion. Adjusted EBITDA to shareholders grew 8% to $267 million with margins, excluding reimbursements of 23%, up 130 basis points over the prior year. Within our real estate business, contract sales of $719 million were down slightly, performing in line with the expectations we laid out on our prior call. The decline was the result of tough comparisons for our Bluegreen business as it normalized against a strong HGV Max launch period last year. New buyer contract sales were over 26% of the total for the quarter, an increase of approximately 160 basis points from the prior year, as we benefited from continued strength in new buyer tours, along with solid execution from our sales teams that drove new buyer transactions to their best first quarter performance since 2023. Tours grew 8.5% during the quarter to more than 189,000 with growth coming from both our new buyer and owner channels. Conversion of the package pipeline we built over the past year fueled new buyer growth, while the strong value proposition of HGV Max continues to drive owner to demand. VPG was nearly $3,800 for the quarter, declining 8% and in line with the expectations of a high single-digit decline we discussed last quarter. As we indicated, the decline was driven by the normalization of owner close rates at Bluegreen due to the lapping of the record HGV Max launch period comparisons, along with higher mix of new buyer sales in the quarter, which carry lower VPGs. Cost of products in the period was 10%, which benefited from higher-than-expected sales mix of lower cost inventory during the quarter. Real estate sales and marketing expense for the quarter was $352 million or 49% of contract sales, 260 basis points lower than the prior year. The strong margin performance was primarily the result of our efficiency initiatives, which the team did a great job executing against. Real estate profit for the quarter was $152 million with margins of 28%, up 350 basis points versus the prior year. Overall, I'm very pleased with our performance this quarter as our focus on efficiency was able to more than offset the margin dilutive effect of lower VPG and higher new buyer mix. In our financing business, first quarter revenue was $138 million and profit was $87 million. Excluding the amortization items associated with our acquired receivables portfolio, financing margins were 65%, up 510 basis points from the prior year. Looking at our portfolio metrics, our weighted average interest rate for originated loans was 14.5%. Combined gross receivables for the quarter were $4.4 billion. Our total allowance for bad debt was $1.3 billion on that $4.4 billion receivable balance or 29% of the portfolio. The portfolio remains in great shape overall. Our annualized default rate for our consolidated portfolios was 10.1% for the quarter, reflecting a slight improvement against the first quarter of the prior year. And as of quarter end, our 31 to 60-day delinquencies expressed as a percentage of the total portfolio remains broadly unchanged relative to the prior year at 1.48% compared with 1.49% a year ago. When measured as a percentage of the total portfolio net of fully reserved loans, delinquency performance reflects a similar trend at 1.7% versus 1.72% in the prior year. Our provision in the first quarter declined sequentially to 14.9%, in line with the expectation we laid out on our prior call, and we continue to feel confident in our expectation of provision remaining in the mid-teens for the full year. In our resort and club business, our consolidated member count was just over 720,000, reflecting strong new buyer additions offset by continued recaptured activity in the period. Revenue grew 1% to $185 million for the quarter and profit was $126 million with margins of 68%. Our expenses were slightly elevated owing to program-related headcount additions, which reduced our margins when combined with our seasonally lower Q1 revenue. However, we expect those effects to diminish as we move into our seasonally stronger quarters of the year. Rental and ancillary revenues were up 5% versus the prior year to $197 million. Revenue growth in the period was driven by higher available room nights and a slight increase in our overall portfolio RevPAR, reflecting continued healthy trends for our rental business. Developer maintenance fees remain the largest driver of our rental and ancillary business profitability trends and were responsible for the $19 million loss in the period. Reducing the burden of developer maintenance fees is a key objective that we'll achieve through both consistent sales growth as well as our inventory optimization initiatives. As Mark mentioned, regarding our inventory optimization, we have signed an agreement with a third party to begin the process for a set of properties that we've selected for disposition. Broadly speaking, we will trade off several revenue streams we currently receive from property HOAs and owners in exchange for savings on the associated carrying cost of the inventory with the net result being a positive contribution to adjusted EBITDA. There are minimum sales generated at these resorts and by transferring that torque flow to other sites within our sales distribution network, we don't expect to sacrifice any sales revenue. We will lose property management fees from the resorts, along with the associated rental income from inventory available for monetization. However, more than offsetting that revenue loss will be a reduction in our developer maintenance fee expense that we are currently paying on unsold inventory at these properties. Our initial estimate for the net of these items is that on a run rate basis, they will benefit our adjusted EBITDA by $10 million to $12 million on an annual basis. I'd note that the agreement is subject to customary closing conditions, and there remains work to be done to get to closing. Therefore, our 2026 adjusted EBITDA guidance does not currently include any contribution from these dispositions. This is subject to change as we move through the process. And in the coming months, we look forward to providing additional financial and timing-related details as they are finalized. Bridging the gap between segment adjusted EBITDA and total adjusted EBITDA, JV EBITDA was $5 million, license fees were $53 million and EBITDA attributable to noncontrolling interest was $2 million. Corporate G&A was $40 million or 3% of pre-reimbursement revenue, in line with our run rate over the past year. Our adjusted free cash flow in the quarter was a use of $37 million, including inventory spending of $71 million, reflecting the timing of our ABS deal activity in the year. We continue to expect our conversion rate for this year will remain in the lower half of our long-term range of 55% to 65%. During the quarter, the company repurchased 3.3 million shares of common stock for $150 million. From April 1 through April 23, we repurchased an additional 904,000 shares for $41 million. And as of April 23, we had $237 million of remaining availability under our current share repurchase plan. We remain committed to capital returns as a primary use of our free cash flow in 2026, and we remain on track to continue repurchasing our shares at a pace of approximately $150 million per quarter, subject to the repurchase activity not increasing our net leverage for the full year. Turning to our Elara transaction. As Mark mentioned, we entered into an agreement to purchase the inventory tail of our Elara JV. This agreement is effective as of today. Given the scale of our Elara project versus prior tail purchases, I think it's important to lay out the effects on our financials in Q2 and beyond. We have been a 25% owner of the JV, and thus, historically, we haven't consolidated their financials into ours. Rather, we reported our share of the JV's income through our EBITDA from unconsolidated affiliates line in our financial statements. In addition, from a revenue perspective, we recognized fee-for-service commission package sales and other fees on our consolidated income statement. And on a KPI basis, contract sales from the project were classified as fee-for-service sales in our real estate business. Given the transaction, as we fully consolidate Elara and recognize the project as owned in Q2 and beyond, you'll notice a reduction in each of those line items, which will be offset by additional sales of VOI, along with the benefits of a new stream of portfolio income in our financing business. Our total initial outflow for the remaining 75% of the entity is approximately $130 million. The acquisition included approximately $85 million from the combination of unpledged eligible ABS collateral and short-term working capital, which we will monetize and will ultimately result in a net cash use of $45 million. This will be a deleveraging transaction and should slightly reduce our corporate net leverage level. We currently expect Elara to contribute approximately $20 million for the remainder of the year, which was not included in our prior 2026 guidance. As Mark mentioned, Elara has been one of the marquee projects for many years and having full control of the asset will be a positive for HGV on a go-forward basis. Turning to our outlook. For the quarter, we outperformed our prior guidance for Q1 adjusted EBITDA growth to be flat to down slightly by approximately $20 million. Due to our strong performance this quarter, along with the additional contribution of Elara, I'm pleased to announce that we're increasing our 2026 guidance for adjusted EBITDA before deferrals to be $1.225 billion and $1.265 billion from the prior $1.185 billion to $1.225 billion for an increase of $40 million at the midpoint. To be more specific, outside of the contribution of Elara's EBITDA, our performance and adjusted EBITDA assumptions in the second, third and fourth quarters remain the same as what was embedded in our initial guidance for the year. From a sales perspective, our prior full year 2026 top line targets remain in place. As a reminder, those include low single-digit contract sales growth with low to mid-single-digit tour growth and VPG down slightly. On a quarterly basis, our expectation for VPG growth for the remainder of the year remain unchanged. We continue to expect VPG to be down slightly for the full year with Q2 and Q3 seeing low to mid-single-digit declines and returning to solid growth in the fourth quarter as we fully lap the Bluegreen Max launch period. In addition, we continue to expect that our 2026 conversion rate will be in the lower half of our target 55% to 65% range as we wrap up spending on Ka Haku projects ahead of its anticipated opening later this year. In addition, despite Q1 outperformance, we still expect that our adjusted EBITDA on a dollar basis will increase sequentially each quarter. For the second quarter specifically, we expect to grow our adjusted EBITDA in the low to mid-single-digit range versus the prior year, which includes approximately $3 million contribution from Elara. Moving on to our liquidity. As of March 31, our liquidity position was $852 million, consisting of $261 million of unrestricted cash and $591 million of availability under our revolving credit facility. Our debt balance at quarter end was comprised of corporate debt of $4.8 billion, and a nonrecourse debt balance of approximately $2.6 billion. At quarter end, we had $150 million of remaining capacity in our warehouse facility. We also had $929 million of notes that were current on payments but unsecuritized. Of that figure, approximately $370 million could be monetized through a combination of warehouse borrowings and securitization, while we anticipate another $367 million will become available following certain customary milestones such as first payments, dating and recording. Turning to our credit metrics. At the end of the quarter, the company's total net leverage on a TTM basis was 3.9x. As you may have seen, just after the end of the first quarter, we also completed our first securitization of the year, an oversubscribed $500 million deal, upsized from $400 million as a result of stronger investor demand. The deal priced with an advance rate of 98% and an average coupon rate of 5.13%, which included a tranche. So despite some of the geopolitical noise, the securitization markets remain open and healthy, and we look forward to completing several more deals later this year. We will now turn the call over to the operator and look forward to your questions. Operator? Operator: [Operator Instructions] The first question is from Patrick Scholes from Truist Securities. Charles Scholes: Dan, I think you made it pretty clear regarding trends in the loan loss provision and propensity to pay really no instability or whatever I think your [indiscernible]. Any additional color you'd like to provide of what you've seen with the new issuances? And then secondly, a follow-up. If you can give us a little color on expectations compare and contrast tour growth versus VPG for 2Q and/or the rest of the year. Daniel Mathewes: Yes. No, absolutely. So I'll jump in on the portfolio, and then I'm sure Mark has some thoughts on VPG and tour trends. But with regards to portfolio, we're really pleased with the performance. I mean, we have a very consistently strong performing portfolio. And if you think about the balance of the portfolio, it's increased year-over-year by almost 8%. The annualized default rates have decreased by about 10 basis points. And as we talked about in our prepared remarks, the early-stage delinquencies are stable to improving. Specifically, even post quarter close, when we look at our early-stage delinquency rates by portfolio, HGV is performing even better. It's down 7% from a delinquency perspective. Diamond is down 10%. Bluegreen is stable and their early, early-stage delinquencies, that 0 to 30-day mark, is actually at a 4-year low and has improved 11% subsequent even quarter end. So that's with all the geopolitical noise, which is very encouraging. And as you probably recall, mid-year last year, we changed the underwriting process for Bluegreen to allow for an enhancement in equity being put down initially. So the actual Bluegreen equity at the table is up 50% compared to 2024 levels. So really pleased with all that performance. So when we look at the provision, sequentially, we dropped from 18% to just under 15%, right in line with our expectations. We're right in that mid-teens level where we expect it to be. So we're really pleased with how that's all coming together. Mark Wang: Yes. And Patrick, on the VPG front, say, first of all, the teams are -- I think they're doing a great job and really in the right direction on the demand front. As we called out on the last call, we expected -- and we saw our VPG headwinds as we lap Max for Bluegreen. So any -- pretty much all of the VPG pressure was related to the Max and Bluegreen launch. So -- but importantly, the teams drove nice growth in new buyer sales and transactions through tour flow. We were up 8% year-over-year on new buyer transactions. So anyways, VPG headwinds were offset by that healthy offset with the foot traffic. So -- and importantly, what we saw is margin expansion, which is really encouraging, especially in a quarter where some of the real estate KPIs would have suggested margin deterioration. So as we focus for Q2 and beyond, our focus is really balancing healthy tour growth with sustainable VPG growth over time, and we expect that balance to improve as we move through the year with headwinds really until we lap the tough comps at the end of Q3. So all in all, pleased with how the teams have managed through the expected headwinds that we anticipated on our VPGs. Operator: The next question is from Ben Chaiken from Mizuho. Jiayi Chen: This is Rita Chen going in for Ben. Could you please elaborate on the inventory optimization initiatives? And do you see more opportunities beyond the 8 resorts that's currently identified? And then as our follow-up, could you also elaborate on Elara, which adds $20 million to the '26 guide? And we would have thought there's a longer term inventory play from -- just benefiting from the mix of own inventory from fee-for-service. Any color there would be helpful. Mark Wang: Okay. Yes, definitely didn't sound like Ben, so thanks for introducing yourself. Look, very -- we're in a really strong inventory position following a decade of building quality and scale into our portfolio. And as we've talked about in the past, we picked up a lot of really good inventory in acquisitions in a lot of great markets. And the optimization that we laid out today and what we'll talk through today is really driven by financial considerations. It's driven by the rebranding, the ability to rebrand these properties, the investments required there that didn't make sense and market overlap. So consistent with what we said in the past, we knew that some of the acquired inventory in these acquisitions wouldn't fit. From a deal standpoint, we've mentioned we entered an agreement on the disposition of the 8 properties. And there's a number of closing conditions, but we're confident that we'll get that achieved in Q3. The economic benefits really is about transferring the ongoing developer maintenance obligation, and Dan covered off on that $10 million to $12 million being run rate and net EBITDA benefit once completed. So that's -- again, that's run rate, and these deals won't be -- we won't get this finalized until probably sometime in the third quarter. So yes, all in all, pleased with this. As far as talking about any future opportunities, we're really focused on executing this transaction, which will have a significant benefit for us. And we're going to continue to be very deliberate in our steps to optimize our portfolio. And this is not about shrinking. It's about upgrading the portfolio. We're monetizing lower quality inventory well, improving the margin and cash flow. So on the Elara front, and I'll let Dan touch on the numbers here. But Elara is -- it's our flagship property in Las Vegas. And we have 38,000 owners and we operate and it's been super productive for us in a very productive and strategic market for us. And Las Vegas has been a core growth engine for the company for multiple decades. And we're excited about this. This is a classic tail acquisition at the right point in the asset's life cycle. And it strategically aligns tightly with our owner-centric and new buyer strategies. So -- and Elara has been very popular with new buyers. And importantly, when you think about what this does, okay, this transaction allows us to unlock all those owners that are sitting within the Elara ownership base. And now they have the potential to upgrade out of that project because historically, over the last 15 years, they've been upgrading within the Elara project. Now they can upgrade outside of it. And simultaneously, it allows our members to upgrade into Elara. So anyways, super excited about this one. And Dan, I don't know if you want to touch on any of the details on the numbers. Daniel Mathewes: Yes. No, I can definitely add some color on that. I mean we talked about the benefit for the year being close to $20 million. But when you think about the transaction in general, we're also picking up from -- included in that $20 million, clearly, but we're also picking up a consumer note portfolio net of impaired that's north of $400 million. So a material increase to the portfolio balance. When you think about other projects that are out there, we -- this is not our only fee-for-service transaction. But to Mark's earlier point, this is a single site transaction. We do have a partner that we've been working with for over a decade at this point in South Carolina with a series of resorts in Myrtle Beach, Charleston, South Carolina, even one here in Orlando. It's a different environment, though. So we're not close to acquiring the tail on that. That's probably anywhere from 4 to 7 years out, just depending on how that runs through. But it will change our fee-for-service percentage. We were in the mid-teens, and it will bring us below 10% with us closing on Elara. Operator: The next question is from David Katz from Jefferies. David Katz: Recognizing that sometimes the press reports can overstate these things, but there definitely was some weather late in 1Q and early 2Q in Hawaii. How -- what are you seeing and/or hearing? Is some of that overstated? Is there some impact that we should be noting? Mark Wang: Yes. Look, definitely some unusual weather in the quarter for Hawaii. And look, I lived in Hawaii for 27 years. It's called the Kona Low, and you get these type of storms about every 20 years. But I can tell you, our teams did a really good job managing through the challenges to minimize the impact. The impact was larger on arrivals than it was for sales. And for instance, if you look at Maui, Maui, which got hit pretty hard, was actually one of our strongest performing sales markets this quarter. So again, the teams did a really good job. But if you look at overall, the weather impact between the ice storms in the Northeast, some of the colder temperatures in Florida and Hawaii, the impact was about $5 million of revenue with the majority of that being contract sales and the balance in rentals. So -- yes, so I'd say not material for us, but I think the teams did a good job managing through it. David Katz: And just following that up, I assume that's -- that minimal impact is reflected in whatever guidance and you're not preparing for anything further or anything ongoing, it was a onetime thing? Mark Wang: That's correct. Yes. Operator: The next question is from Trey Bowers from Wells Fargo. Nicholas Weichel: This is Nick Weichel on for Trey. I just had a really strong new owner performance in the quarter. I was kind of just curious what's driving that? What are you guys doing that's resonating with your owner base, new buyers? And with this and the inventory optimization program and the rebranding cycle you're going through, do you think you're approaching a period where maybe you could put up like sustained positive NOG? Any detail would be great. Mark Wang: Yes. No. Well, first of all, really pleased with how the new buyer trends have been playing out. And we have consistently talked about that being a key focus of ours, and it's critical to the long-term health of the business. And so the trends we saw having 8% increase in transactions and our mix moving up 3 percentage points are all very, very positive. And then we've also talked about just absolute new buyers coming in the system. Over the course of the last 4 years, it has been pretty impressive on a relative basis when you look across the industry. One of the things that we've really been striving on and the teams have been doing a good job is around tour quality. And on the other side, the value proposition. And so all in all, I feel really good about that. I think on NOG, NOG in the near term is more a mechanical outcome of recapture. And ultimately, that's going to improve our cash flow and returns. And what matters for us is EBITDA and lifetime value creation and both of which we continue to grow. So we'll get back to positive NOG at some point, but some of this recapture is healthy, but the trend on new buyers is -- we're pleased with. Operator: The next question is from Stephen Grambling from Morgan Stanley. Stephen Grambling: Just wanted to go back to the -- effectively the disposition or the optimization of the clubs. Is this something that we should be thinking about more consistently going forward? Or is this more of a one-off? And when you were looking at these clubs, was the reason to think about the dispositions mainly because of changes in the individual market? Or is there something when you just think through the structural dynamic of the way these are set up where the HOAs just won't kind of cover the maintenance CapEx over time? Mark Wang: Yes. Look, there's a lot of considerations, a lot of analysis that goes into this, Stephen. And I'd say, first of all, the average age of these properties are 38 years old, right? And that in itself doesn't drive the decision. But when you look at the overlap, 4 of the 8 are in Orlando. And we have 19 properties in Orlando and some of those were picked up through the acquisitions. And so these are, I would say, are the smaller properties and the older properties that when you look from a rebranding perspective, just did not financially make sense. And so -- and then when you look at just kind of the makeup of the inventory or the base of owners in here, the mass majority of the owners were in the trust. So they remain in the trust. So there is not a lot of legacy owners. There's less than 300 legacy owners in these properties. And we're going to be offering them. It's a compelling opportunity to remain into the club, but -- or join the club that these are legacy members and are not part of the club today. So really not a lot of work that had to be done to get past that. I don't know, Dan, if you have anything to add. Daniel Mathewes: Yes. I mean I think the only thing I'd add is very similar to Mark's earlier comments. We always viewed a number of resorts that were not going to be rebranded. So when you think about this, hey, is this a one-off or is this something that we're consistently going to be doing? I'd say it's somewhere in between in the sense that this is an initial set of properties that we've identified. But it's not something that you'll hear from us every single quarter on. Will there be more? Yes. Probably at some point in the next 12 or 24 months, there'll be more. But it's not something that you'll see us do on an annual basis consistently going forward. Mark Wang: Yes. And just to maybe finish up on this particular question. I think we're in a very good inventory position. We're above our long-term targets, which will support a lot of strong free cash flow going forward. But importantly, when you look at our brand stack and the way we're structured now, when you go from luxury, which with our Hilton Club brands, if you look at the property that we're selling right now in Ka Haku, we're getting $175,000 average per week. Now you go down to the other side of it, and that is really being sold to a much more mature customer, I'd say, bloomers, portions of the Gen X. These are people that have higher net worth. And then we have the Bluegreen acquisition really gives us a really good product where we are attracting a lot of new younger buyers into the system. So we like our branding position. We like our inventory position. This is really -- as I mentioned before, it's not about cleaning. It's not about shrinking. It's about upgrading the overall portfolio to better fit on our strategy. Stephen Grambling: Got it. So maybe one quick follow-up just to make sure I understand. So if we think about the club and resort management side then, do you generally expect that segment to grow going forward over the long term? Because I guess this is always a segment that I think was touted as kind of, I don't want say bulletproof, but effectively a perpetuity because you just kind of have inflationary growth every single year. Is any of that changing? Or should we think that this as static? Mark Wang: No, I don't think you should think of this as static. This is going to be a segment that will continue to grow over time. I think we had a couple of onetime things this first quarter. But I don't know, Dan, if you want to jump into any of that. But we're expecting to grow this segment, and it's a high-margin part of our business. And so -- and we're very pleased with the way the teams that are managing that business for us. Daniel Mathewes: Yes. No, I think that's right, Mark. I mean -- we don't look at this being static. We look at growth opportunities. The net result of this impacting resort club and rental is clearly a positive from a cash flow basis, and it's making the organization not only from a portfolio's perspective, but also from an owner's perspective, healthier and stronger position. Operator: The next question is from Chris Woronka from Deutsche Bank. Chris Woronka: I was hoping we could maybe zoom in for a minute on some of the issues that will impact your margins, which I think were maybe a little bit better than you expected in Q1. And really talk about kind of staffing levels and marketing. And maybe if you can just give us a few words on each of those? Are you satisfied with where the budgets are? Is there anything that you -- concerns you with staff attrition or turnover? Or is marketing in line with where you thought based on demand levels? And then I have a follow-up. Daniel Mathewes: Sure. No, I mean when -- I think when you think about Q1 and you think about the outperformance and the margin expansion, there was some element of timing of certain expenses, but we had really strong performance, both in sales and marketing expense as well as the financing business. So some of that trending does carry forward into Q2, 3 and 4. What I would say is you also have -- there is a bit of a mix. So things are going to come in like we originally expected, just in a different way. Clearly, on the financing side, I think everyone would readily recognize that when we gave guidance, we did not anticipate the conflict that we currently see in Iran and its impact on interest rates. So that clearly is priced into our ABS deals going forward, a little bit higher than we originally anticipated this year. But we feel we're in a good strong position there. And from a personnel perspective, I also feel that we're in a good spot. Chris Woronka: Okay. Perfect. And then maybe if we could just circle back for a moment to some of the LLP. I know you've answered a lot of questions on it. I think it all makes sense. But is there any way to maybe if we drill down a little bit to get more granularity on, are you seeing any change in trends, whether it's legacy Bluegreen or legacy Diamond, legacy HGV, are you seeing any trends with demographics or geographic areas? Just curious as to whether we can maybe put to bed some of these concerns about things that are concerns that are out there that haven't yet materialized or any trends you would call out on a more granular level? Daniel Mathewes: Yes. I mean, look, I think there's 2 things worth highlighting here. One, it wouldn't be timeshare if it wasn't a little bit complicated. So when you think about our loan loss provision, it's always going to be dependent upon -- if you ignore macro for a second, for us and specifically, it's going to be dependent upon the mix of the product that we sell. So the more trust we sell, the higher the actual provision will be because that's our entry-level product, and that bears a higher provision. The more deed we sell, the lower the provision will be. In this particular quarter, we had a higher mix of trust being sold, which led to a slightly higher provision especially if you look year-over-year. Sequentially, directionally and absolutely, it landed right in line where we expected it to be. So that always has a little give and take. Now you get a little benefit because the more trust we sell, it has a lower cost of product. So you'll see that we had a lower cost of product in Q1 year-over-year as well. So there's that dynamic. But when you think about trending and the overall stats that we're seeing in the new originations as well as our historical originations, like I said, we are very -- our portfolio is performing extremely well. No deterioration. It's solid performance. And I think that is also well received in the ABS markets. The deal that we closed just a few weeks ago happened to be on one of the days that Trump was saying X, Y and Z, and we still increased the actual offering from $400 million to $500 million and had strong investor demand. Even with the D tranche, we priced just at 5.13 in that kind of environment. So that is all, in our minds, extremely encouraging. Operator: This concludes the question-and-answer session. Before we end, I will turn the call back over to Mark Wang for any closing remarks. Mr. Wang? Mark Wang: All right. Well, thank you again for joining the call today to our members and team members around the globe. Thank you for making HGV a part of your story. We look forward to updating you on our Q2 call. Have a great day. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings, and welcome to The Boston Beer Company's First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Mike Andrews, Associate General Counsel and Corporate Secretary. Please go ahead. Michael Andrews: Thank you. Good afternoon, and welcome. This is Mike Andrews, Associate General Counsel and Corporate Secretary of the Boston Beer Company. I'm pleased to kick off our 2026 first quarter earnings call. Joining the call from Boston Beer are Jim Koch, Founder, CEO and Chairman; and Diego Reynoso, our CFO. Before we discuss our business, I'll start with our disclaimer. As we state in our earnings release, some of the information we discuss and that may come up on this call reflects the company's or management's expectations or predictions of the future. Such predictions are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's most recent 10-Q and 10-K. The company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. I will now pass over to Jim to share his comments. C. Koch: Thanks, Mike. I'll begin my remarks this afternoon with an overview of our strategy and operating results before turning the call over to Diego to discuss our first quarter financial results and our financial outlook for the remainder of 2026. Immediately following Diego's comments, we will open the line for questions. In the first quarter, we were encouraged to see some signs of improvement in the total beer and RTD category, which we estimate was flat in volume compared to a decline of 4% for the full year of 2025. Beyond Beer continues to outperform traditional beer in volume in measured off-premise channels with an increase of about 3% for the quarter compared to traditional beer, which slightly declined. While these trends represent modest industry progress, we continue to anticipate volume headwinds for 2026, given a dynamic macroeconomic environment and evolving geopolitical developments that may impact consumer spending. With respect to the Boston Beer portfolio, we have not yet fully participated in the improvement in category trends. We are encouraged that Twisted Tea and Sun Cruiser together are growing depletions, driven by the strong performance of Sun Cruiser and some sequential improvement in Twisted Tea. Angry Orchard and Dogfish Head have now experienced 4 consecutive quarters of growth. However, Truly remains a meaningful portion of our mix and continues to lose share, and we've also seen some softness in Samuel Adams and Hard Mountain Dew. Our first quarter depletions were down 4%. As we expected, shipments trailed depletions at down 7%, reflecting first quarter 2025 shipments comparisons when distributors built inventory for our Sun Cruiser and Truly Unruly innovations. Additionally, improvements in the responsiveness of our supply chain to meet consumer demand led to moderately lower distributor inventory of 4.5 weeks on hand at the end of the quarter versus 5 weeks on hand in the prior year period. We continue to make strong progress on our margin enhancement initiatives, delivering 49.3% first quarter gross margin, and we're on track to achieve our planned full year 2026 savings. The business is generating strong cash flow, and we have repurchased over $30 million in shares year-to-date. Our priorities for 2026 continue to be supporting our category-leading brands to improve market share trends, launching strong innovation and continuing to expand our gross margins. We remain focused on controlling what we can control and executing in the marketplace, and I'm confident in our operating plans for the key summer selling season. Incremental advertising support for our brands following a significant step-up in 2025 is on track, while maintaining flexibility to adjust toward the lower end of our financial guidance range of brand investments as we monitor the energy cost environment. With respect to our full year outlook, we expect the factors that I discussed on our last call, including tighter consumer budgets, pressure on the Hispanic consumer and moderation trends to continue. Based on year-to-date depletion trends and our latest outlook for the balance of the year, we are slightly narrowing our 2026 volume range to down low single digits to mid-single digits from our prior guidance of flat to down mid-single digits. As we look to the summer, we're highly focused on executing our marketing plans with strong partnerships, programming for the U.S. men's soccer team during the World Cup and local market activations. We expect to slightly increase our total portfolio of shelf space this spring, while we continue to make progress on regaining lost display space. I'll now provide an overview of our brand performance and plans. As I mentioned on our last call, a key priority for 2026 is to improve share trends and grow volume in the hard tea category through progress in Twisted Tea and the continued expansion of Sun Cruiser. On a combined basis, Twisted Tea and Sun Cruiser delivered depletion volume growth in the first quarter. As a reminder, to the extent that Sun Cruiser sources volume from Twisted Tea, this is revenue and margin accretive for us. Twisted Tea off-premise measured channel depletion trends improved sequentially in the first quarter, but are not yet where we want them to be. Measured channel sales dollars declined 4% in the quarter compared to a decline of 9% in the fourth quarter against more difficult prior year comparisons. Twisted Tea continued to gain distribution and shelf space with lower velocities reflecting broader category headwinds, reduced feature and display activity, primarily due to the expansion of RTD spirits and some interactions with spirit-based hard tea. The declines are primarily concentrated in the original Lemon Tea and variety packs, particularly in 12-pack sizes, as previously discussed. Encouragingly, Twisted Tea Extreme and Twisted Tea Light are both growing and gained shelf space in the spring resets. We're seeing much better trends in single-serve across the full brand portfolio, which indicates continued consumer engagement with the Twisted Tea brand. So far this year, we've increased advertising investment, added new partnerships and launched new pack sizes and Twisted Tea Extreme flavor innovation. This summer, we'll be running our high-performing Tea Drop national ads complemented with in-store display programs and always-on media for Twisted Tea Extreme and Twisted Tea Light. We've expanded partnerships, including Barstool's #1 sports podcast, Pardon My Take, and with Realtree Camo. Lastly, we continue to increase our investment in Hispanic and Hispanic language brand content, including new media and digital content to continue to widen the brand's appeal. Our pack size innovations, including lower price point 4 packs, a 16-ounce can, and a 24 can value pack, and the Twisted Tea Extreme variety pack are now in market. While it is still early, we believe these offerings will continue to provide more options for consumers to engage with the brand and benefit volumes over time. Sun Cruiser has quickly grown to Top 5 spirits RTDs and is the fastest-growing brand in the category by volume across combined measured and off-premise channels. Built in bars and restaurants, Sun Cruiser is the leading RTD spirits tea and lemonade brand in the measured on-premise channels. On-premise remains a key driver of trial, and we are investing in the channel alongside our off-premise expansion. We expect strong distribution gains for Sun Cruiser in 2026, but continue to expect measured off-channel -- off-premise data coverage to be lower versus our other brands due to Sun Cruiser's strong presence in on-premise and independents. Advertising support for Sun Cruiser includes content around the Let the Good Times Cruise media campaign, which includes television, paid social and digital advertising and key influencers. We will be present where Sun Cruiser fits into our drinkers' lifestyles with a particular focus on music and sports. And we recently announced a multiyear USGA partnership, making Sun Cruiser the official ready-to-drink cocktail of 2 of golf's most noticeable championships, the U.S. Open and the U.S. Women's Open. The partnership goes live this spring and programming includes retail and tournament activation, golf media influencers and experiential marketing programs as well as wholesaler incentives. Sun Cruiser will have continued media presence in sports, including the NCAA, the MLB, the NFL, and sponsorship of numerous music concert series. From an innovation perspective, we're maintaining a disciplined range of tea and lemonade styles while expanding package options, including new 19.2-ounce single-serve packages, single-style 8 packs, and tea and lemonade sampler 12 packs. We expect these offerings to broaden drinker occasions and support strong growth in 2026. Turning to hard seltzer. The overall hard seltzer category has continued to improve and grew slightly in dollars in measured off-premise channels for the first quarter. Truly has maintained its #2 share position in the category. However, share trends remain challenged. Our effort to improve our share during 2026 include investing in new equity building creative, capitalizing on the U.S. men's soccer team participating in the World Cup, and continuing to expand Truly Unruly. We're continuing to build our communications platform of Make Your Dreams Come Truly, while leveraging our U.S. soccer partnership through our Drink Like A Believer program. Drink Like A Believer commercial activities launched in May and have been well received by major retailers. The programming includes displays and a U.S. soccer collector set of singles along with the soccer-themed Star Squad Rotator 12-pack and 24-pack. In addition, we will have significant local media and retail programming investment in the 11 host cities. High ABV offerings continue to be a growth driver in hard seltzer and Truly Unruly continues to grow both volume and distribution as our second highest volume 12-pack. In cider, Angry Orchard continues to grow, supported by new positioning, refreshed creative and strong retail programming, including our St. Patrick's Day themed promotions and displays in the first quarter. The new Angry Orchard Crisp Imperial 19.2 single-serve cans are a growth driver for the brand and overall Crisp Imperial volume has increased more than 40% in the first quarter in measured off-premise channels. For our Samuel Adams brand, we have recently updated our brand messaging around Independent Since Forever, and are excited to celebrate America's 250th anniversary this summer. To support our Drink Like It's 1776 retail programming and promotions, we have launched limited edition retro packaging. For our Dogfish Head brand, which returned to growth in 2025 and has grown for 4 consecutive quarters, we continue to expand Dogfish Head's Grateful Dead Beer collaboration and invest behind the Minute Series IPAs. Turning to innovation. We continue to prioritize high-growth, margin-accretive opportunities. Our Sinless Vodka Cocktails are full-flavored spirit-based cocktails with zero sugar and zero carbs. With approximately 100 calories per can, it is positioned as guilty of flavor, free of sugar and carbs, and targets incremental consumer segments that complement our core brand portfolio. Sinless was tested in a small number of states in 2025 and expanded to more than 30 states in March. Sinless is in the early stages of launch and initial feedback from wholesalers, retailers and drinkers has been positive. In closing, I'm encouraged to see modest improvements in category trends. While the macroeconomic environment remains dynamic, we are focused on executing our operating plans for the upcoming summer season. We're acting with urgency to leverage the strengths of our brands, our innovation capabilities and our distributor relationships to improve performance and drive long-term value. I'd like to thank our Boston Beer Company team and our distributors and retailers for their continued support. I'll now pass the call to Diego for a detailed review of the first quarter and our 2026 guidance. Diego Reynoso: Thank you, Jim. Good afternoon, everyone. Depletions in the first quarter decreased 4% and shipments decreased 6.9% compared to the first quarter of last year, primarily driven by decreases in our Twisted Tea, Truly, Sam Adams, and Hard Mountain Dew brands, partially offset by increases in our Sun Cruiser, Angry Orchard, and Dogfish Head brands. Consistent with our plans, shipments declined at a higher rate than depletions in the quarter, with shipments lapping strong growth in the prior year to load innovation. Distributor inventories at the end of the quarter was 4-1/2 weeks on hand, which was approximately 1/2 of a week lower compared to the end of the quarter last year. This decrease in distributor inventory was due to the timing of innovation and supply chain improvements, as Jim mentioned earlier. Revenue for the quarter decreased 4.4% due to lower volume, partially offset by price increases and favorable product mix. Our first quarter gross margin of 49.3% increased 100 basis points year-over-year. Gross margin performance primarily benefited from procurement savings and brewery efficiencies. The positive impact of pricing and product mix were offset by inflationary commodities and tariff costs. Advertising, promotional and selling expenses for the first quarter of 2026 increased $2.5 million or 1.8% year-over-year due to higher freight rates, partially offset by lower volumes. Brand investments were flat, lapping mid-teens increases in advertising investments in the first quarter of 2025. General and administrative expenses increased $4.4 million or 9.1% year-over-year. Excluding legal costs related to the onetime litigation expense, general and administrative expenses increased by $0.4 million from the first quarter of 2025, primarily due to increased consulting costs. We recorded $216 million in total pretax litigation expenses in the quarter. As we previously disclosed, this amount is related to a supplier contract dispute, and we intend to pursue all available post-trial motions and appellate remedies. We cannot estimate when or if damages or interest will ultimately be paid, but do not expect this issue to have a material impact on our operating plans. The total impact of these litigation expenses represented a $15.52 impact to our first quarter GAAP EPS. Excluding the litigation-related expenses, we reported non-GAAP EPS of $1.64 per diluted share. Now I'd like to provide an update on our ongoing productivity initiatives. We continue to make progress and are on track to deliver our 2026 savings target. As I noted on our fourth quarter call, we expect year-over-year gross margin improvement in 2026, although at a lower rate than that of 2025, given strong performance in 2025. We believe the multiyear operational improvements that we have made in our supply chain better positions us to manage variability in volume, product mix and the tariff and commodity environment. For the remainder of 2026 and beyond, we continue to expect contribution from all 4 savings buckets, as I discussed on the last quarter call. I'll now provide some highlights on our initiatives in each bucket. In brewery performance, we continue to see improvements in OEEs driven by process improvements, which helped to increase our internal production capacity. In the first quarter, we produced 95% of our domestic volume internally compared to 85% in the first quarter of last year. For the full year 2026, we continue to estimate domestic internal production will be over 90% compared to 86% last year. In procurement savings, our first quarter results benefited from lower negotiated pricing on certain packaging and ingredients. As discussed previously, procurement savings have been a significant contributor to our gross margin improvements over the last 2 years. While we expect some continued benefits in 2026, the impact is expected to moderate versus 2025. In waste and network optimization, we're continuing to enhance our customer ordering and inventory management system. These efforts helped us achieve high customer service levels, lower inventories and improved our cash flow. In addition, we reduced obsolete inventories 36% in the first quarter. Revenue management capabilities were added this year as part of our margin agenda. These efforts are in the early stages in 2026 with a more meaningful contribution expected in 2027. Turning to our 2026 guidance. As Jim mentioned earlier, our volume guidance range of down low-single digits to down mid-single digits reflect year-to-date depletions and market share performance and our latest outlook for the balance of the year. Fiscal week depletion trends for the first 17 weeks of 2026 have declined 4% year-over-year, a sequential improvement from down 6% in the fourth quarter of 2025. As a reminder, the summer selling season is a significant driver of our full year volume performance, and we will have more visibility on market trends as we move through the summer. Since our last earnings call, we are seeing additional inflation in energy and aluminum that could impact the balance of the year. We do not hedge commodities and are closely watching recent market cost increases driven by macroeconomic factors. As a result of these 2 factors, we are narrowing our full year non-GAAP EPS guidance to $8.50 to $10.50 from our prior guidance of $8.50 to $11. This EPS outlook embeds our latest volume and energy cost projections as well as productivity and cost mitigation efforts. We also expect to maintain flexibility to reduce incremental advertising spending, if needed, to offset further headwinds from the macroeconomic cost pressure. We will update our EPS outlook if commodity inflation continues to increase. We continue to expect price increases of between 1% and 2% and some additional benefit from mix. We continue to expect full year 2026 reported gross margins to be between 48% and 50%. Our outlook expects tailwinds from positive pricing, favorable product mix, productivity savings and lower shortfall fees with headwinds from tariffs and commodity inflation. As a reminder, the majority of our freight expense is booked in advertising, promotional and selling expenses. Our 2026 guidance reflects a full year tariff cost estimate of $20 million to $30 million versus a partial year in 2025 of $11 million. These tariff cost estimates are based upon tariffs that we are currently being charged by our suppliers and that what we expect to continue going forward. We continue to estimate that our investments in advertising, promotional and selling expenses will increase between $20 million and $40 million. This amount does not include any changes in freight costs for the shipment of products to our distributors. As I mentioned earlier, we may choose to spend at the lower end of the range depending on the commodity and energy cost environment. We are estimating our full year 2026 non-GAAP effective tax rate to be approximately 29% to 30%. As you model out the year, please keep in mind the following factors: our business is impacted by seasonal volume changes with the first quarter and the fourth quarter being lower absolute volume quarters and the fourth quarter typically our lowest absolute gross margin rate of the year. We expect first half shipments to decline towards the lower end of our full year volume guidance with better shipment performance later in the year. This is due to higher shipment comparisons in the first half of the year as the company shipped ahead of depletions in 2025 to support innovation and build distributor inventories as well as 2026 innovation launches, which are second half weighted. Additionally, improvements in the company's supply chain responsiveness, that enables modestly lower distribution inventory levels, are expected to have a more meaningful impact on the first half and begin to be lapped throughout the second half. During the full year 2026, we estimate shortfall fees and noncash expenses of third-party production prepayments in total will negatively impact gross margin by 40 to 60 basis points. We expect year-over-year gross margin rate improvements to be the most meaningful in the fourth quarter. We typically expense the majority of our shortfall fees in the fourth quarter. We expect lower shortfall fees in 2026 and the timing of these benefits, together with the fact that the fourth quarter is a smaller dollar quarter has an outsized favorable impact on the gross margin rate. Incremental advertising investment is expected to be weighted to the second and third quarters to support the key summer selling season. Turning to capital allocation. We ended the quarter with a cash balance of $164 million, and $150 million of availability on our line of credit. These balances, together with our projected future operating cash flow, enables us to maintain operating investments in our business and cash returns to shareholders as well as the potential litigation-related payments. We expect capital expenditures of between $70 million and $90 million in 2026. These investments will be primarily related to our own breweries to build capabilities, improve efficiencies and support innovation. We will continue to be disciplined in our capital spending as we monitor the dynamic industry environment over the long term. During the 13-week period ended March 28, 2026, and the period from March 30, 2026, through April 24, 2026, we repurchased shares in the amount of $23.8 million and $7.4 million. As of April 24, 2026, we had approximately $197 million remaining on the $1.6 billion repurchase authorization. This concludes our prepared remarks. And now we'll open the line for questions. Operator: [Operator Instructions]. And your first question comes from the line of Eric Serotta with Morgan Stanley. Eric Serotta: Jim, I wanted to get your perspective on Twisted from here. You made a number of interventions last year, including some selective pricing adjustments or certain packs in certain channels. The brand still seems to be stubbornly declining. Can you talk about how you're looking at the outlook from here? I know you talked about some innovation in packaging, new packaging coming. But do you think you need something sort of a little bit more of a reset or something a little bit more, I don't want to say drastic or extreme, but more expensive to get the brand back to where you want and need it to be? C. Koch: Yes. To answer your question, I don't think it needs a drastic reset, but it does need some levers. What I think is going on is, the success in the rise of vodka-based teas has certainly eaten into the Truly (sic) [ Twisted Tea ] volume. No question about it. It's happened in a bunch of ways. One is it took a lot of display space in 2024. In the first half of 2025, we were getting significant display space for Twisted Tea. We lost some of that last summer to sort of the new shiny penny, which was brands like Sun Cruiser and Surfside. And in total, our Twisted Tea and Sun Cruiser volume is actually up this year. And of course, but the shift is we lost volume in Twisted Tea, made it up in Sun Cruiser, which happens to be margin and revenue accretive in that shift. So our volume in hard tea is actually up a little bit, but there's movement from FMB tea like Twisted Tea to Sun Cruiser and Surfside in the vodka-based teas. What we're doing with Twisted Tea, there's a bunch of sort of smaller levers. One of them is trying to reset some of the pricing. There are markets where it's up at Stella pricing or Modelo pricing, and it's traditionally lived a little bit below FMB pricing because of a more kind of blue collar, but upscale blue collar clientele for Twisted Tea. Second, we've actually gained shelf space for Twisted Tea in the resets. And a lot of that went to Twisted Tea Extreme, which is growing triple digits. Then we are putting more advertising dollars into it and things that don't show up as advertising dollars like Pardon My Take, which is the #1 sports podcast in Barstool. So we're adding more advertising money and pushing it towards NASCAR, Realtree Camo, those kind of partnerships that refresh our connection to our original or blue-collar drinker base for Twisted Tea. And then we've introduced some new packs to give us a better price pack architecture, things like a 4-pack of 16-ounce for under $10 because even the 6-pack pricing has gotten over $10. So this gives us an entry point. And then at the other end of it for value, some 24 packs. So those are the things we're doing with it. And within FMB hard tea, I think Twisted Tea is holding or perhaps gaining share, because the new entrants that have come in the last 5 years from like Monster and Belgium and even Lipton are kind of falling away. So like those are the actions that we've taken, none of them is a drastic reset, but there's a bunch of tweaks. Eric Serotta: And for Diego, look, your gross margin performance over the past year has really been very impressive, especially in light of the commodity pressure and some of the volume deleveraging. It looks like you're basically maintaining the gross margin guidance for this year and the EPS guidance more or less despite the incremental costs since the war. Can you help us unpack some of the gross margin drivers from here? I know you don't give specific quantifications, but kind of order of magnitude, what you're expecting for incremental cost headwinds. LME aluminum is up quite a bit since the war. I believe you don't hedge. So if you could help us understand the moving pieces there, it would be great. Diego Reynoso: Yes, sure. So first of all, thank you for the comment. Look, our margin agenda has always said, look, we think we can get to high 40s. And the difference between high 40s and 50s is that to get to 50%, you need the external kind of situation to, whether it's volume or geopolitical, to help. And I think that's where we've gone to where we're still delivering the savings. But to your point, those savings are being used to offset some of the challenges that we have. So if we look at Q1 for the moment, you can see that like just in aluminum for the quarter, which is a small volume quarter, we've got like $4.3 million of aluminum tariff costs, which is the biggest piece of the tariffs. We also have some POS costs in there and some ingredients. We've been able to offset some of those. We think for the rest of the year, we'll be able to take our continuous agenda, which is procurement savings, brewery efficiencies, where we're 95% in-house versus out of our production facilities. And the other piece is the positive mix that Jim mentioned when we're talking about things like Sun Cruiser and some other innovations that we're launching this year that are accretive to our margins. All of those things are helping us offset some of these external pieces that have challenged our cost structure. Now in order for us to actually improve our gross margin even less (sic) [ more ], what we need to do is maintain those opportunities and savings. And hopefully, as those headwinds disappear, hopefully, in the future, we'll be able to maintain those, and that would be the only way we could drive our margin even higher. Operator: The next question comes from the line of Robert Ottenstein with Evercore ISI. Gregory Porter: This is Greg on for Robert. I just had a quick question about Sun Cruiser. Maybe if you could talk a bit about how the ACV and the brand's penetration differs between the East and the West Coast, and sort of like as you build the brand across the country where you see the biggest opportunity still for TDP gains? C. Koch: Yes. It's strongest in New England. I mean, it's been sort of game changing in some ways in New England. It's the size of Twisted Tea at a higher margin. So our distributors are quite delighted with the performance there. Mid-Atlantic is fairly strong. And you do see differences in penetration. Like Twisted Tea, the last major market was California, and it was almost 15 years behind New England. So there is that regional gap. And with Sun Cruiser, you have the added complexity of the state tax rates and the distribution limitations because it's vodka based. So you have much bigger variations than we have with Twisted Tea in states where you have to buy it from a state liquor store, like in New York, for example. So it's not readily available cold, it's not in the same distribution channels. In Texas, you have to go through a different class of distributors to get to the bars. So there's just much bigger -- and in Washington state, there's a huge tax on any spirits-based products. So there's no really great potential like in Washington state that we would have in Massachusetts or Connecticut. So there are these big differences. To try to boil it down, I think we probably -- we do have ACV upside if we look at it versus High Noon, which is highly developed. There's definite upside, maybe another 50% ACV, and we did not pitch it to chains this time last year. So we didn't get on the steps (sic) [ shelf sets ] quick enough. But now we are. And so we weren't on the shelves a year ago, but we had successful distribution drives this year. So in the shelf sets this year, there's going to be significantly more Sun Cruiser. In some of the chains, we got one item, and now we're getting 3 or 4. So I see a nice bump in the next 3 or 4 months, and then long-term continued upside as the category gets more and more developed. Operator: Our next question comes from the line of Peter Grom with UBS. Peter Grom: So Jim, you touched on the category improvement. Can you maybe just give us a sense for how you see category growth evolving from here? And maybe just some perspective around why you think category trends are getting better? C. Koch: Sure. With the kind of the caveat, my crystal ball is no better than anybody else's. But we can look at the numbers so far this year, and there's been an improvement. There's no precise number. People don't agree on what's in the beer category when you look at a lot of numbers, for example, hard cider is in there. But overall, what we're seeing is when we look at traditional beer and hard cider, it's down this year, maybe 1.5%, something like that as opposed to 5%, 5.5% last year. So that's a significant improvement. If I try to attribute that to something, I would say that some of the big factors last year like the health publicity. A year ago, we were reading about beer cause of cancer. Now we're hearing, wait a minute, beer is an important social lubricant, an important element of sociability, and it's a mitigation of the loneliness epidemic and Dr. Oz talked about it helps people create social connections. And we know that there's more and more evidence that those social connections are an important part of longevity and beer is an important part of that, and the dietary guidelines came out and they basically said, it's okay to have a beer now and then, might just be a good thing. So the health dialogue has become much more hospitable. Hemp, with the changes in the legislation and basically a federal ban on hemp-based THC products, including the beverages, that has taken a fair amount of the excitement around the hemp-based beverages becoming 5%, 10%, 20% of beer. That looks like that's off the table. There's still a lot of them out on the shelves. And I think a lot of retailers are waiting to see maybe the loophole has been extended, but it looks and I think the Farm Bill got out of the house today without an extension of the loophole. So it's an uncertain legislative landscape, but things look much more difficult for hemp-based THC replacing beer and finally, less pressure on the Hispanic community. We don't have as good a data as Constellation. So they're better authority than we are, but we're seeing a little bit less pressure on that. So that's where I would see the improvement. It's somewhat subject to the macroeconomic environment, which is probably worse right now than it was 6 months ago, but very uncertain. Consumer confidence is very unpredictable, but the price of gas can't help and C-stores are hurting a little bit. So if I had to attribute this improvement, which is real, that's where I would go with it. And then finally I'd add in from us, we view our kind of accessible market as being traditional beer, cider, beyond beer, and a certain part of the spirits-based RTD-type beverages. Last year, when we ran our numbers, that looked like it was off about 4% versus 5%, 5.5% with beer. This year, it's probably slightly down, but significantly better than the 1.5% to 2% that traditional beer is suffering. So closer to flat. And the bad news is our volume is still off 4%. We think there's a lot of things in the pipeline that will affect our trends over the next 9 months in the back half of the year. So we are planning on that getting better. But right now, as opposed to last year when we held share, right now, we've actually lost share of what we consider our addressable market. Peter Grom: That's very helpful color. And then, Diego, you made a comment around updating the EPS outlook if commodity inflation continues. So just curious if you could maybe unpack what inflation assumptions underpin the outlook today. And then just on the offsets you mentioned to Eric's question, mix and kind of the savings initiatives, are you leaning more or leaning in here further? Or are the benefits from these items greater than what was originally contemplated? Just trying to understand whether the shift in cost pressures changes your perspective around where you would expect to land in the gross margin guidance? Diego Reynoso: Okay. Perfect. Let me unpack that. So first, let's start with inflationary costs. So as you can see in our 10-Q, for the quarter, we've got about $12.5 million of inflationary impacts, out of which most of that was aluminum. And in that piece of aluminum, you got $4.3 million of tariffs. The rest is kind of the underlying cost of aluminum. We are forecasting that to continue mostly through the back end of the year. So we're not expecting any big shifts like either up or down. We're just projecting our current situation and assuming that, that will continue. So that's kind of our base assumption of where we're going. The second part of your question is, in the buckets we've kind of laid out, I think in general, we're a little bit better than we thought in total of the savings that we could deliver. Some buckets have delivered more, some less, but the big difference has been the speed at which we've been able to go after it. So our procurement savings that we've kind of laid out a 5-year road map, we've pretty much tapped out in 3.5 years. Some of our other buckets like our brewery efficiencies, again, are ahead of schedule. The one that I think is lagging a little behind and it still has some room to deliver is our footprint. So I'd say, overall, in total, they are going to deliver a little bit more than we thought, but it's more the speed of the delivery that has changed. Now what we have done is we've added a fourth bucket that hasn't really started delivering yet, but we expect it to start delivering in 2027, which is revenue management. So as we've been able to accelerate some of our cost savings buckets, we're making sure that we keep adding new things that we think can maintain that gross margin or potentially help it depending on volume and inflation, and that would be the bucket that we're adding. So I'd say it's mostly acceleration, although in total, we will deliver a little bit more savings than we thought we could deliver of current buckets, and we're adding a new bucket to try to offset from those pieces. So hopefully, that answers both parts of your questions. Operator: The next question comes from the line Filippo Falorni with Citi. Filippo Falorni: Jim, I was hoping you can give us your perspective on the expectation heading into the summer, especially with the big events coming with the FIFA World Cup, America's 250th. How are you thinking the consumption occasions will evolve, especially the interaction between traditional beer and, as you call it, the fourth category and the RTD space. Do you see that more of an occasion for more traditional beer? How do you think you can get consumers into your core portfolio for that? I know you have the sponsorship with Truly, but maybe you can expand a little bit more how you're planning to capitalize on those occasions. C. Koch: Yes. We have a number of things that we're playing. The big one is with Truly, and that is our sponsorship of the U.S. men's soccer team. And we have gotten good reactions from retailers. I mean, basically, we're using that to get on the floor, to get big displays, theme displays around the U.S. soccer team. We have a soccer ad that we're running about and a whole sort of campaign around Believe in the U.S. Soccer Team. So that's the biggest thing we've done with Truly in a number of years. And we've gotten good reception from retailers. So we think that will have at least temporary effect on bending the trends on Truly. With Samuel Adams, we are using it more in a PR sense. We're having 0.25 million person toast to America's birthday where 250,000 people who raise the Sam Adams. As we go into the summer, we benefit from just the seasonality of Sun Cruiser and Hard Tea in general. So we expect the fact that Sun Cruiser is the fastest-growing significant RTD out there, and it's heavily seasonal products. So that growth of Sun Cruiser is going to mean a lot more in Q2 and Q3 than it did in Q1. So those are the big summer-oriented promotions. How much more -- are they going to benefit traditional beer more than the fourth category? I don't know. I don't think they will. I mean we are seeing Gen Z accepting the beyond beer category as being as attractive, in some ways more attractive than traditional beer. And traditional beer is much stronger in people over 40, but people under that are quite accepting of fourth category as a beverage that they would consume in an occasion that 15 years ago was dominated by beer. Filippo Falorni: Great. That's very helpful. And then, Diego, maybe on the cost front and the commodity front, can you remind us a bit of your hedging policies? Looking through your filings, it seems like most of the hedging is on some of the brewing ingredients like hops. But maybe on the packaging side, is it more on the spot rate? Should we think about it that way on the Midwest premium? And then maybe any comment on transportation costs as well, that would be helpful. Diego Reynoso: Excellent, Filippo. Well, first of all, we do not hedge. So in general, our policy is not to hedge. Some of our suppliers will hedge for us, but we do not directly hedge. So the Midwest premium kind of directly goes through our numbers. And we feel like overall, over time, that's actually a better approach than spending on hedge. So from that point of view, that's why you're seeing kind of the movements in the Midwest premium in our first quarter, and that's why we're kind of disclosing what assumptions we're taking for the rest of the year. So that's kind of the piece that we'll see during the year. If the Midwest premium comes down, we will be able to improve kind of our P&L. On the second piece, as you know, we book most of our distribution costs through SG&A. We do kind of see the impact of diesel like everybody else is doing. And although it hasn't materially impact our numbers, we've been able to offset it through other pieces. I do think that is going to be a challenge for everybody as the year continues in 2 fronts. From an impact on the actual fuel cost can be -- right now, we're probably thinking kind of mid-single digits in millions, but it will depend on the mix. But the second one is we're also seeing the availability of truckers being a challenge given some of the policies implemented. So I think as we go through the year, especially in the high season, that's something that we're working very close to our supply chain team to ensure that we can minimize the impact to our P&L. But that is definitely something that is going to impact pretty much every CPG company as we go into the summer. Operator: The next question comes from the line of Kaumil Gajrawala with Jefferies. Kaumil Gajrawala: Good job on getting my name correct. So I just want to ask a couple -- a question on Dogfish Head and Angry Orchard. It's great to see that you're delivering growth once again. So what would you point to as the key drivers for this level of improvement for the brands? Is it new customer additions? Or are you growing more penetration with younger drinkers? And on a go-forward basis, how do you think about -- like how do you see this playing out for the remainder of the year? And do you expect to sustain this level of growth that you're currently seeing? C. Koch: Yes. Let me talk about those brands. I think the growth with Angry Orchard has come partly from us focusing on a little bit and focusing on the core. We did a year ago, a push on Angry Orchard Draft that gave us a bunch of draft lines, some of them stuck. And some of it's just consumers are sort of swinging back to cider. They're open to non-beer experiences. So in some ways, this is like a fourth category. And cider has -- it kind of belongs in beer occasions. It comes out of a draft line, you drink it in a pint glass. It happens to be gluten-free, and it's very friendly to drinking when you're in a group drinking craft beer. And it's very fruit forward. Like a lot of fourth category products, it is sweet. So it sort of bridges traditional beer and fourth category products. And that's given it some underlying consumer-driven growth. And then we focused a little more on it, cleaned up the portfolio, we have an effective advertising campaign underneath it, Don't Get Angry, Get Orchard. And we had a very successful Halloween promotion with the Friday The 13th character, and we're repeating that this year. So I think it will sustain itself, repeating it with Scream, another Halloween franchise. So I think that will sustain itself with Dogfish Head. Again, we went in, sort of cleaned up the brand, cleaned up the clarity of the product line around 30 Minute, 60 Minute, 90 Minute, which was very easy for consumers to understand. And we're getting growth from Dogfish Head Spirits. And Dogfish Head was one of the original craft distillers over 20 years ago. So they've got a history of being a distiller and a line of delicious canned cocktails that they sell at a price premium over Cutwater or a similar product, so they have a higher-end niche. So I think those are the things that have made both of those brands grow. Operator: The next question comes from the line of Michael Lavery with Piper Sandler. Michael Lavery: Just was wondering if you could start by unpacking some of the shelf resets and display upside you've talked about. I don't know if you could quantify some of that or maybe clarify on some of the displays, either timing or how temporary or relatively permanent they might be? And just how to think about that retail distribution piece of the equation? C. Koch: Yes. Overall, we were one of maybe 2 or 3 suppliers that gained shelf space. I think the beer category was a little bit stressed given its performance last year. Nobody was really eager to add a significant amount of beer and beyond beer fourth category shelf space. We were fortunate enough to be one of a couple of suppliers who did. That was driven on the upside by, as I talked about earlier, a lot more shelf space for Sun Cruiser. In 2024, we didn't really pitch Sun Cruiser very strongly. And so we didn't get a lot more shelf space. But last year, we did, and we're reaping the benefits of that this year. So where Kroger had 1 SKU, now they're going to have 3, in some stores 4. Some chains didn't put it in at all and are now giving us multiple SKUs, I mean, because Sun Cruiser is the fastest-growing brand in probably the fastest-growing category in the spirits-based RTDs. So we're getting that. Twisted Tea actually gained shelf space because they found a place for Twisted Tea Extreme. So we got a lot more shelf space for Extreme that more than offset where we lost a peach or raspberry. And that works out advantageously to us because the SKUs that we lost have a lower rate of sale than Twisted Tea Extreme. So there's kind of a double benefit. We got more space, and it's going to be more productive. Where we lost, and we lost significantly, was on Truly and a little bit on Sam Adams. But the net of it was not only more points of distribution for our portfolio, but even more an increased share of the available shelf space. Michael Lavery: Okay. That's great color. And just on a brand that doesn't get as much attention, but can you maybe walk us through Hard Mountain Dew and just a little bit of maybe what hasn't worked there. It seems like when it first launched in the states where it launched through Pepsi's distribution, it had sort of a 2-ish share of FMBs, but it doesn't seem like it's held or gotten to that with the broader distribution from your system and is soft now. Can you just help us maybe understand what happened there and kind of how -- it seems like -- I'm assuming that didn't come out just as much as you would have expected. Maybe just a little bit of a review of how to think about what happened with that brand? C. Koch: Yes. I would say, overall, the hard sodas that came out have not had the appeal on an enduring basis that I think a lot of us thought they would. And they've actually struggled against sort of new-to-world purpose-driven brands. And that's across all of the hard sodas, whether it's Fresca or some of the other extensions like Simply and so forth. Hard Mountain Dew is -- our experience with it, it's a very strong brand. I'm not sure that we've found our niche with it. So we are looking at, where is the core Hard Mountain Dew consumer, and what is his or her occasion for Hard Mountain Dew, which has very strong attributes. It sort of has some energy drink attributes in it. And we want to see if there's a way to bring those to the fore as the hard soda category. And then there have been some distribution issues where the bottlers, the remaining independent bottlers have been able to block it coming into their territory. And that has then made it difficult to get chain distribution, and it's difficult to get wholesaler support when the Pepsi bottler's territory doesn't have the same footprint as our wholesaler and so our wholesaler only has it in part of their territory, which makes it harder for them to give day in and day out support to it. So that's some of the underlying issues. But at the end of the day, we continue to believe it's a really strong brand, and we continue to work to try to figure out how do we find a good niche that's based on all the brand equity of Hard Mountain Dew, which is unique. Operator: [Operator Instructions] And the next question comes from the line of Chris Barnes with Deutsche Bank. Christopher Barnes: Jim, recently, Brown-Forman and the Brown family put their toes in the water on a merger process that ultimately didn't materialize. But I'm just curious to hear your thoughts on why you think they'd evaluate a transaction down here? Clearly, the investment community thinks the alcohol profit pool is evaporating. So is consolidation and the related synergy capture increasingly becoming a survival strategy that alcohol and beverage companies need to more seriously consider today? C. Koch: You know, that's a question to investment bankers, and frankly, the brainpower of the people on this call is much greater than mine. So I'm going to -- that's up there in the stratosphere. We're just down here going from bar to bar trying to sell more product. There's clearly consolidation going on. I think we feel like, in some ways, we're in a unique position in that we've gotten over the hump as a supplier to the point where we're important to our wholesale partners, and we're important to our retailers. And that importance is amplified. For an average wholesaler, we may be 10% of their gross profit. So that's meaningful. When they're top 5 suppliers, so we're important to them, and that's somewhat amplified by -- historically, we've been a bigger part of their growth. And we have a great innovation track record. We're very happy with our pipeline. Again, the success of Sun Cruiser in the last year has validated our continuing ability to bring new-to-world brands to our wholesalers that they don't have to pay for and buy from somebody else. So we continue to be big enough to get the attention that we need. So I don't feel like we're disadvantaged. I think that we're in the sweet spot of we're big enough to innovate and bring successful new products to market with a strong 550-person sales force bigger than any other sales force in our category. But we're small enough to be nimble, move quickly, be innovative and continue to grow against the opportunities that we're finding today, which primarily are in the fourth category, which is now 85% of our volume. So it's where we've proven our capabilities of bringing new strong brands to our wholesalers and our retailers. I would also add that I think as investors, when there's a segment that drops value like alcohol in general has, obviously, there's a lot of people that see the value there and see it as an opportunity to jump in. I think part of the reason you're not seeing some of those mergers materialize is because people see the opportunity in the future and therefore, hold on it. So I still think it's an industry that has a lot of value, but I do think that people see an opportunistic time given that last year, on average, most companies have gone down to jump into something they see value in the future. So I think the value will continue in the industry, and I think we're really well positioned to play in that. Operator: Thank you. This concludes the question-and-answer session. And I would like to turn the call back over to Jim Koch for closing remarks. C. Koch: Thanks to everybody for joining us this afternoon, and it's an exciting time to be in this business. There's both lots of challenges and opportunities, and I look forward to talking to you in a few months. Operator: This concludes today's conference. You may disconnect your lines at this time, and enjoy the rest of your day.
Operator: Good day, ladies and gentlemen, and welcome to Universal Display Corporation's First Quarter 2026 Earnings Conference Call. My name is Sherry, and I will be your conference moderator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Darice Liu, Senior Director of Investor Relations. Please proceed. Darice Liu: Thank you, and good afternoon, everyone. Welcome to Universal Display's First Quarter Earnings Conference Call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer; and Brian Millard, Chief Financial Officer and Treasurer. Before Steve begins, let me remind you that today's call is the property of Universal Display. Any redistribution, retransmission or rebroadcast of any portion of this call in any form without the expressed written consent of Universal Display is strictly prohibited. Further, this call is being webcast live and will be made available for a period of time on Universal Display's website. This call contains time-sensitive information that is accurate only as of the date of the live webcast of this call, April 30, 2026. During this call, we may make forward-looking statements based on current expectations. These statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially. These risks and uncertainties are discussed in the company's periodic reports filed with the SEC and should be referenced by anyone considering making any investments in the company's securities. Universal Display disclaims any obligation to update any of these statements. Now I would like to turn the call over to Steve Abramson. Steven V. Abramson: Thanks, Darice, and good afternoon, everyone. Thank you for joining us today and for your continued interest in Universal Display. Let me begin with how we are thinking about the business, both in the context of today's environment and the longer-term opportunity we continue to see ahead. While the near-term backdrop has become more challenging, our long-term view remains unchanged. Our leadership in OLED built on sustained innovation and deep customer integration positions us well to navigate the near-term macro uncertainty while continuing to capture the industry's long-term growth opportunities. We operate a high-margin business model with strong free cash flow generation, long-standing partnerships across the OLED ecosystem and a balance sheet that provides meaningful strategic and financial flexibility. At the same time, visibility across the consumer electronics value chain has become more limited in recent months. A more cautious demand environment, higher component costs and supply constraints are adding complexity to demand forecasting. These dynamics are consistent with what we are hearing broadly across the industry and reflected in newly published conservative outlooks from third-party market research firms. Against this backdrop of increased uncertainty, we believe it is prudent to moderate our near-term revenue expectations. Brian will provide additional details shortly. Despite these near-term dynamics, our profitability, cash flow generation and lean operating model remains strong. We ended the quarter with approximately $911 million in cash and investments, supporting a measured and balanced capital allocation approach centered on investing in innovation, pursuing strategic opportunities and returning capital to shareholders. Over the last 12 months, we returned more than $187 million to shareholders through dividends and share repurchases. We announced today the authorization of a new $400 million share repurchase program following the full utilization of our prior $100 million authorization. While we remain disciplined in our approach, this authorization underscores our confidence in the long-term trajectory of the business and the strength of our cash generation model. Looking beyond the near term, the growth runway for OLEDs remains as compelling as ever. Adoption is expanding across IT, automotive, televisions and foldables and emerging architectures such as tandem. At the same time, performance expectations continue to rise across key dimensions, including brightness, power efficiency, lifetime and color performance. As these requirements increase, materials and technology innovation becomes even more critical, reinforcing the value of our capabilities and our role in enabling progress across the OLED ecosystem. Phosphorescent blue continues to be a significant opportunity for the industry and a key area of focus for us. As specifications advance and new architectures emerge, expectations for blue are becoming more demanding and more varied across applications. In turn, we are aligning our blue development program to meet these increasingly complex specifications. While this evolution is extending the development path, our conviction in the commercialization of phosphorescent blue has not wavered. The value proposition is clear. When adopted, we believe phosphorescent blue has the potential to deliver up to an initial 25% improvement in OLED panel energy efficiency, a meaningful advance at a time when devices are being asked to do more, run longer and perform better. That is a compelling proposition for the industry and the market interest reflects it. We look forward to sharing additional technical detail next week during our invited paper presentation at SID Display Week. Supporting this work is an increasingly powerful in-house R&D engine. We are applying AI and machine learning at greater scale to enhance material discovery, evaluate candidates more effectively and prioritize development pathways. For example, these tools allow us to predict thermal processing stability up to 10,000x faster than traditional density functional theory while achieving near comparable accuracy. By combining AI-driven modeling with more than 20 years of proprietary data, deep device expertise and decades of OLED know-how, we are accelerating progress in phosphorescent blue while also advancing innovation across our next-generation red, green and yellow emissive materials. More broadly, earlier this month at ICDT, China's largest display technical symposium, we highlighted a meaningful shift underway in the industry. As performance requirements continue to broaden, progress increasingly depends on advancing materials, device architecture and display design together with a greater emphasis on energy efficiency. This system-level approach is supporting the development of advanced OLED architectures such as tandem and hybrid structures, advanced pixel layouts and PSF, helping address the evolving performance demands across applications. This direction aligns well with our long-standing development philosophy and reinforces our role in enabling innovative OLED solutions as the industry evolves and grows. One example we shared in the invited paper was the incorporation of our phosphorescent material into the industry's first commercial green PSF product targeting BT2020 specifications introduced by Visionox. This milestone highlights the growing role of our phosphorescent materials in enabling next-generation OLED architectures and reinforces our position at the forefront of OLED innovation. The same depth of collaboration extends across our broader customer base. During the first quarter, we announced new long-term agreements with Tianma and LG Display. These agreements underscore the value we deliver and the trust we have built over multiple technology cycles. At the industry level, we believe OLED is entering the early stages of a multiyear capacity expansion cycle. Significant new Gen 8.6 investments are progressing in Korea and China to support growing adoption across IT and automotive applications. Samsung Display's $3.1 billion facility is reportedly nearing commercial shipments and BOE's $9 billion fab has entered customer sample validation and is targeting mass production in the second half of this year. Visionox has begun equipment move-in at its $7.6 billion facility and TCL China Star continues construction on its $4.1 billion greenfield plant. We view this year as the beginning of a longer ramp with output increasing over time as facilities move through qualification, yield ramp and production scaling. Taken together, these developments across technology road maps, customer engagement and manufacturing capacity reinforce our conviction in OLED's long-term growth trajectory and in the increasingly important role we play in enabling next-generation architectures that advance performance. With our materials leadership, deep customer partnerships, strong financial foundation and disciplined capital allocation, we believe we are uniquely positioned to drive sustainable long-term value creation. And with that, I'll turn the call over to Brian. Brian Millard: Thank you, Steve. Revenue for the first quarter of 2026 was $142 million compared to $166 million in the first quarter of 2025. While material volumes decreased by approximately 4% year-over-year, total revenue decreased by 14%. This year-over-year decrease was primarily driven by customer mix as well as tariff-related purchasing activity by Chinese customers in the prior year period and the softer macro environment between periods. The ratio of materials to royalty and licensing revenue during the first quarter was approximately 1.5:1. For the full year, we continue to expect this ratio to average closer to 1.3:1 as customer mix normalizes. As Steve discussed, the operating environment has become more challenging over the past few months. Near-term visibility has declined as macro pressures weigh on consumer demand assumptions, while higher memory pricing and supply constraints continue to temper end market expectations. Based on current forecast, we expect second quarter revenue to be sequentially higher than the first quarter, and we continue to expect the second half of the year to be stronger than the first half. At the same time, given reduced near-term visibility and the evolving macro backdrop, we believe it is prudent to revise our full year revenue guidance range to $630 million to $670 million from our prior guidance range of $650 million to $700 million. Turning to materials. Total material sales were $84 million in the first quarter compared to $86 million in the first quarter of 2025. Green emitter sales, which include our yellow-green emitters, were $64 million in both periods. Red emitter sales were $20 million in the first quarter of 2026 compared to $21 million in the first quarter of 2025. As we've discussed in the past, material buying patterns can vary quarter-to-quarter. First quarter royalty and licensing fees were $54 million compared to $74 million in the prior year period, primarily reflecting changes in customer mix. Adesis revenue in the first quarter was $4.3 million compared to $6.6 million in the first quarter of 2025. First quarter cost of sales was $36 million, resulting in a total gross margin of 75%, which is consistent with our full year gross margin guidance range of 74% to 76%. This compares to cost of sales of $38 million and total gross margin of 77% in the first quarter of 2025. Operating expenses, excluding cost of sales, were $63 million in the first quarter compared to $58 million in the prior year period. Operating income for the quarter was $43 million, representing an operating margin of approximately 30% compared to operating income of $70 million and an operating margin of approximately 42% in the first quarter of 2025. The year-over-year decline reflects lower volumes, customer and product mix and higher input costs. Nonoperating expense for the quarter was $6.2 million, primarily reflecting foreign exchange and investment-related items. This included a $3 million foreign exchange loss related to movements in the Korean won associated with the tax receivable as well as a $2.7 million investment loss on our marketable equity securities. The income tax rate was 21% in the first quarter of 2026. For the full year, we now expect our effective tax rate to be approximately 20%. Net income for the first quarter was $36 million or $0.76 per diluted share compared to $64 million or $1.35 per diluted share in the first quarter of 2025. We generated $109 million of operating cash flow in the first quarter and ended March with approximately $911 million in cash and investments. During the first quarter, we repurchased approximately 633,000 shares of common stock for $66 million and completed our previously authorized $100 million share repurchase program, having repurchased a total of approximately 924,000 shares under that authorization. Building on this, the Board authorized a new $400 million share repurchase program and declared a cash dividend of $0.50 per share for the second quarter. These actions reflect our continued commitment to a disciplined and balanced capital allocation framework underpinned by strong free cash flow generation. We remain thoughtful but opportunistic in our approach to share repurchases while maintaining the flexibility to invest and support future growth. With that, I'll turn the call back to Steve. Steven V. Abramson: Thanks, Brian. 2.5 weeks ago, we rang the Nasdaq closing bell to mark 30 years as a publicly listed company. We started with a little more than a bold idea to help revolutionize the display industry. At a time when CRT television dominated living rooms. Our journey required tenacity, resilience and a long-term vision. Over these 3 decades, OLED has evolved from a laboratory concept into a global display platform powering billions of devices and supporting an industry estimated at approximately $50 billion this year. We're proud of how far we've come and even more energized by how far we will go in the years ahead. The best of Universal Display is still to come. I would like to thank each of our employees for their drive, desire, dedication and heart in elevating and shaping Universal Display's accomplishments and advancements. We are committed to being a leader in the OLED ecosystem, achieving superior long-term growth and delivering cutting-edge technologies and materials for the industry, for our customers and for our shareholders. And with that, operator, let's start the Q&A. Operator: [Operator Instructions] Our first question is from Brian Lee with Goldman Sachs. Brian Lee: I guess starting with the guidance revision here. I know starting off the year, you guys have kind of talked about how you're always tied to the square meter surface area growth, and you had alluded to sort of mid-single digit, maybe 6% specifically as sort of the guiding principle for your revenue outlook for 2026. Clearly, the year has been weaker, smartphone cuts have accelerated. But are you seeing that in capacity growth, too? And if so, can you quantify? And then as it relates to the smartphone pressures, can you speak to kind of the high end and midrange? Those are the areas that you obviously have the most exposure to given OLED is well represented there. But what's your view on kind of what the high-end, mid-range parts of the market are going to do this year if overall smartphones are now expected to be down, call it, 15%, 20% depending on who you talk to. Brian Millard: Yes. Thanks, Brian. Firstly, on the guidance, there has been an overall change in growth expectations this year, both in terms of area as well as units over the last -- even the last 2 months since February. And on the area, now there's a projection of roughly a 2% growth in square area this year. And as you know, some -- we occasionally do grow below that overall area industry growth because of customer efficiencies and other factors that come into place. As it relates to the capacity, the capacity plans that we've talked about and that Steve reiterated today in his prepared remarks continue to be moving forward at full force. Samsung and BOEs coming online this year and Visionox and China Star thereafter. So that is all really no changes as it relates to that. And to your last point on smartphones this year, certainly, the more premium models are expected to be more insulated from some of the memory concerns. But with OLEDs now having 65-plus percent penetration, we are in the mid and even some of the low-end models as well. So there is exposure that OLED has to the mid and low end that would be subject to some of the memory concerns out there, and that has evolved even over the last 2.5 months here. Brian Lee: Great. That's helpful. And then maybe a couple more here. Just on the China revenue contribution in Q1. That was particularly soft, especially in the context of your Korean customers still spending quite a bit. Can you speak to the trends you're seeing in China? Is there inventory? Is there just end market demand, share issues? Just what's happening with the China backdrop? Because it does seem like your 2 Korean customers spent a pretty good amount here in Q1. Steven V. Abramson: Well, Brian, as you know, the China revenues are much lumpier over the course of the year than the Korean revenues. We still have a very strong position, obviously, in China. We're working closely with all of our Chinese customers, and we believe that, that's going to pick up throughout the year. Brian Lee: Okay. Fair enough. And then last one for me. Maybe this one for you as well, Steve. I think you made a comment during your prepared remarks about different architectures and one caught my attention. You mentioned hybrid architectures, and I think you mentioned Tianma by name. But is there any notable progress or developments that UDC is seeing with TADF hybrid recipes? And maybe bigger picture question, why are customers looking at hybrid to begin with instead of just a full phosphorescent system? Steven V. Abramson: So hybrid means a bunch of different things. And I think it was separate than the Tianma issue. Hybrid in this context means you combine a layer of phosphorescent technology with a layer of fluorescent technology. And what that does is it enables you to get the best of both technologies. So you can get the efficiency from phosphorescence and the color points and lifetimes from fluorescence. And that type of technology can expand the market. And that's, I think, what our customers are looking for. Operator: Our next question is from James Ricchiuti with Needham & Company. James Ricchiuti: I was just wondering, given the softer environment, and you may have given this, Brian, but I'm just wondering how we should be thinking about OpEx as we look out over the balance of the year. Brian Millard: Yes. So we had guided back in February mid- to high single-digit growth in OpEx. This year, I think it's trending more toward mid at this point. And as we've always been -- we've always had a very lean OpEx organization, continuing to fund R&D and all the investment opportunities we need to make there, but maintaining a lean SG&A organization. And that continues to be the case, and we're being very cautious on spend this year just based on the overall environment. James Ricchiuti: Makes sense. With respect to the separate release you made regarding a new presentation, new paper at the upcoming SID show on blue. When last did you guys deliver a paper on blue at that conference? Can you remind me? Brian Millard: It's been a few years. We have -- some of our customers have presented papers on blue in recent years, but it's been a while since we have. And we're excited to share some of the progress that we've made over the last few years in our blue development efforts. And this is really our first blue paper in quite some time. So we're excited to get that out there and share those details next week. James Ricchiuti: And then one final question, if I may, and this relates to the question Brian just asked about China. If we think about what happened regarding tariffs last year, when did you see the biggest stockpiling of materials as it related to some of the tariff concerns that some of the Chinese display manufacturers had? I'm trying to get a sense as to how much that played a role in the decline in China this quarter. Brian Millard: Yes. It was the largest in April, but there certainly was some toward the end of Q1. And at the time -- as time went on, it became clear to us that a lot of the strength that we had in the Chinese market in Q1 of '25 was tariff related. But the largest bit of it was in April following the U.S. tariff announcement and customers placing significant orders thereafter. But it was in both Q1 and Q2 last year. Operator: Our next question is from Scott Searle with ROTH Capital Partners. Scott Searle: Maybe to follow up on the China front a little bit. I was hoping to get a little more granularity in terms of some of the linearity that you're seeing and historic buying patterns ahead of new fab capacity launch, if you could remind us what that's looked like in the past. And also wondering just your latest thoughts in terms of China and exposure more on the smartphone front relative to IT or TVs. Qualcomm last night, I think, was referencing they thought things start to loosen up as we get into the September quarter. So I'm wondering if you're starting to see some of that, I'll call it, optimism or order patterns from your customers in China? And then I have a follow-up. Brian Millard: Sure. So on your point about fab ramps and volumes associated with fab ramps, historically, especially many years ago, there was a good bit of yield issues and challenges as our customers turned on new fabs. They've gotten much more efficient in their use of materials. And -- but we do have a component of our guidance this year is reflective of materials that will be needed to bring on new capacity coming online this year. As it relates to the year and what we're expecting, we do continue to expect mid- to high 40% of revenues to be in the first half and the balance in the second half, which does imply a continued ramp over -- heading into the second half. Scott Searle: Brian, just to follow up on that. Do you have visibility at this point in time to China specifically in that recovery? Brian Millard: We have -- we always get ongoing forecast from customers and have routine conversations with them about what their forecasts are expected. As you know, our China market, as Steve just said a few minutes ago, it's been very lumpy historically, and that continues to be the case. But we have visibility right now to what we expect for the rest of the year, and we feel that our guidance range properly balances the outcomes that we can see ahead of us. And we do expect China revenues to grow in the coming quarters, as Steve mentioned earlier. Scott Searle: Great. And Steve, to maybe follow up on the hybrid architecture. As I understand it, it sounds like that's been complicated the process and time line for the adoption of blue. I'm wondering if you could give us some thoughts in terms of how you're seeing customers looking to implement blue, whether it's in a hybrid architecture or otherwise, if that is part of the -- basically the hesitation or kind of extended the time line for adoption. Steven V. Abramson: Well, I think you've hit an important point. The customers -- I mean customers are looking at a number of different ways to implement blue using phosphorescence and fluorescence. And because you're using multiple materials, the matching in those materials becomes even more complicated. So it does delay -- it delays the time line. It also, as we are continuing our development efforts, we're working on specific implementations to meet our customers' needs. Scott Searle: Got you. And Steve, just to follow up on that, and then I'll get back in the queue. But from an economic standpoint and performance standpoint for the customer, do the hybrid architectures meet what the customers need that these are commercially deployable products and we just kind of, I'll call it, had an extended time line related to the complexity of the new architectures? Steven V. Abramson: Well, I'll answer multiple ways. You have to talk to our customers on the product introduction in terms of the timing. But having said that, it's a question of -- clearly a question of when, not if. And we're working really hard with our customers to make sure that blue gets introduced as quickly as possible. Brian Millard: And Scott, just adding on to Steve's comments, when LG Display, May of last year, they went out at SID Display Week last year and showcased a hybrid tandem tablet using our material. That was using 1 layer of fluorescent, 1 layer of phosphorescent. And they noted at that time, both at the show as well as in their press release that it was a commercially performing display that they had validated using commercial equipment. So that, we believe, evidenced the use of our material in the commercial system. Operator: [Operator Instructions] Our next question is from Martin Yang with Oppenheimer & Company. Martin Yang: My question first is on the guidance. Can you maybe talk about the guidance range when it comes to your expectations broken down by capacity-related ups and downs, product release timing and then underlying market? Brian Millard: Yes. So Martin, it's -- our guidance range really reflects -- specifically, we already knew -- know what capacity is going to be online this year. That was -- is unchanged since February. What has changed is the overall macro environment with certainly the -- what's going on in the Middle East and oil prices being where they are and therefore, gas prices for consumers, all that is new. And we've seen people that we talk to in the industry as well as the market research firms that track the industry, all lowering their estimates over the last 2 months for the year just based on what's out there. As it relates to specific models and end markets, certainly, the midrange smartphones mid -- and to the extent that OLEDs are in the low end, which we are in a few models of low end as well. Those are the areas where I think we're seeing the most pressure. And certainly, the expectations for OLED smartphone growth this year have come down since February as well. Martin Yang: A follow-up on your capacity input guidance because we are getting new Gen 8 fabs online. Do you feel confident that you have a good sense of how those new fabs will consume materials for the year? Brian Millard: Yes. We've not heard that there is any shift in the plans that our customers have to bring that capacity online. And there is an expectation of the equipment -- Samsung is expected in the middle of this year to have their equipment for mass production and BOE shortly thereafter. That has been the case and was expected back in February as well when we issued guidance. And so things from -- in terms of the new capacity coming online, that's really not changed since February, and we do believe that they will come online and our customers are actively working to make sure that capacity is utilized. Martin Yang: Got it. Last question for me on IP. Can you maybe remind us your approach to IP protection? We're starting to see more phosphorescent OLED developers outside of China, mainly in Korea. Can you maybe remind us your IP position as well as your approach to protect your IP? Steven V. Abramson: Well, we firmly believe that when you have inventions, you need to protect them and we protect them with our IP worldwide. We have over 7,000 patents worldwide. And we utilize our IP as part of our product development because we have strong IP protection as well as the best materials on the market. And we believe that, that is a winning combination and has been for quite some time. Operator: This will conclude our question-and-answer session. I would like to turn the program back to Brian Millard for any additional closing remarks. Brian Millard: Thank you for your questions. We remain confident in the long-term opportunities ahead for Universal Display and the OLED industry, and we appreciate your continued interest. We look forward to speaking with you again next quarter. Operator: Thank you. This will conclude today's teleconference. You may disconnect at this time, and thank you for your participation.
Operator: Good day, ladies and gentlemen, and welcome to The Clorox Company Q3 FY '26 Earnings Release Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference. Lisah Burhan: Thank you, Jen. Good afternoon, and thank you for joining us. On the call with me today are Linda Rendle, our Chair and CEO; and Luc Bellet, our CFO. Please note that our earnings release and prepared remarks are available on our website at thecloroxcompany.com. Linda will share a few opening comments, and then we'll take your questions. During this call, we may make forward-looking statements, including about our fiscal 2026 outlook. These statements are based on management's current expectations but may differ from actual results or outcomes. In addition, we may refer to certain non-GAAP financial measures. Please refer to the forward-looking statements section, which identifies various factors that could affect such forward-looking statements, which has been filed with the SEC. In addition, please refer to the non-GAAP financial information section of our earnings release and the supplemental financial schedule in the Investor Relations section of our website for reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures. I'll now turn it over to Linda. Linda Rendle: Thank you for joining us today. As we approached fiscal year 2026, we knew it would take a disciplined, phased approach. In the front half of the year, we intentionally focused on implementing and stabilizing our new ERP. That work was foundational to strengthening how we operate, even though we knew it would create some near-term disruption. As we moved into the back half, our focus turned to rebuilding momentum, getting innovation to shelf and sharpening execution. That sequencing is still the right one and it remains central to our plan. That said, the pace of improvement has been slower than we expected in some businesses and as a result, our third quarter results were mixed and fell short of our expectations. We continue to make progress on market share across much of the portfolio, but more gradually than we anticipated in certain categories. Gross margin also came in below expectations, driven by higher-than-expected supply chain costs and delayed cost savings as we deliberately prioritized stabilizing the ERP. Even with those challenges, we remain confident in the path forward. With the ERP implementation now complete, we're better positioned to convert our innovation, investments and distribution gains into value superiority for our brands and stronger results our focus is squarely on execution, delivering the fundamentals, accelerating innovation performance and finishing the year with momentum as we set up for fiscal year 2027. With that, Luc and I are happy to take your questions. Operator: [Operator Instructions] And our first question comes from Peter Grom with UBS Financial. Peter Grom: I was hoping to start just on the top line trajectory. You touched on some of the macro pressures. But as you just mentioned, the progression of your business has not been in line with your expectations. So I mean, you touched on different areas in the prepared remarks, but do you have any perspective as to why the improvement isn't taking shape the way you hoped? And I guess as you look out to '27, do you have confidence that you will see stronger performance across more pieces of the portfolio? Linda Rendle: Thanks, Peter. I'll get started and Luc can build if there's anything he wants to add to this. I'll start with there's areas of continued momentum in the portfolio that are going as well as we expected or better. I'd call out our cleaning business, which continues to be an area of strength and of course, is our biggest business. Innovation is going extraordinarily well there. And despite a very competitive promotional environment right now, we continue to win and win share. International, despite disruptions around the world, continues to perform with strength. We're seeing Glad make significant progress, so shares quarter after quarter have sequentially improved. We're seeing distribution pick up on that business and some of the actions that we took investing back in price have done really well. Food, we returned to share growth this quarter. So lots of things going well and where momentum continues. And really, the area of the shortfall is a few businesses we expected to make more improvement that did not quite make the improvement that we expected in Q3. We expect continued progress there in Q4 and then continuing to make improvement in fiscal year '27. And I'll talk about a couple of them. The first and most importantly would be Litter. Category tailwinds continue to be exceptionally strong, and we are committed to getting back the share that we have lost, and we're doing that through a complete reinvention. So for those of you who saw what we talked about in CAGNY, this is really a fundamental reset of our Fresh Step business. We changed all of the items. We changed their names. We changed their claims, pack size through price pack architecture, and that began to roll out at the end of Q3. And while largely that foundation is now in place, now we're doing the really difficult work of mapping consumers from what they used to buy in Fresh Step to the new items. I would say the distribution came in generally in line with what we expected, which was an increased amount of TDPs. But unfortunately, some things aren't quite where they need to be, and we're working on improving those in the next few months. And that would relate to shelf placement on a couple of items in key retailers, et cetera. But we're addressing those fast and making changes. So I think Litter is going to be just bumpier, and it's not totally unexpected given the amount of transformation we're taking on there. And I'd also remind you, Litter is going to be a multiyear process. We talked about this was the first important step, but we've got to get innovation back on track to the place where over time, we can begin building or growing share, not just rebuilding share. And then the other area I would just call out would be Food. And although we did grow share in the quarter, and we saw portions of the elements of the things we put in place working, the category was weaker than we had expected. So we expected a low single-digit decline. It was closer to a mid-single-digit decline in the category. We're seeing high promotional intensity and deep discounting from competitors in that category, which is putting pressure on dollars. And we're also seeing some consumer trends that we're watching closely on GLP-1s, et cetera. But the good news for Hidden Valley is we did some price pack architecture work. I think you all recall, we had made a transition where we flipped our bottle upside down, which was consumer preferred right before last February when kind of value superiority really accelerated from a consumer perspective. So we have since reversed that decision and put our regular 16-ounce bottle that everyone knows and loves back on the shelf. That's playing well. In addition, we've just recently launched a number of trend forward Hidden Valley launches, including protein forward options, Avocado Oil item, and we believe that's why we've seen that inflection in share and that, that should continue moving forward. So net, Peter, a lot is going well, and we're making progress in a lot of the areas we expected to. I would just call out Litter making slower progress than we had expected and Food are really working to get that category going again. Peter Grom: Okay. Great. And then I guess I know we'll get '27 guidance in August, but there's just a lot of moving pieces here with the $0.90 and now this inflationary pressure. And I guess if I look at the guidance this year, it would seem the majority of the $0.40 move at the midpoint is related to cost pressures, which if you were to annualize, would seem like a pretty substantial headwind. So just -- is there any way to frame how you see costs and inflation looking out to '27 at this stage? Luc Bellet: Peter, this is Luc. I can try to answer that. I mean, obviously, it's a very dynamic situation and uncertainty. I would say it's too early to share any perspective for next fiscal year. And as you can imagine, we're currently working on next fiscal year, working on a wide range of scenarios, including a wide range of possible -- potential outcomes. Having said that, what you can see in Q4 is the current impact of the higher oil price. Right now, we are assuming about $100 per barrel will be the midpoint of our estimate in Q4, which is about between $20 million and $25 million of headwinds or about 130 basis points of gross margin. So that gives you a point of reference. This is obviously material. But because it's in Q4, we didn't have time yet to deploy any of the mitigation actions. So this is -- we're basically getting the full gross impact in Q4 and not yet any of the mitigations. As we talked in the past, over time, we feel confident in our ability to cover those input increased costs. We have a solid track record over the last few years. And if anything, we've developed a really robust set of tools around integrated margin management. And we have a really strong pipeline of cost savings next year. Now again, I'll get back to my first point, which is it's very hard to predict what might happen in the next few months, next quarters or even the next year. Operator: And we'll move next to Filippo Falorni with Citigroup. Filippo Falorni: Linda, I was hoping you can talk about the shelf space gains that you realized so far versus expectations, especially as we think about Q4 organic sales and as we're heading into fiscal '27. Are they going according to plan, especially around the innovation? And then are you seeing any of the areas of the business where you're seeing maybe more or less shelf space than you were expecting? Linda Rendle: Sure. Thanks, Filippo. So shelf space gains are going according to our plan at an aggregate level, and then I'll touch on a few businesses. So if you look at Q3, total distribution points for Q3 were up over 5%. And we know that our retailers are still resetting our shelves and will through the remainder of Q4. So we expect continued progress on that as we move through this quarter. That being said, what we're watching is not only that we got the gains, but the items are in the right locations. So I'll call it Litter. We got the distribution gains that we expected, but there are places where it was shelved in a different place than we had expected or next to an item that we didn't expect. So we're doing that type of detailed shelf work, but all of the distribution points were there. And I would say a number of the businesses, like I called out Glad that we have been working on, we feel good about where we're landing on distribution points there, and that will continue to accelerate into Q4 as well as food behind our innovation and our price pack architecture work. So on track from a shelf space perspective, but now we'll do that work to ensure that items are placed on the shelf where they should be. Filippo Falorni: Great. That's helpful. And then, Luc, maybe I can follow up on Peter's question on the cost headwinds into next year. I guess as you think about the mitigating -- potential mitigating factors, how are you thinking in terms of order of importance between cost savings, potential from pricing and any other levers that you can pull to mitigate some of those headwinds? Luc Bellet: Filippo, yes, we're looking at a whole set range and looking at essentially all elements of our integrated management set of tools anywhere from leveraging RGM and leaning more in RGM and PPA in some business units to lean more into productivity and cost savings, and it's a whole wide range of potential savings, including potential reformulation, supply chains. And we're also looking to accelerate some more structural cost savings that we had planned maybe later in '28 into '27. And as you probably saw in Q4, we are recognizing a lot of onetime cost, and this is in our gross margin. That's a headwind of 50 basis points, but that's going to allow us to actually accelerate one of those more structural cost savings. So I would say it's across the range of levers. Of course, it will differ by BUs depending on the competitive dynamic as well as the pipeline that was already existing. Operator: And our next question will come from Andrea Teixeira with JPMorgan. Andrea Teixeira: I wanted to just go back to the comments, Linda, you made on the exit of the quarter in the prepared remarks and things got tougher, especially for the Food for Hidden Valley. I'm assuming you -- can you comment a little bit on how you landed as you exit the quarter, the categories. As you said, it was like a mid-single-digit decline for Food, but just in general, in all categories that you're in, if you can give us like an estimate of how much the categories have contracted. And then as you think about like the view that you embedded in there, in terms of the mitigations and all of that, do you feel you can have a potentially an RGM that could allow you to create or maybe pivot into RGM, as you pointed out, even in the first half of the year or that's going to be more of a long, let's say, a long-term shift that you wouldn't be able to make in such a short period of time? Linda Rendle: Thanks, Andrea. I got it. I'll start with the categories, and then I'll move to your question on RGM. So from a category perspective, we thought at the beginning of the year, we would be in the range of flat to up 1% in aggregate for our categories. And what's played out through Q3 is exactly that. So we're about in the middle of the range. What we did see in Q3, though, was market differences in January, February and March. January and February were more in line with what we expected, and March was slightly better, meaning that the categories at the end of Q3 were slightly above our expectation of 1%. What we think happened in March was that people received additional tax refunds and some of that money they spent back in essentials categories on stock-up trips. But we're starting to see that decline a little bit as people are having to spend more money at the pump. But generally, still for the remainder of the year, we expect our categories to be in that range of 0% to 1%. Some of them are higher, as we noted. So Litter is closer to mid-single digits. We're seeing Food down closer to mid-single digits, although we're hoping, again, some of those actions that we've taken are going to help mitigate some of that and then a range between those 2. Most of our categories were positive, though, this quarter, which is good news. I think the important part to note here is that even though the consumer is under stress, and you could argue a lot more stress now given what they're experiencing from gas prices and just the uncertainty of what's going on, they're still really resilient in our categories, and that's a good sign. We're seeing them continue to buy innovation. Private label shares did not increase this quarter. They're still shopping for brands. We're seeing the premiums here in many of our businesses do very well as people are looking for value in all of its forms, whether that be convenience or a little bit of joy in their lives as well as trading up to larger sizes and trading down to smaller sizes. So all of that's playing out. But I would say, generally, again, the consumer is pretty resilient in our categories. And we will watch closely for '27 for what this means. I think what Luc outlined from a cost perspective is the single most important variable, whatever happens in the Middle East and how costs play out, that will impact the consumer environment in '27. But again, what we're focused on is that we have resilient categories. They respond well to innovation. They respond well to growth plans, and that's what we're focused on is improving our superiority and being the leaders in category growth as we move to '27 and making improvement on share. And one of the important levers is the second question you had, which is RGM. And this is something that we are live in action right now. So we gave an example, if you might recall at CAGNY that we did RGM work on glass. And we actually took the price down on one of our items that made a significant difference and grew a significant amount of share. We are doing that work across our businesses. And actually, in the coming weeks, we'll have a couple more tests in market. And if those tests do well, we'll expand those. So we have that built into our Q4 plan, and we would expect additional activity as part of our fiscal year '27 plan. Andrea Teixeira: And that's super helpful. And then if I just can squeeze the GOJO's acquisition. I mean, obviously, you have given the synergies. Did that change as you point out, like the impact that I think if I understood you correctly, Luc, you mentioned 30 basis points gross margin headwind. But how does that change for GOJO's when you gave guidance at the time, it wasn't when we saw oil prices at these levels? Linda Rendle: So for GOJO, and then I'll have Luc walk through the financials just so we're clear, but I'll make a few comments. We closed on April 1 and have been deep at work on integration and integration planning since then. And I'll just say my confidence remains incredibly high on this acquisition, both from a strategic perspective and the fact that it gives us additional growth exposure in health and hygiene, where we have a long history of strong performance. The team, we were able to retain the management team. We're seeing strong results on the business. And as we think about that moving forward, we knew it had a different profile given it's a Pro business, just like our Pro business has a little bit of a different profile. It has higher SG&A, lower advertising, a bit lower gross margin. But overall, this is financially attractive and will be accretive to the company in the near term, and we outlined that in the prepared remarks. And again, I'll have Luc go through it. But I would just say that my confidence continues to increase that this is a great acquisition for the company. Luc Bellet: Yes, I can -- I'll add maybe a little bit more context around how it's impacting the P&L. Maybe what I can do is some of it was already included in our prepared remarks as we think about Q4, but I'll also just give you a sense of how it might impact next year. So maybe let's start with growth. So we're adding a business of $800 million that has a solid track record of growing mid-single digits. And so far, they're progressing as expected during the calendar year. So that means that we will be adding $200 million in Q4, right, which adds about 10% for the quarter and about 3% for the full year, and we'll add the remainder in fiscal year '27. So that's on growth. EBITDA margin, nothing changed. As we discussed, the business EBITDA margin is in line with that of Clorox, right? And so it will be year 1 EBITDA neutral. And of course, as we continue to be confident in generating about at least $50 million of run rate cost synergies. And so that means accretion in EBITDA over time. Now maybe just a comment on how do we think about the integration and strategies. We're really going to prioritize the integration during the first year and expect to start delivering both revenue and cost synergies starting the second year and the third year. We -- the good news here is that we have retained the management team. We have separate resources that are dedicated to the integration, and we also retain an integration partner to help lead through the execution, which is already off to a great start. So that's on EBITDA margin over time. Now on the rest of the P&L, Linda mentioned it, given that the business is about 80% B2B, the P&L looked a little bit different than the average of Clorox, right? So the gross margin is a little dilutive, and so that will be about 50 basis points of dilution in year 1. Now of course, some of the synergies will be in supply chain. And so we would expect gross margin to increase over time and get pretty much in line with -- over time with the average of the company. Now that's going forward, and that's also in the fourth quarter. But in the fourth quarter, you also had the recognition of onetime associated with the transactions, which are related to an inventory value step-up, right? And so just that's onetime that's worth about 150 basis points of headwinds in Q4, but that's nonrepeating. And then if we look at the other line of the P&L, if you look at SG&A, as Linda mentioned, it will be -- it's a little higher than the average of the company. So it will probably add less than 1 point to the total company average when it's fully integrated in year 1. Again, that will go down over time as we start realizing synergies. And advertising is much lower, not that different than our own Pro business. And so that will actually probably bring the advertising as a percentage of sales down by about 1 point initially and probably ramp up as we continue growing the consumer business. So that's for the different line of the P&L. And then the last thing I'll mention, of course, our interest expenses will increase. Our run rate pre-acquisition was about $100 million. And so you will see about an incremental $30 million in Q4. And then next year, we expect about $110 million above and beyond the $100 million run rate. Operator: We'll move next to Robert Moskow with TD Cowen. Robert Moskow: You are one of many HPC companies that have talked about rising inflation from oil-related costs. And the higher costs are all pretty uniform. Is it possible that since everyone is kind of facing the same cost at once, that makes it a little bit easier to go to retailers and argue for either some price increases or maybe some less generous price promotion? Linda Rendle: Robert, yes, I think what you've heard from everyone is we expect rising inflation and what Luc talked about was our ability to handle these over time, and we feel confident about that ability given the toolbox that we've built over the last number of years and certainly how we handled the last round of inflation that we experienced in 2022. That being said, on the pricing front, although we're evaluating pricing and expect that we could take potential targeted pricing, we are approaching this with a high level of discipline and caution. We know the consumer is under stress, and our absolute #1 priority is to ensure that we are driving improvements in value superiority to drive our categories and to drive share. So we do see there's places where we think we can take pricing. There are places where we can do trade optimization. The point that Andrea made on RGM is going to be very important, and we can be very targeted with that activity. So I think these are conversations that certainly everyone in the industry will be facing, which always makes it a more productive conversation because everyone sees what we see. But at the same time, we are all focused on the same thing and our retailers are seeing exactly what we see, a stressed consumer, and we want to make sure that we're doing the things for long-term category growth that are right. And so again, I feel like we have the right tools. I know we can handle this. We'll discuss the pacing between sales and margin as we get a better look at what '27 will bring from an inflation perspective. And our #1 priority will be on driving consumer stability and ensuring we have value superiority to do that. Operator: We'll move next to Anna Lizzul with Bank of America. Anna Lizzul: So your second half guidance here was somewhat hinging on your ability to deliver here on innovation. And I know it's still moving forward, but it's proving challenging, I think, for that to come through fully in this environment. So I was wondering if you can elaborate on the ways maybe how you're adjusting moving forward, meaning have there been any changes made on these innovation investments or marketing spend as you're thinking ahead? We've also seen some greater exposure from private label and the data coming through in certain categories. So wondering if you can comment on this as well. And then longer term, just with GOJO, do you see -- still see your ability here to meet your longer-term IGNITE strategy just given the margin profile of the business and then the potential advantages that come from this acquisition here longer term? Linda Rendle: Thanks, Anna. I'll go through these. And if I miss anything, please come back to me. Innovation, that has been largely very successful in this back half. So despite everything that's going on, our innovation execution, and I'm going to put Litter to the side for a moment, and I'll touch on that again, has been great. So our largest innovation with Clorox PURE, which is our allergen platform, has gone very well. We got early wins on distribution. We were online early. We're getting great reviews. Retailers are very excited and they're excited for the next round that we have coming at the beginning of fiscal year '27. We'll bring them some new benefits in this category. But on that, we got preferred shelf placement. And these are new sections of the store for us, and retailers are partnering with us to ensure we can get this in front of consumers. So feeling terrific about that big innovation platform, its execution and the results, which are at this point from a velocity perspective, above expectations. I'd also note that the other innovations we have in Cleaning, including the expansion of our Scentiva line continue to do really well. We launched a new flavor in Cherry Blossom and that has been our #1 scent, and we're expanding that scent into different forms. But that's a place where, as I talked about, consumers are continuing to willing to pay for a premium experience and joy and scent fit in that bucket and Scentiva continues to personify that. I'd also call out our food launches, which we believe are off to a good start and our Glad line where we have a new absorbent layer in our trash bag, we continue to feel good about the distribution and the plans for that as well as new scent. So generally, innovation, very strong execution and strong performance. Litter, again, early days, and this was a hard conversion. So I would note it's not unexpected where we are, but we just have not proven yet that it is exactly what it needs to be, and we are making the adjustments to the plan. I feel good about the fact that we're offering a better value. The claims are better. The packaging is better. Our digital execution is much stronger, and we're seeing very strong digital pickup on Fresh Step, but we don't have yet the whole thing in market yet to see exactly where we need to make adjustments. The places we do know we need to make adjustments, we are with retailers right now doing that. So I'd call that out as the one place in innovation that is behind our expectation with everything else at or above. And then on -- I'll go to your next question, as long as I've covered innovation sufficiently for you. I'll start with private label. And I think I mentioned in one of my comments that private label shares have been flat over the majority of our categories. It's basically stabilized. We're watching it really carefully because we have seen ticks up in certain time periods as retailers promoted or and bring in a new item. But generally, consumers continue to want brands, and they continue to want value overall, not just the lowest price. There are places where we've seen a bit more pickup in private label. Brita would be one. We're watching that one carefully. We've seen that trend over time. And as we continue to launch innovation, we end up getting some of that share back, but that's a place we're watching carefully. And then I'd say we're watching carefully any other place where retailers are leaning in and making investments. But overall, private label just hasn't had the impact that many would have expected. And I know many of you are asking questions about that. We've continued to see it play the role that it normally does, which is offering a low price for those consumers who need it. And then on GOJO on the long-term algorithm, certainly, GOJO is a strong step to delivering our overall algorithm, which we remain committed to. But also what is also very important is that our categories get back to normalized levels in order for us to deliver that. So because it's accretive from a growth perspective, we see that playing a role in '27 and beyond. And of course, most importantly, we're focused on getting our core categories back up to what they were before in low mid-single digits. Operator: And our next question comes from Chris Carey with Wells Fargo. Christopher Carey: I just wanted to ask about just first and foremost, as a clarification. Was there any kind of like shipment versus consumption dynamic in the quarter? I think just health and wellness and household specifically came in a bit different than expectation. I realize that you had the timing dynamics from last quarter, but I just wanted to check how results compared to underlying consumption as you see it. And I have a follow-up. Luc Bellet: Yes, Chris, I can take that. There was certainly a lot of movement across segments and difference between shipment and consumption. For the total company, U.S. retail, we -- it all netted out to about 1 point of negative timing relative to consumption. Now if you remember, in the second quarter, we shipped volume ahead of consumption in health and wellness ahead of our last wave of manufacturing ERP implementation. So we were expecting that point of favorability in the second quarter to reverse in the third quarter and that happened. So that's on Health and Wellness. But then you had more noise in both household and lifestyle, and they were related to a mix of retailer inventory adjustments, mostly in lifestyle as well as some early shipments in -- mostly in household, both in Litter and in Kingsford. So those 2 offset each other. There were about a point of the company -- a point of total company each. And the retailer inventory adjustment is just onetime and nonrepeating. But of course, the early shipment is something that we expect to reverse in the fourth quarter. So that will be a little less than a point of headwind in the fourth quarter. Now the fourth quarter has a lot of merchandising leading up to July, August, September period. So there might be more noise. And so we'll see what happens. But that's the gist of it as you think about shipment related to consumption. Christopher Carey: Okay. The follow-up question is just around the portfolio. There are some areas of the portfolio which have been challenged for some time. There are some categories where maybe they're not traditionally where you would think you are right to win exists. When you go through moments like this where market shares are maybe progressing a bit slower, there's potentially an opportunity to be even a bit more focused. Are you having those portfolio review conversations? Is that activity becoming a bit sharper? Any context on just when you're going through these kinds of cycles, how you think about them and how you react? Linda Rendle: Sure, Chris. First, I'd start with we're always doing portfolio work, and we have a regular review process as a management team and, of course, importantly, a regular review process as a Board where we're looking at our portfolio, and we're doing a number of things. We're deciding how we allocate resources within the portfolio that we have, where we want to place bets, where we think we need to be more efficient. And we do that on a regular basis. And in fact, we'll do that again coming up here for fiscal year '27. And then we are evaluating the portfolio more strategically as well and looking at inorganic options, and that's led to many of the things that we have done, including the divestiture of Argentina, the acquisition of the majority of the ownership in the JV that we had in Saudi Arabia as well as the sale of VMS and of course, importantly, the acquisition of GOJO and our expansion in our Health and Hygiene portfolio. And that is exactly the result of the work that we have done. And we'll continue to do that work. It's important work to ensure that we have a portfolio set up for success. The thing I would note is some of these issues, we just -- we've got to execute better and we have to deliver better superiority. And a case in point would be Glad. In Glad, trash it can be a tough category. It's very competitive. Consumers can be price sensitive, but innovation works in that category. And we've seen through the work that we've done on getting sharper price points, better innovation, stronger plans that Glad has begun to progress and make progress. We saw the trash category was quite strong this quarter, up over 2 points. And our share is sequentially improving significantly, and we feel good about our Q4 plan. So it's a great example of where we talked about that, that's been a little bit of a thorn for the last couple of years. But putting the right measures in place, being disciplined about cost management, ensuring that we have superiority, we can make progress, and we're doing just that. And I would expect that for any of our businesses. So maybe just to sum up, Chris, yes, we're always doing the portfolio work. That leads to the type of actions like we've taken. And job #1, no matter what, is always ensuring that we have a healthy core, and that's exactly what we're focused on. Operator: Our next question will come from Javier Escalante with Evercore ISI. Javier Escalante Manzo: Hello, everyone. I guess mine are for Luc, I think. So double clicking on the -- hello, can you hear me? Linda Rendle: We can hear you. Yes, perfectly. Javier Escalante Manzo: Okay. Sorry for that. Okay. So perhaps for Luc, I think, because they are very mechanical my questions. One clarification about price mix for household. So reported was flat, right? But Circana data shows pricing running down mid-single digits. So trying to bridge the difference, should we think of that to be some sort of an artifact, meaning that you advance shipments of litter and grilling and that trade and marketing spending will accrue in Q4. So shall we expect pricing to become negative in Q4? And then I have a follow-up on Glad. Luc Bellet: Yes, Javier, in general, like the price/mix for household, I would step back, and we might have a little bit of noise by quarter, but we expect it to be about a point of headwind, meaning that volume would grow about a point ahead of sales. That's the average for the quarters. We'll see a little bit of difference by quarter, and it depends, of course, on promo events. And in household, especially if you have different promo at club, this can actually really distort the data and which might not be fully reflected in the same exact period from a P&L standpoint. So that's maybe what it is. But I wouldn't expect a big shift in Q4. Again, just we're currently tracking as expected on price/mix for the remainder of the year. Javier Escalante Manzo: Very helpful. And on the Glad JV buyout, what category growth and pricing assumptions you guys built as you presented the capital spending model to the Board when you value the acquisition, right, and whether you compare that NPV and return of the buyout against divesting it, for instance? Could you elaborate on that? Linda Rendle: Javier, we won't get into that level of specificity. But what I will say when we are talking about this with the Board and why we feel really great about what we did in Glad, we saw an opportunity to move faster. And that our Glad JV offered great innovation results for a number of years. But we knew that by having full control, we would be able to move faster. We would be able to get innovation to market faster, make changes faster. And we've seen that come to life in the plan, and we believe that's part of the reason we've been able to have an inflection in the Glad business. The other thing I would just note is we look at all the businesses, like I said with Chris, we're always looking at our portfolio. And of course, there's a multitude of things that have to be true. There has to be a buyer. There has to be interest. It has to be the right move for our company. We have to make sure that we're able to execute any time we take very seriously whether we've divested a business like Argentina or VMS or acquired one, the organizational capacity and resources to do that. So we're evaluating all of those things with the Board. And net, where we landed is ending this JV and moving forward with our Glad business was the right thing to do. And we are continuing to be focused on innovation in that category, ensuring that we get prices right and then managing through what -- I don't know exactly what it's going to look like, as Luc said, but a potential difficult cost environment coming up here for an uncertain period of time. Operator: And our next question comes from Olivia Tong with Raymond James. Olivia Tong Cheang: I wanted to ask about a comment that you made in your prepared remarks on Glad and saying that you're prepared to adjust your plans as needed to balance growth and profitability. Obviously, that business is the most impacted by resin costs and if they start to materially move. So we've seen a lot of your staples peers doubling down on brand support and how that isn't going to be an area where companies are going to look to pull back despite the increased anxiety about the consumer -- despite the increased inflation because of the increased anxiety about the consumer. So if you could just sort of elaborate on that comment around the balance of growth and profitability, where you could potentially find areas of flexibility within the P&L given that Glad has started to turn the corner and just understanding your ability to hold that momentum? Linda Rendle: Thanks, Olivia. Yes, we really do mean a balance. And Glad is one, as you rightly note, that does have a big impact depending on energy complexes and then how it plays out into resin costs. And it's one that we have a long history of taking price and actually taking price down over time depending on where those markets are. So too early to say what we're facing in fiscal year '27. So we're evaluating it closely. But I'll just make a comment that's true of Glad and it's true of the entire portfolio. I said a little bit earlier, but I'll emphasize it. Our #1 priority right now and in fiscal year '27 will be on driving value superiority in our brands, investing in them strongly, and I mean that very broadly. I mean that in advertising and sales promotion, and we're strengthening our plans and investments right now on that as we think about '27 ensuring that we have the right RGM activities in the market, as I gave you an example with Glad, and we'll be putting more tests in the market that we think will pan out well and potentially could be more permanent moving forward. Of course, we've invested in data and technology. So we're making all of the spending we have more efficient at the same time, moving more dollars into working media and out of nonworking media, using AI to take costs down. We're focused on just a holistic way that we can get more investments to our brands and drive superiority. And that will absolutely be true of Glad. And we will evaluate is pricing the right move? Would we change trade, et cetera. But that's the order of operations for us. Number one, value superiority in driving categories and shares. Number two, and we believe we will be able to do both of these balance over time is recovering costs. And we think we have the toolbox to do both, and Glad will be no different than the rest of the portfolio. And the other thing that I would note is it's really important that we continue to be focused and we are on innovation. We said we were ramping up the back half. We have. Most of it has gone very well. We expect to continue to make progress in fiscal year '27. We feel great about our innovation pipeline over the next couple of years and getting -- if we can get another point of innovation, that is a significant driver to our top line and to our shares. Operator: And our next question comes from Lauren Lieberman with Barclays. Lauren Lieberman: First thing I just wanted to ask about was just the ERP stabilization that you talked about in this quarter. First, a technical aspect. Sort of where does the incremental cost from that show up in the gross margin bridge you guys share so we could just kind of try to understand the magnitude of the pressure as we think about into next year, the comp. And then just sort of anything that you could add on where you stand? You said, I don't know where -- when during the quarter you felt you reached stabilization and kind of what that entailed? And then I do have a second question afterwards. Linda Rendle: Lauren, thanks for the question. I'll start, and then I'll hand it over to Luc for the technical margin [ question ]. So we were able to complete our ERP in Q3. If you all recall, we did the major portion of the U.S. at the beginning of our fiscal year, but then we had a series of changes at our plant, and that finalized in Q3 with very minimal impact as we had expected. So mainly the ERP stabilization too, is about getting our performance and service levels up, and we continue to stabilize that in Q3, and that was a result of the cost. I think I would just maybe take an opportunity to say again how important this transition is to the company. And we recognize it's created some dispersed focus, but it's critical to having the foundation of the company that allows us to use all of the tools from a data and technology perspective that can help us grow our business, make our business more efficient, and so recognize the noise and certainly the dispersed focus we've had. But we feel good about where we are and the fact that we've gotten to the place where it is -- all 3 rounds are complete. And it did have a margin impact. I think we talked about that last quarter, where we would expect some incremental costs that were a bit higher than we had expected. And I'll have Luc walk through those details now. Luc Bellet: Yes. And Lauren, maybe one more piece of context is we rolled out a lot of different, what we call module as part of the ERP transition. Some of it is supporting our manufacturing operations. Some of it is supporting our logistics, demand fulfillment and order to cash. And if you remember, in the first quarter and second quarter, we've been slower in ramping up our order to cash and stabilizing our service levels. And we knew that we will continue that stabilization through the third quarter and the fourth quarter, right? Now we had expected -- we incurred additional costs in the front half as we stabilize that service level. And those costs are mostly in the area of logistics and fulfillment, right? So think about cost of expediting orders, additional costs moving around inventory more than you should, less than optimal transportation costs and incremental labor costs. So as you -- now we expected those to linger in the third quarter and those costs ended up being a little more than we had anticipated. Now the good news, though, is that as we moved through the third quarter, we started making more progress on stabilization and towards the end of the quarter and this month, we incurred very minimal costs. So we're seeing those come down. And for the fourth quarter, we would expect no incremental costs are very minimal. So that was one portion of the shortfall related to our outlook. And then we also ended up delaying some cost savings and having a little less cost savings than we planned in our outlook, which further put pressure on gross margin. And that, again, related to the stabilization of the order to cash and service level. If you remember, in Q1, Q2, as we were at the peak of the ERP disruption, we had lower cost savings than our historical level, especially in Q1 as we essentially had the organization and operational organization and resource really focused on stabilization and ramping up service levels. And so since it took a little longer to ramp up in the third quarter, we had to further delay some cost savings. And so that will -- some will go in Q4 and some of Q4 will go in next year. Now the good thing here, though, is that we already had a strong pipeline next year, and that will only strengthen the pipeline going forward. Lauren Lieberman: Okay. Great. And then my second question was just about TDPs earlier in the call, Linda, when you shared that TDPs are up 5%, which is great. We can definitely see that when we look at the Nielsen data. But what we have seen is that the velocities have actually been pretty weak. I guess you shared that the items are in the wrong place. So maybe the answer is just that simple. But I just wanted to check in if that's kind of the right way to think about it and that as you get that on-shelf execution more in line with your plan and your thinking that, that's where we should see the indication of change. Is that right? Linda Rendle: That's right, Lauren. We would expect that ramp-up as we get things fully on shelf and we turn on advertising related to those specific items. I'd also note on Litter, if you're specifically referring to velocities there, which you likely are given what we've seen in performance, because that was a hard conversion, and I know you all know this, but I'll take the opportunity to explain it a click more. We took an item and then we completely changed it. So actually changed the UPCs, and that requires a hard conversion at a retailer. So what happens is in the old item, they start to discontinue it and they sell it down before they bring the new item in. And in some places, they don't want to have any overlap in that. So there were places where we had some out of stocks. It's pretty normal in a conversion, which can impact velocities, and that's what we think some of what the noise was in Litter and will continue to be until we get the shelf fully reset is, and we're also noticing there's some change in velocity data, Lauren, due to the fact that people are making value choices with trading up to larger sizes and small, make the velocity information a little noisy. But where it's cleaner, we see strong performance. And as we continue to ramp up spending, we would expect that to continue. But literally, we'll be watching very closely, and we might have to make additional adjustments so we can get those velocities back up. Operator: We'll move next to Stephen Powers with Deutsche Bank. Stephen Robert Powers: Great. I thought I was on mute. I'm glad not. Okay. Fantastic. First question to round out the gross margin. I guess -- and maybe I'm a little slow with the punch here, but can you just, Luc, maybe bridge exactly what's changed and what the drivers are between last quarter's full year outlook for gross margin down around 100 basis points and now down 250 to 300. I think I've got the buckets qualitatively, but I'm having a hard time assigning like numbers to those various drivers. Luc Bellet: Yes. And Steve, just confirming you're asking a bridge for the third quarter or for the fourth quarter? Stephen Robert Powers: For the full year and prior guidance -- current guidance. Luc Bellet: Good. Well, yes, you mentioned it. There's essentially 2 impacts. The third quarter, we just talked about it. It was a little over a point, and we just talked about what drove that. And then there was Q4. And Q4, let me unpack this a little bit because there's certainly some complexity. I guess the most important thing when we look at Q4 projected margin, it's probably important to frame it within the context of several temporary and nonrepeating items. So maybe what I can do is let me do a quick rec versus a year ago and then just talk about what is different in the new outlook. So versus a year ago, we're also -- we're seeing about 5 points of decline versus last Q4 gross margin. 150 basis points of that is coming from the fact that we're lapping strong shipment and operating leverage associated with the ERP transition. So that was in our prior outlook, but it's still significant on a year-over-year basis. And then we have about 200 basis points coming from the GOJO acquisition, right? Now as I mentioned, we'll expect ongoing in the first year to see about 50 basis points of gross margin dilution. And in Q4, we have 150 basis points of onetime items related to -- that are associated with the inventory value step-up of the -- that we acquired. And so that won't be repeating, but that creates a total of 200 basis points. And then the last item is really just recognizing about 100 to 150 basis points of elevated input costs related to the conflict in the Middle East. So that's the 5 points versus year ago. Now what is new, we already had the first item, which was the lapping of the ERP transition. Both the GOJO and the Middle East are new, and that creates most of the variance and then there's a few puts and takes. Probably the most meaningful one is what I mentioned. We have about 50 basis points of headwind associated with some onetime expenses related to a large cost saving projects that we're accelerating into fiscal year '27. So that's the bulk of the difference between our prior outlook and the current outlook. Stephen Robert Powers: Okay. Yes. I actually I follow that. That's very helpful. Okay. My follow-up then is 2 parts. One is you said earlier that the fourth quarter Middle East impact at $100 oil was a pretty full impact at $20 million, $25 million a quarter. So I'm assuming that annualized at $100, your impact at $100 of oil would be $80 million to $100 million. And therefore, we'd be looking at roughly $75 million incremental in fiscal '27, if you follow that kind of math. My second question is on advertising. You held the 11% of sales even as we layered on more sales with the addition of GOJO. So there's implied more advertising dollars in the guide now. And I'm just curious if that incremental A&P is intended to go against the GOJO portfolio or if it goes against your legacy portfolio? And if the latter, kind of where you'd be targeting it? Linda Rendle: Perfect. Steve, I'll start with just maybe a framing on the Middle East and cost, and then I'll hand it over to Luc for a couple more details, and he can cover the advertising in Q4 as well. So just from a Middle East perspective, I think what's important to note, and I'll just go back to what Luc said, I think that's what everyone knows, Q4 is right in front of us. So we can see the energy complex effects that are happening, and you got that right in the $20 million to $25 million. But as we look to the year ahead, what I would just caution us all to do is there are so many impacts potentially depending on how this conflict plays out, how long it goes, other related downstream commodity impacts that can happen that we're watching carefully, and they're just really uncertain and volatile right now. And so if everything were to continue as is, and it was just energy complexes, that would be a fair set of assumptions. But I think based on what we know and what goes through the Strait of Hormuz and things that are happening now across infrastructure, it's -- we'll be better positioned to tell you in '27 exactly what we think that looks like depending on the assumptions that we'll have at that time. But I just -- I wouldn't take that and just multiply that. That's only one of the impacts. And again, we'll be watching the other ones carefully as we move forward. I'll hand it over to Luc. Luc Bellet: No, I think that's right. And I mean, it's still a very helpful number, and it certainly materialize what we're currently seeing. Maybe just switching to your advertising question. So the short answer, Steve, is it's just rounding. So you are correct in Q4 we will see advertising as a percentage of sales going down by 1 point due to the integration of the GOJO business. But because it's only 1 quarter, it's about negative 25 basis points or so for the full year. So we're still rounding to 11%. Operator: And our next question comes from Edward Lewis with Rothschild. Edward Lewis: I guess just a couple of ones for me. Just Linda, you talked about value superiority in the last month. We've heard you talk about this a lot. I guess just wondering now how much of a role does price take when you're considering sort of value superiority, how it's sort of calculated or perceived just in light of what you were saying around the actions you've done about Glad. Just any color on that would be interesting. And then you talked about making some investments to address further cost savings going forward. Can you just elaborate a bit more on those? Because obviously, we've got pretty used to seeing very consistent cost savings coming through. And so interested to hear what you're doing there. Linda Rendle: Ed, I'll start on value superiority, and I'll cover investments as well and if anything Luc wants to add. So on value superiority, that is, by definition, a combination of the entire experience that we provide to a consumer. It's the product, it's the package. Is it where it needs to be? Is the place right? And is the proposition right? Does the brand stand for something? And then, of course, importantly, price. And those 5 things work together, those 5 Ps to give an overall value to a consumer. And what we aim to do is take those 5 and create overall superiority. And what we want to do is drive superiority through a better brand experience, through a better product, through a great package that gives consumers a new way to use a product or an easier way. And then we want to be able to price to that superiority, which usually means we can command a premium, which is what we do in most of our categories. And we just got to make sure we have that balance right. So for example, in Glad on that RGM activity where we took price down on 80 count, we didn't have that quite right. We took the price down, and we got back to a place where we felt we had overall value superiority, but we did need to pull the price lever to get closer in line to the right price gap that we needed. We're testing other things, as I mentioned, in RGM that we'll look at that for other brands where we want to be targeted to ensure that we have that overall equation right and where we think price is playing a little bit more of an important role or because we took 4 price increases as did the industry during that significant period of inflation, and there might be some places and we said we knew we would have to do this where we'd have to adjust. And again, we're testing a few of those now. And we also want to use things like price pack architecture and other RGM levers where we don't have to just take a truckload price, but we can do take pricing in different ways as we trade off benefits. So I would say price plays a very important role, but it is really about connecting it to those other 4 levers and making sure you have overall superiority. The most important thing that we can do, though, is have those other things right. So I'll take PURE, for example. We have a superior product that we know gives consumers more benefits to remove allergies. It's in a great package that consumers love and makes it easy for them to use. The proposition is clear. The claims are clear. We're spending against it strongly. And then we've leaned into digital and on-shelf placement to ensure they get it, and we can command a premium for that experience as a result and velocities are quite strong to start. That's the magic and that's where we want all of our brands to be. But if we need to lean into price in a couple of places to get back in line, we will, Ed. We've done that, like you said on Glad, and we'll do that in other places. Yes. And then moving to the second point on your investment on cost savings. So I won't give specifics on the project. We'll talk about it more later, but it's a big supply chain project that we're able to accelerate and will offer significant savings moving forward. But as we looked ahead into the cost environment in '27, we thought the right thing to do was to go ahead and accelerate that project. And so we made that investment in this quarter, and we'll talk more about what we're doing as we head into fiscal year '27. Luc Bellet: Yes. And Ed, maybe just as added context, we always have onetime investment associated with cost savings and usually plan pretty tightly by quarter. Since we've been removing and delaying some cost saving and accelerating some, that created a little bit of a difference in the fourth quarter. And just the magnitude of the project is a little larger than normally what we see. Those investments can be asset write-off, could be engineering costs, if you look at a manufacturing project -- manufacturing cost saving project as an example. Operator: And this concludes the question-and-answer session. Ms. Rendle, I would now like to turn the program back to you. Linda Rendle: Thanks, Jen. As we close out today's call, I want to reinforce a few points. First, while our third quarter results did not meet our expectations, we're operating from a much stronger foundation. The ERP implementation is complete, service levels have stabilized and complexity and costs are coming down. These are critical enablers of better execution. Second, we see clear signs of progress as we focus on driving value superiority across our portfolio. Innovation across the portfolio is strong. On-shelf presence is improving and teams are sharply focused on the fundamentals that matter most: availability, pricing and promotional effectiveness and end market execution. These actions are essential to building momentum through the fourth quarter. Looking ahead, we're also strengthening our plans and investments in targeted areas to accelerate share gains. And finally, we remain confident in our ability to translate these efforts into improved performance over time. While the environment remains challenging, we have the right strategy, capabilities and teams in place to finish the year stronger and enter fiscal 2027 with greater momentum. We thank you for your time and questions and look forward to updating you on our continued progress next quarter. Operator: And this concludes today's conference call. Thank you for attending.
Operator: Hello, everyone. Thank you for joining us, and welcome to Cable One's First Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Jordan Morkert, Vice President of Investor Relations. Please go ahead. Jordan Morkert: Good afternoon, and welcome to Cable One's First Quarter 2026 Earnings Call. We're glad to have you join us as we review our results. Before we proceed, I'd like to remind you that today's discussion contains forward-looking statements relating to future events that involve risks and uncertainties, including statements regarding future revenue, customer growth, connects, churn rates and ARPU, the future competitive structure of our markets, the anticipated benefits of our mobile service offering, new product rollouts, future customer retention trends, anticipated cost savings and other benefits to be derived from our billing system migration and our other investments in growth enablement platforms, our plans to expand our multi-gig capabilities in more markets, future cash flow and capital expenditures, potential uses for our cash flow, the upcoming MBI transaction, including the purchase price, MBI's future debt levels, integration timing, anticipated cost and tax efficiencies, combined leverage ratios and closing date, the anticipated timing for closing of the merger of Point Broadband with Clearwave Fiber and expected benefits from that transaction, future tax savings and our future financial performance, capital allocation policy, leverage ratios and financing plans. You can find factors that could cause Cable One's actual results to differ materially from the forward-looking statements discussed during today's call in today's earnings release and in our SEC filings, including our 2025 annual report on Form 10-K and our forthcoming first quarter 2026 quarterly report on Form 10-Q. Cable One is under no obligation and expressly disclaims any obligation, except as required by law, to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, today's remarks will include a discussion of certain financial measures that are not presented in conformity with U.S. generally accepted accounting principles or GAAP. When we refer to free cash flow during today's call, we mean adjusted EBITDA less capital expenditures as defined in our earnings release. Reconciliations of non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures can be found in our earnings release or on our website at ir.cableone.net. Joining me on today's call is our CEO, Jim Holanda; and CFO, Todd Koetje. With that, I'll turn the call over to Jim. James Holanda: Thanks, Jordan, and good afternoon, everyone. We really appreciate you joining us today. I've now been in the role for a little over 70 days, which has given me the opportunity to spend meaningful time with our teams, get closer to our markets and develop a clear view of where we are performing well and where we need to improve. At a high level, I'd say the work underway across the business is moving in the right direction, but those efforts are not yet showing up consistently in the results. Today, I want to spend my time on 3 things: what we're seeing in the business, what I've learned since stepping into the role and our focus and priorities going forward. Starting with the quarter, we're not yet seeing the full benefit of the changes we are making in the business. Results reflect the broader economic backdrop and continued pressure in our more competitive markets, particularly in customer retention. While we have already begun to make changes in these areas, it remains early and those efforts are not yet meaningfully reflected in our results. At the same time, first quarter connects improved year-over-year, which we view as an early indication that elements of our strategy are beginning to gain traction. In addition, we are roughly 2 months into our MSO-wide mobile launch. And while it is too early to draw conclusions around retention or lifetime value, initial customer response has been encouraging. We continue to believe mobile can become an important component of the broader relationship over time. Even with these challenges, the business is generating substantial free cash flow, reinforcing both the durability of the model and our ability to continue to execute on our debt reduction, strengthen the balance sheet and create long-term shareholder value. In the first quarter, we generated approximately $115 million of free cash flow and $500 million over the past 4 quarters, providing meaningful flexibility to allocate capital in a disciplined manner. Turning to residential services. I want to spend a bit more time on what we're seeing in the business. In the first quarter, we reported 12,600 net residential broadband customer losses on a sequential basis. While this reflects continued pressure in certain areas of the business, there are several underlying dynamics that help frame how we are thinking about the trajectory going forward. Over the course of my career, I've seen firsthand what has and has not worked in operating environments like this, and those lessons are shaping how we are approaching the business today. First, churn was elevated in the quarter, but remained primarily concentrated within our more competitive markets, which allow us to concentrate our retention efforts where they can have the greatest impact. At the same time, new connects improved year-over-year, driven in part by value-conscious customer segments. These customers represent an important part of our segmentation strategy and remain focused on adding them in an accretive way. We also saw year-over-year improvement across certain go-to-market channels, including e-commerce and direct sales, reinforcing our focus on meeting customers where they prefer to engage and expanding on our connect opportunities. From a retention standpoint, we are implementing targeted initiatives to better identify and engage at-risk customers. These include speed upgrades, more gradual stepped promotional roll-offs, AI-driven tools and a new CRM platform expected to go live later this year. We are also deepening multiproduct customer relationships through offerings such as mobile, Whole-Home WiFi, enhanced online security and comprehensive technical support for the connected home, all while continuing to invest in the network to further strengthen the consistent, reliable experience our customers expect. While still early, these are the types of operational actions we believe can improve retention trends over time. Looking at ARPU, results in the quarter reflected downward pressure from go-to-market initiatives and targeted retention offers, partially offset by continued selling to higher speed tiers and the broader multiproduct offerings just mentioned. While we may see some variability from quarter-to-quarter, we continue to expect ARPU trends to remain broadly stable for the year. Taken together, while retention remains the primary challenge, we believe the underlying trends in connects and multiproduct offerings provide a constructive foundation as we work to improve customer outcomes and drive more consistent performance. Turning to business services. Overall performance showed improvements through the back half of the quarter. Under Edwin Butler's leadership since early January of this year, the business services organization has moved quickly from assessment into execution. Targeted investments in sales enablement, go-to-market discipline and a new sales training program drove improved results across our fiber, carrier and enterprise channels. While still early, these trends are encouraging and reinforce our confidence in the actions underway. Todd will address some discrete items in the quarter in more detail. Clearly, competitive intensity persists. However, we believe our network capacity, reliability and local operating presence position us well, and we continue to invest for improved performance. Today, approximately 53% of our markets are multi-gig capable, and we expect to expand that capability to most markets by year-end, reinforcing our ability to meet growing customer demand across the footprint. Against that backdrop, over the past several weeks, it has become clear that our biggest opportunity is improving the consistency of execution across the footprint. Many of the underlying dynamics are consistent with patterns I've seen in prior operating environments. As a leadership team, we've aligned around a focused set of priorities where disciplined execution can drive the most meaningful improvement. These priorities center on strengthening retention and conversion, simplifying our product set and ensuring greater consistency in how we go to market across the footprint. We've already begun to take action in each of these areas with the objectives of improving the customer experience, the price value equation and therefore, the customer trends and the financial performance over time. The work we're doing today will still take some time to show up in our results, and we would not expect it to fully translate into the numbers within a single quarter. Our focus right now is on improving overall execution of the array of operating strategies at our disposal and continuing to strengthen the balance sheet. Stepping back, I remain confident in our long-term opportunity. The durability of our cash flow allows us to continue prioritizing debt reduction while maintaining the flexibility to invest in the business and support long-term shareholder value creation. That confidence is grounded in the strength and the capacity of our network as well as the clear opportunity we see to improve execution within our existing footprint. And with that, I'll turn it over to Todd, who will provide a recap of our financial performance. Todd Koetje: Thanks, Jim. Starting with the top line. Total revenues for the first quarter of 2026 were $353 million versus $380.6 million in the first quarter of 2025, with the year-over-year decrease driven primarily by lower residential video and residential data revenues. Residential video accounted for approximately $10 million of the decrease. Residential data revenues decreased $11.6 million or 5.1% year-over-year due primarily to a 6.1% decline in subscribers. Business data revenues decreased $1 million or 1.8% year-over-year. Operating expenses of $93.9 million for the first quarter of 2026 decreased 6% compared to the first quarter of last year, due primarily to a reduction in programming costs associated with our video business. OpEx was 26.6% and 26.2% of revenues in Q1 of 2026 and Q1 of 2025, respectively. Selling, general and administrative expenses totaled $87.2 million or 24.7% of revenues in the first quarter of 2026 compared to $95.4 million or 25.1% in the first quarter last year. The decrease in SG&A was driven by lower labor costs and a reduction in billing system conversion costs. Adjusted EBITDA for Q1 of 2026 was $183.3 million or 51.9% of revenues compared to $202.7 million or 53.3% of revenues in Q1 of 2025. Capital expenditures were $68.4 million in the first quarter, a decrease of 3.8% year-over-year. During the quarter, we invested $5.1 million of CapEx for new market expansion projects. We continue to track towards 2025 levels for full year CapEx. Adjusted EBITDA less capital expenditures totaled $114.9 million for Q1 of 2026 compared to $131.6 million in Q1 of last year. In March, our $575 million convertible notes matured and were repaid in full with a $575 million revolver draw. Throughout the quarter, we paid down a total of $90.6 million of debt, of which $86.1 million was voluntary. We opportunistically paid down our senior notes by $33.7 million and term loans by $27.4 million at very attractive discounts, along with a $25 million repayment under our revolver at quarter end. Such payments demonstrate our continued commitment to debt reduction. As of March 31, we had $165.6 million of cash and equivalents on hand, and our total debt balance was approximately $3.1 billion, consisting of approximately $1.7 billion of term loans, $550 million of revolver draws, $548 million of unsecured notes, $345 million of convertible notes and $3 million of finance lease liabilities. We also had $700 million of undrawn capacity under our $1.25 billion revolving credit facility at quarter end, providing us additional committed capital. Our net leverage ratio on a last quarter annualized basis was 4x. As Jim mentioned, we are focused on strengthening our balance sheet. While we have the committed capital in place and sufficient excess operating liquidity to affect the MBI acquisition at closing in Q4 2026, as we have stated before, we will remain proactive in our balance sheet management initiatives and continue to evaluate the markets with a focus on optimizing our longer-term capital solutions. Turning to our investment partnerships. We posted updated information about our unconsolidated investments on our Investor Relations website. For the fourth quarter of 2025, these businesses generated approximately $542 million of LQA revenue and $262 million of LQA adjusted EBITDA, representing year-over-year growth of roughly 17% and 36%, respectively. These businesses also grew broadband customers by approximately 22,900 or 7.9% and added over 80,000 new fiber passings during the year. This summary excludes the financial results of MBI as we provide additional detail within our quarterly filings. Additionally, CTI Towers, Ziply and Metronet are no longer reflected in this table following the monetization of those investments, each of which generated attractive returns. We believe these outcomes, including both the operating performance of these businesses and the monetization of certain investments reflect the strength of these assets and the value created over time. And finally, I'll touch on a couple of items related to a recent transaction, along with an update on a pending one. In mid-March, we completed the sale of certain fiber-to-the-tower contract rights for $42 million in cash. We recognized a $26.6 million gain on the sale. Such contracts generated $9 million of business data revenues in 2025 and $2.1 million in Q1, and the sale reduced first quarter business data revenue by approximately $300,000. Results were also modestly impacted by lower revenue from EchoStar as they continue to decommission portions of their 5G network build-out, representing approximately $50,000 in the quarter and roughly $200,000 on an annualized basis, which we believe represents substantially all of our remaining exposure to this activity. Meanwhile, the merger of our Point Broadband and Clearwave Fiber strategic investments remains on track to close during Q2, subject to customary closing conditions. And we continue to work proactively on our pending acquisition of MBI. The Cable One and MBI teams are preparing for an efficient integration of MBI's operations when the transaction closes, which is expected at the beginning of Q4. Before we open it up for questions, I'd reiterate that while the current environment remains competitive, the business continues to generate strong cash flow, and we remain focused on disciplined execution and capital allocation. We are continuing to prioritize debt repayment while investing thoughtfully in the business, and we believe the changes underway position us to deliver improved performance over time. With that, we are ready to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Sebastiano Petti with JPMorgan. Sebastiano Petti: And real quick, I guess just trying to think about the connects being up year-over-year. I think, Jim, you talked about contribution from the value-conscious segment. Maybe help us think about how much of that -- I mean, maybe a little bit of a difficult question to answer, but how much of that is from just improved offer strategy or maybe improvements or expansion of your distribution channels? And then relatedly, as you, I think, talked about defending the base last quarter, help us think about maybe how much ARPU or was there perhaps some dilution in the quarter relative to win back retention efforts that I think, yes, other -- some of your peers are also kind of enacting to try to defend the base? James Holanda: Sebastiano, thank you for the questions. Appreciate it. This is Jim Holanda, everyone. And yes, connects, I think it's kind of twofold, both to your points. The expansion of the direct sales channel and the improvement in the e-commerce channel results, I think, certainly contributed to that, along with, again, our now very targeted segmented offers across how we've chosen to segment the base and being more aggressive and not afraid to be doing price locks in especially those hypercompetitive markets that we find ourselves in, in 15% of the footprint. So I think all of that helped contribute to it. And I think there's still a lot of meaningful room for improvement in regards to executing across all of those channels and all of those strategies. And yes, certainly, on the ARPU side, along with more aggressive go-to-market offers as certain areas get more competitive. Certainly, being more aggressive on the retention side where we feel those competitive pressures has been a focus. Again, I think we're still early on. We saw a little bit of those results then impacting the ARPU numbers in Q1. Operator: Your next question comes from the line of Frank Louthan with Raymond James. Frank Louthan: As you're looking for -- to save customers and so forth and that kind of activity, what kind of pressure do you expect on ARPU in your back book? And then can you give us some color on how MBI is tracking from subscribers and a financial perspective? And I assume there's -- that might impact the price. Do you expect that to be any materially different from what you've kind of signaled is going to be the cost when you close? James Holanda: Well, I'll let Todd go ahead and answer the MBI question real quick. Todd Koetje: Frank, on MBI, so their first quarter, which we put in the Q, net adds were south of 2,000. So they lost 2,000, but that's a meaningful improvement from the run rate at which they were last year. And there are some timing-related adjustments in the first quarter for MBI. But I think if I understood your question correctly, there are not adjustments in the purchase consideration. That is a locked in and disclosed number at $480 as we talked about last quarter. And so that's currently the plan. We did adjust just to address it, the anticipated debt that we will assume or be looking to refinance in conjunction with it into a new range of $895 million to $925 million. So it's slightly higher than what we had as a range before just due to the impacts of their performance last year and slightly lower free cash flow between now and closing. James Holanda: And then on the ARPU pressure piece, Frank, yes, clearly, bringing in customers at lower promotional rates and seeing continued kind of elevated churn in the back book continues to put pressure on ARPU. Certainly, my read of the analyst community from our last earnings call is such that, that's a good thing. In terms of that, again, we do have targeted retention offers in our more competitive markets at lower rates, but we're also simultaneously focused, as we've talked about on adding a ton of value in terms of those higher ARPU existing customers. And again, whether that's with TechAssist, whether that's been with eero's, whether that's been with security product, we now have mobile in our arsenal as it relates to that as well as continuing to give people more speed at no incremental cost in terms of the network capabilities. So those are all things we continue to be very focused on and get out there, quite frankly, as quickly as possible. Frank Louthan: How much of your back book do you think you're going to need to adjust and kind of lower the pricing when it's all said and done? James Holanda: Well, all said and done is a very wide question. I don't know if you're meaning by the end of this year, the end of a 3- or 5-year cycle. Frank Louthan: Well, multiyear. I mean, ultimately, to get kind of competitive parity, your back book is pretty high. What would you expect that to have to adjust to? James Holanda: I think overall, in the $2 to $5 range over time. And I think is realistic and doable given the value adds that we have at our disposal for our existing customer base. Todd Koetje: And Frank, it's Todd, I'll jump in just real quick, too. Keep in mind, if you think about the history of CABO, it was very one size fits all. It wasn't this deeply discounted promo with a high step-up that would result in a wide variation of front book, back book as you're referring to it. So when you think about -- I think you said the back book is really high, which we don't disclose that. It's not a major delta to what we're looking at from new selling. Operator: Your next question comes from the line of Greg Williams with TD Cowen. Gregory Williams: First one is just on satellite broadband. We're hearing a couple of big announcements in the last few weeks. I'm just curious how you view the satellite competition, particularly in your rural areas. And second question, Todd, you mentioned a little bit about refis and you just paid down the converts. I'm curious about next steps on the balance sheet and when you'd be looking to the debt markets and eventually turn that out. James Holanda: Yes. I'll go ahead and take the satellite and then turn it over to Todd. Obviously, we're an avid user of OpenSignal and have pretty accurate and telling data in regards to the competitive landscape of our footprint across the United States. And while satellite shows up in very low circumstances and quantities, it certainly continues to go up. We keep our eye on it very closely. We're not going to let what happened kind of with FWA happen on the satellite front or even going back to my Dish and DIRECTV days back in the early '90s. I think they are formidable competitors that could flush out over time, yet to be determined. And there is no consistency from at least the 2.5 months that I've been here in terms of their offers and their installation costs and their monthly pricing is widely varied territory to territory, market to market. And we have not seen any consistency yet across our footprint in terms of their go-to-market strategy, which I think they will figure out a technological way to overcome at some point in the future, should they choose to allocate their resources and bandwidth there. So we'll continue to keep an eye on it. But at the same time, as you're fighting off 1, 2 or 3 FWA carriers and fiberized LECs and in 15% of the footprint, fiber overbuilders, we feel we have a good playbook to run in order to defend the base that we have and to figure out how we continue to grow the connect side of our business simultaneously. Todd Koetje: And then, Greg, on the balance sheet side, as Jim alluded to, and I commented also in my prepared remarks, meaningful repayments have continued as we attack the numerator. That was over $400 million in 2025, $90 million here this last quarter. Most of those were voluntary and repurchases at attractive discounts on both our term loans and our unsecured notes. And that's an intentional approach as it relates to how we want to think about the balance of the capital structure. As I've mentioned several times, diversity of duration because we are actively evaluating longer-term capital solutions and optimizing the balance sheet to ensure we have the flexibility to continue to reinvest in the business, but also the flexibility to continue to repay debt at attractive levels going forward. But we're also very focused on the diversity of the structure and ensuring that we have both secured that's more attractively prepayable as well as more foundational capital on the unsecured side. And then as it relates to preparation, I think you even asked about timing. I've kind of been pretty consistent for the last few quarters, but we do have our contingency plan in place, but that's not a primary plan. And so we actively evaluate the markets. We're looking at it through the lens of ensuring we have the right disclosures in place. So we started putting more disclosures on MBI as that acquisition will be affected in early Q4 of this year. And we are aware of, obviously, the refinancing that we need to do over the course of the next 2 to 3 years and very actively planning around how we address that. Operator: Your next question comes from the line of Brandon Nispel with KeyBanc. Brandon Nispel: A couple, if I could. It seems like a pretty consistent theme we're seeing across the space is that there's an inverse correlation between ARPUs and subscriber growth. So I'm curious how you guys are expecting to get better performance on the subscriber side while keeping ARPU flat this year. And then if I remember right, historically, your guys' footprint tends to perform best seasonally in the first quarter from a connect standpoint in the third quarter, and if we're looking at trends getting worse in the first quarter here, how should we be thinking about sort of second quarter from a net add standpoint? James Holanda: I'll start, and I'm new, so I can't speak to historical Q1s. I know my experience in my other locations is nothing historical patterns upheld through the pandemic and going forward in a new competitive environment, generally speaking. So that one is probably harder to gauge. Having said that, I think we were pretty clear on last quarter's earnings call that in the third quarter of '25, we saw the spike associated with some very large work done in the back office and with our systems in terms of a billing system consolidation across the family brands that made up Cable One that really put pressure there. We're not going to have those pressures at all this year. And so I think that becomes an opportunity. And like I say, I think the opportunities in terms of all the go-to-market strategies that we've been talking about on these last 2 calls are really the things that can help start to change what have been otherwise historical trends there. And as we think about kind of ARPU versus sub growth, the interesting thing about Cable One and one of the reasons I came here is 40% of our footprint, we're still the only gig provider. And there's not a lot of cable operators out there that can say that. And while we certainly expect that intensity to grow over time and have modeled that out and are thinking in those terms, we also have clear visibility in terms of as ILECs start to fiberize or third-party overbuilders start to come in with a fiber build. We see that coming well in advance, and we think we've built a pretty good playbook in terms of how to defend against that. And so I don't think as you compare us to others, I think we have just a little bit more flexibility in terms of our timing. And I think we have a little bit more opportunity in terms of, again, getting higher speeds and getting a whole host of value-added services into our customers' kitchens and living room to help us as we go forward across those retention pressures. Brandon Nispel: Got it. Todd, if I could just follow up with one for you. I don't think you provided it or an update here, but with the higher debt that you guys are planning to take on with Mega, the trends there and then the EBITDA trends that you guys are seeing, is there an updated thoughts on your closing leverage target once you do close Mega? Todd Koetje: Yes, Brandon, yes, the range is pretty modest relative to the overall debt stack. So that doesn't move that much. But obviously, with the trends from 2025 for both CABO and MBI on a customer basis and how those translate into the effective denominator of that leverage ratio and EBITDA that will be higher than what we previously stated, which was in and around 4x, but still very manageable in our opinion, as it relates to where we close and how quickly we can get that down relative to the ongoing initiatives to focus on debt repayment as well as, of course, stabilize and change the trajectory of the EBITDA base. Operator: Your next question comes from the line of Sam McHugh with BNP Paribas. Samuel McHugh: Two questions, if I can. One on the gross add connect side. Do you have a sense of how many of your gross adds are coming from DSL? And then as DSL kind of just disappears in the next few years, kind of what's the plan to make up that gap? And then secondly, on the tower divestment, Todd, you've given us the revenue number. I wonder if you could give us an EBITDA number of how much that might just take out EBITDA for this year. James Holanda: Yes. Thank you for those questions. On the -- in terms of the connect side, how many are coming from DSL, again, with only 40% of the footprint left that -- where the ILECs are unupgraded, you'll over-index slightly in terms of that connect performance. So if it's 40% of the potential and 50% of the connects, I think that's a pretty consistent rule in terms of the OpenSignal data that helps us kind of support that structure and thought. And having said that, it's interesting, you brought that up because I think that is an opportunity for us to exploit that even further. And given these bigger announced acquisitions by the ILECs and the integration work that they have to do and so forth, I think that gives us a window to hopefully potentially take advantage of that in a bigger way going forward. Todd Koetje: And Sam, I'll just say, of course, as we've talked about in the past, where the LEC has not upgraded to fiber and especially where that LEC has a fixed wireless access product for home broadband. They've been very aggressive on attempting to keep the customers they already have as their initiatives are not only focused on the customer side, but decommissioning that high-cost copper. So that has moved that DSL population down at a more accelerated pace than what it was naturally because of those fixed wireless saves. As it relates to the fiber-to-the-tower contract sale that we affected in the first quarter, it was $42 million of gross proceeds, pretty comparable because of the tax efficiencies that we had from a net proceeds perspective. We used those proceeds to accelerate our debt reduction. The revenue, we did disclose, as you alluded to, that's a high single-digit multiple and margins that are slightly higher than what you see from an enterprise side of the equation. So that should get you to a pretty directionally accurate cash flow number as that rolls through on a GAAP basis throughout this year. Operator: Your final question comes from the line of Julie Zhu with MoffettNathanson. Julie Zhu: Team, last quarter, you had mentioned approaching an equilibrium on fixed wireless competition. I was wondering if you could comment on any updated thoughts there. I know that we saw that Verizon's fixed wireless net adds sharply slowed, but T-Mobile stopped reporting yet and given they're your largest overlap, would love any insight into year-to-date activity and view into the future. And then if I can squeeze a follow-up in about the satellite LEO competitors. Jim, I think you had mentioned that it's sort of a hazard strategy on go-to-market for them. How does that affect how you and the team think about competing in more rural areas? And do you have an updated point of view in terms of the structural market share of satellite connectivity and fixed wireless across your footprint? James Holanda: Wow, that's a lot for 2 questions, Julian. I wouldn't expect anything less, by the way. Thank you. On the satellite piece, and they're somewhat intertwined given the fact that roughly 80% of our footprint now has one or more FWA competitor, which is the latest and greatest information we have from OpenSignal. So we're already in a mode where we are competing fiercely in terms of retaining customers that we have and going after the low end where those product sets are more appealing. And so even as they might have the capacity to come to a more consistent go-to-market strategy. At some point, if you're competing against 2 or 3 FWAs and 1 or 2 other wireline competitors doesn't matter whether there's 6 or 7 in a particular market, we're focused on the things that we can control and the value and the customer experience differentators that we can bring to market and the localism that our network and our people bring to communities in the way that we support them day-to-day throughout the year. So we'll continue to try and take advantage of all of those opportunities to the best of our ability and see how that develops and unfolds. I think your narrative is accurate. I think we haven't seen according to our data, a whole lot of incremental expansion out of the Verizon FWA product, but we do continue to see and expect T-Mobile and AT&T deployment within the market. And I would call theirs slow and steady, but not -- they're not turning on huge additional sloughs from the information we've gotten so far. Todd Koetje: And then, Julie, on the structural market share, we did discuss last quarter, it's an estimate. It's a view, a thesis as it relates to what the future looks like. And when you think about wired broadband, we believe that longer term from an equilibrium perspective, wired broadband based on the capacity needs, the speed needs and the utilization that you see constantly increasing across our both residential and business customer base that, that will be in more of that 80% area. And then I would view the 20% is whether it's wireless only, whether it's mobile fixed wireless access or it's satellite that really comprises that other 20% factor when you think about an adoption being nearly ubiquitous for Internet connectivity. Julie Zhu: Got you. I appreciate the fulsome answers. I think maybe just a quick follow-up. Is it fair to characterize the rate of change for T-Mobile and AT&T fixed wireless as slowing when you say slow and steady? Todd Koetje: No. Consistent. Julie Zhu: Okay, got it. Todd Koetje: Thanks, Julie. Operator: That's all we have time for today. I will now turn the call back to Jim for closing remarks. James Holanda: Thank you, Alexandra. Before we wrap up, I just want to thank all of our associates across the country for welcoming me into the Cable One family and for their continued focus on our customers and each other. And over my first roughly 70 days, I've had the opportunity to meet many of our associates, customers and investors, and I look forward to continuing to engage with our key stakeholders in the quarters ahead. And thank you, everyone, on the call today for your time and your continued interest in Cable One. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Q1 2026 OneSpan Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Joseph A. Maxa. Please go ahead. Joseph A. Maxa: Thank you, operator. Hello, everyone, and thank you for joining the OneSpan Inc. First Quarter 2026 Earnings Conference Call. This call is being webcast and can be accessed on the Investor Relations section of OneSpan Inc.'s website at investors.onespan.com. Joining me on the call today is Victor T. Limongelli, our Chief Executive Officer, and Jorge Martell, our Chief Financial Officer. This afternoon, after market close, OneSpan Inc. issued a press release announcing results for Q1 2026. To access a copy of the press release and other investor information, please visit our website. Following our prepared comments today, we will open the call for questions. Please note that statements made during this conference call that relate to future plans, events, and performance, including the outlook for full year 2026 and other long-term financial targets, are forward-looking statements. These statements involve risks and uncertainties and are based on current assumptions. Consequently, actual results could differ materially from the expectations expressed in these forward-looking statements. I direct your attention to today's press release and OneSpan Inc.'s filings with the U.S. Securities and Exchange Commission for a discussion of such risks and uncertainties. Also note that financial measures that may be discussed on this call are expressed on a non-GAAP basis and have been adjusted from the related GAAP financial measures. We have provided an explanation for and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in the earnings press release and in the investor presentation available on our website. In addition, please note that all growth rates discussed on this call refer to a year-over-year basis unless otherwise indicated. The date of this conference call is 04/30/2026. Any forward-looking statements and related assumptions are made as of this date. Except as required by law, we undertake no obligation to update these statements as a result of new information or future events or for any other reason. I will now turn the call to Victor. Victor T. Limongelli: Hello, everyone. Thank you for joining us today. We had a good first quarter with strong profitability and solid revenue growth. Subscription revenue grew 8% year over year and our adjusted EBITDA margin was 32%. I am also happy to report that notwithstanding the doom and gloom you might hear about software, our gross revenue retention reached 90% for the company as a whole and 94% for our digital agreements business. We also generated healthy cash flows, and we returned capital to shareholders via share buybacks, which have totaled approximately 1.5 million shares for more than $18 million over the past three quarters, and via an increased quarterly dividend as well. Before reviewing our results in more detail, I would like to provide an update on our investments and how we are positioning OneSpan Inc. for stronger growth over time. First, in Q1, we completed the acquisition of Build 38, which brings a fantastic team to OneSpan Inc., with deep expertise in mobile threats and mobile application protection, and provides customers with telemetry to help them understand the attacks targeting their mobile applications and the environment in which they operate. Keep in mind that the vast majority of consumer banking is now conducted through mobile banking applications, making this a critical attack surface for banks to protect. We now offer post-compilation application protection, sometimes called post-compilation wrapping, as well as an SDK-based approach through which customers can build in application protection and the telemetry necessary for visibility into the threat environment and overall operating environment. With the addition of Build 38’s capabilities, I am happy to report that we now offer a comprehensive set of leading mobile application security technologies across the app shielding landscape. Second, I want to update you on the acquisition we completed last year of Nok Nok Labs, the pioneer of the FIDO Alliance and passwordless authentication. A fabulous team from Nok Nok joined OneSpan Inc. and together we have grown that business materially, with ARR having increased about 20% in less than ten months since close, and it has broadened our product set as well. We now have the broadest B2B2C authentication offering: both hardware and software, cloud and on-prem, and OTP and FIDO. Third, we continue to invest in internal research and development. In our digital agreements business, we continue to make strides towards our goal of delivering secure, seamless agreement workflows purpose built for the financial services industry, combining white-label capabilities with embedded security, compliance, and identity assurance across the e-signature journey. We are also planning to integrate AI-driven capabilities to provide deeper insights, streamline decision-making, and further simplify integration into our customers' existing environments. Last but not least, I want to reiterate that neither our digital agreements business nor our cybersecurity business has seat-based licensing as the primary revenue model. In cybersecurity, we sell to our customers based on the number of their end users and not based on the number of their employees or seats. Our licenses are tied to the number of consumers using strong authentication or app shielding solutions. Similarly, in digital agreements, the vast majority of our business, about 97%, is priced based on the number of expected e-signature transactions or documents rather than customer employee counts or user counts. Turning to our results, as mentioned, we started the year with a strong first quarter. We generated $21 million of adjusted EBITDA in the quarter, or 32% of revenue. We ended the first quarter with annual recurring revenue of $192 million, up 14% year over year inclusive of the uplift from the two acquisitions in the past year. This strong ARR growth continues a positive trend, as ARR is now up 24% since 03/31/2024. Total revenue grew 4% to $66 million, driven by 11% growth in digital agreements, which had another strong quarter, and 2% growth in cybersecurity. Subscription revenue in digital agreements grew 11%, driven by demand for e-signatures, while subscription revenue in cybersecurity grew about 6.5%, reflecting growth in cloud authentication, passwordless authentication, and app shielding. Both business units were solidly profitable at the division level. Overall, OneSpan Inc. generated $28 million in cash from operations during the quarter. Our Board remains committed to a balanced capital allocation strategy that considers shareholder returns, organic investment, and targeted M&A. In the first quarter, we invested nearly $35 million to acquire Build 38, and returned more than $10 million to shareholders through dividends and share repurchases, following nearly $32 million returned in 2025. The Board has approved a quarterly dividend of $0.13 per share to be paid in the current quarter, and we will continue to evaluate additional share repurchase opportunities. In summary, we serve a diverse global customer base, and we deliver comprehensive offerings in strong B2B2C authentication, app shielding, and e-signatures. We are investing internally and through targeted M&A to strengthen our portfolio and go-to-market execution, and we continue to make solid progress in building a stronger foundation for growth. We remain committed to maintaining strong profitability, cash generation, and returning capital to shareholders. With that, I will turn the call over to Jorge. Jorge Martell: Thanks, Victor, and good afternoon, everyone. I am pleased to report another strong quarter and continued progress in building a solid foundation for future growth. I am particularly excited about our acquisition of Build 38, which strengthens our mobile application security offering and enhances our ability to protect customers and their customers from increasingly sophisticated AI-driven threats. We acquired Build 38 on February 27, and as such, our first quarter results include just over one month of Build 38's financial contribution. Before turning to our Q1 results, I would like to briefly highlight a change we made this quarter to how we present revenue by operating segment. To better align with how we manage the business and our strategic focus on growing recurring revenues, we now include term maintenance revenue within subscription revenue. As a result, subscription revenue now consists primarily of term licenses for on-prem software, the related maintenance and support revenue, and SaaS revenue. In addition, maintenance revenue associated with perpetual licenses and professional services is now presented together, better reflecting the continued evolution of our business away from perpetual license arrangements. These changes are presentation only and have no impact on total revenue, operating income, or cash flows, and prior period results have been updated for comparability. Additional details are included in the revenue tables in today's press release, our Form 10-Q, and the investor presentation on our website. With that context, let me turn to our first quarter results. Annual recurring revenue, or ARR, increased 14.1% year over year to $192.1 million, inclusive of the two acquisitions. Our net retention rate was 105%, benefiting from customer expansion contracts. ARR also benefited from new customer additions and M&A. First quarter revenue was $65.9 million, an increase of 4.1% compared to last year's Q1, driven by 5.8% growth in software and services revenues, partially offset by a 4.3% decline in hardware revenue. Continuing a long-term declining trend, in Q1 hardware comprised only 16% of our overall revenue. Subscription revenue grew 8.2% to $52.7 million and accounted for 80% of total revenue. Gross margin was approximately 74%, consistent with the prior year period. I will provide additional detail on these metrics as I review each business division in a couple of minutes. First quarter GAAP operating income was $14.8 million, compared to $17.2 million in Q1 of last year. The year-over-year decline in operating income primarily reflects increased operating costs related to the acquisition of Nok Nok and Build 38, including headcount and nonrecurring acquisition-related consulting costs, as well as certain costs related to organic investments, partially offset by lower share-based compensation expenses. GAAP net income per share was $0.30 compared to $0.37 a year ago. Non-GAAP net income per share was $0.39 compared to $0.45 in the prior year period. First quarter adjusted EBITDA and adjusted EBITDA margin was $21 million and 31.9%, compared to $23 million and 36.4% in the first quarter of last year. Turning to our cybersecurity division, cybersecurity ARR grew 6.5% year over year to $124.6 million, again inclusive of the two acquisitions in the past year. First quarter revenue increased 1.7% to $48.5 million. Subscription revenue grew 6.6% to $35.3 million, driven by customer expansions, new logos, and M&A, partially offset by lower multiyear term license revenue. Hardware revenue declined 4.3%, which was less than expected due to the earlier-than-anticipated delivery of certain customer shipments. As expected, perpetual maintenance and service revenue declined as we continue to transition legacy perpetual contracts to term-based arrangements. Gross margin for the cybersecurity division was 74%, compared to 76% in the prior-year quarter, primarily reflecting incremental third-party license costs as well as subscription and professional services costs. Operating income was $20.8 million or 43% of revenue, compared to $24.2 million or 51% of revenue in last year's Q1, driven by increased operating expenses from the acquisitions, the incremental cost of revenues just discussed, higher nonrecurring acquisition-related consulting costs, and increased investments. Now turning to digital agreements, ARR grew 9.9% year over year to $67.5 million. First quarter revenue grew 11.2% to $17.4 million, driven by expansion of renewal contracts, new customer additions, and overage fees. Gross margin improved to 72.5%, up from 70.3% in the prior year period, reflecting higher revenues and greater efficiency in our cloud infrastructure costs. Operating income was $5.3 million or 30.4% of revenue, compared to $3.4 million or 21.5% in the same period last year, driven by revenue growth, higher gross margins, and a modest decline in operating expenses. Turning to our balance sheet, we ended the first quarter with $49.8 million in cash and cash equivalents, compared to $70.5 million at the end of 2025. We generated $28.2 million in operating cash flows during the quarter. Uses of cash included $5 million for our quarterly dividend, $5.4 million to repurchase approximately 510 thousand shares of common stock, $34.6 million related to the Build 38 acquisition, and $2.6 million in capitalized software development costs, among other things. We ended the quarter with no long-term debt. Geographically, revenue in 2026 was 43% from EMEA, 38% from the Americas, and 19% from Asia Pacific, compared to 49%, 33%, and 18% from the same regions in 2025, respectively. Year-over-year changes reflect growth in digital agreements and cybersecurity software revenue in the Americas, lower cybersecurity hardware and software revenue in EMEA, and increased hardware revenue in Asia Pacific. Now turning to some modeling notes and our outlook. We are pleased with our first quarter results and the progress we have made in positioning OneSpan Inc. for long-term growth. We are affirming our full year 2026 guidance for revenue and adjusted EBITDA, and we are raising our guidance for ARR. We expect continued growth in software and services revenue, driven by solid performance in digital agreements and moderate growth in cybersecurity. In cybersecurity, we anticipate a second quarter ARR headwind of approximately $3 million from two contracts not expected to renew. In both cases, the customer is not a bank or a financial institution, and the majority of that total is from a customer moving to passwordless authentication, with the decision taken a year ago before we had acquired Nok Nok. Indeed, this reinforces our belief that adding Nok Nok to our product portfolio was the right strategic move, as we expect passwordless authentication to only grow going forward. As such, we expect ARR to grow in the second half of the year, with most of that growth occurring in the fourth quarter. Finally, we also expect the secular shift away from consumer banking hardware tokens to continue. For the full year 2026, we expect total revenue to be in the range of $244 million to $249 million. We expect software and services revenue to be in the range of $201 million to $204 million. We expect hardware revenue to be in the range of $43 million to $45 million. We expect ARR to be in the range of $194 million to $198 million, as compared to our previous guidance range of $192 million to $196 million. And we expect adjusted EBITDA in the range of $66 million to $68 million. That concludes my remarks. I will now turn the call back to Victor. Victor T. Limongelli: To recap, we delivered a strong first quarter, and over the past year, we have better positioned OneSpan Inc. to deliver value to customers and create value for shareholders. While we know there is more work ahead and that one good quarter does not make an excellent year, we are encouraged by the progress we have made. Jorge and I will now be happy to take your questions. Operator: We will now open the call for questions. At this time, we will conduct the question-and-answer session. We kindly request that each participant ask one question and one follow-up question. You may re-queue if you have more questions. As a reminder, please mute your line when not speaking. To ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your questions, please press star 11 again. Please standby while we compile the Q&A roster. Our first question comes from the line of Erik Suppiger of B. Riley Securities. Your line is now open. Erik Suppiger: Yes, thanks for taking the questions. First off, when will we start to realize some of the returns that you are making in the operations over the course of 2026? When can we anticipate some acceleration in top line, and do you have a time frame when you can get back to delivering on the rule of 40? Victor T. Limongelli: Thanks, Erik. I think before getting to the exact timeline for the rule of 40, it is important to highlight the progress we have made. If you look at where we were on the rule of 40 metrics in 2023, I believe the number was 12 on a combined basis, not for one of the metrics. And for the most recent quarter, we are at 36, and 32 last year. So we have definitely made progress. I do not want to pin an exact date on when we will be at exactly 40, but we are making progress. You see it in our ARR growth. You see it in our subscription growth. Of course, for quite a long time we have had a consumer banking token decline, and you saw hardware decline again year over year. It is now only 16% of our revenue. We feel like we have made some good progress. We have added some real key functionality to our product set, and we are investing in go-to-market as well to continue to try to drive that subscription growth and try to drive the ARR forward. Erik Suppiger: Okay. Thank you. Operator: Thank you. Our next question comes from the line of Rudy Grayson Kessinger of D.A. Davidson. Your line is now open. Rudy Grayson Kessinger: Hey, great. Thanks for taking my questions. First one for me on ARR, just so we can try to get to an organic ARR growth rate. What was the Nok Nok ARR and Build 38 ARR as it came out of Q1? Jorge Martell: Hey, Rudy. Thanks for the question. As of the end of Q1, Nok Nok's ARR was $9.7 million, which is an increase from the $8.1 million that we acquired about nine months ago, which we feel pretty good about, and Victor alluded to that 20% growth over the last nine-ish months. The Build 38 ARR that we acquired was $2.8 million. So combined, it is about $10.9 million—call it $11 million. And so when you look at ARR growth organic, it is about 7% to 8%. Rudy Grayson Kessinger: Got it. That is super helpful, and the growth on Nok Nok is good to see—obviously you would lap that next quarter as far as organic goes. And then second question for me, just given your significant EMEA mix, I am curious what impacts, if any, you saw in the quarter or you are seeing in current deal conversations given the conflict in the Middle East right now. Victor T. Limongelli: Thanks, Rudy. The Middle East itself—while the Gulf region itself—is a small part of our business, only about 4% of revenue, and we are obviously keeping an eye on it like many people are. For Europe, I think you will see in the geographic mix—Jorge talked about the geographic mix—EMEA is a little bit of a smaller portion compared to growth in the Americas. Part of that is strategic; we do think we are under-indexed to North America when it comes to security in particular. So we feel like we are going to grow faster in North America than we had in the past, and also the digital agreements business has been doing well, and that is largely a North American business. Overall, we are optimistic, I would say, about EMEA, and cautiously watching the Middle East situation. Rudy Grayson Kessinger: That is helpful. Thank you, guys. Operator: Thank you. Our next question comes from the line of Gray Powell of BTIG. Your line is now open. Gray Powell: Great, thanks for taking the questions. I just had a couple here. So it is good to hear the commentary on Nok Nok. Where are you seeing the strongest pull with Nok Nok within your base? Then when a customer decides to take the product set, how should we think about the upsell opportunity? Victor T. Limongelli: Nok Nok, I think, is an upsell opportunity because people are going to move to passwordless over the coming years. So having that capability is a core part of our offering. Some of that is customer retention. We talked about GRR in the first quarter. It was at a very strong level—94% for digital agreements and 88% for cybersecurity—so higher than it had been in quite a while. And there is also opportunity to get new customers with Nok Nok's offering as passwordless becomes more and more prevalent. Having a super strong offering, having the board seat on the FIDO Alliance, having the history with FIDO that Nok Nok had, brings a lot to the table. Geographically, we have seen it so far be stronger in North America with strength in Japan as well, but we expect it to grow in Europe, ultimately to grow in Latin America, and all over the world. In five years, everyone will use passkeys, and passwords will seem outdated. Gray Powell: Okay. That is really helpful. And then I just want to make sure I am thinking about Build 38 correctly. It makes perfect sense how it can make your existing products better. Was the acquisition's main purpose simply to make you more competitive on the authentication side and to make your existing stuff more compelling, or is it going to ultimately result in another SKU you can sell to customers and therefore generate additional revenue? Victor T. Limongelli: It broadens the offering. If you think about what our app shielding offering was, first of all, it was through a partner. We had a long partnership in that realm that was successful, but that offering was what is called wrapping—so you build the application and then after it is compiled, there is a wrapper or protection put around the app. It is useful and blocks attacks, but it does not give you as much information about what type of attacks are coming in and what the operating environment is. The Build 38 approach is different. It has an SDK-based implementation where the protection is built into the app, and it enables telemetry back from the applications. Remember, they do not control the devices—these are all consumer devices that are using mobile banking apps. It gives them lots of information about the devices themselves and about what attacks are happening. That has all kinds of implications to broaden the cybersecurity solution that we are offering customers. Gray Powell: Understood. Thank you very much. Operator: Thank you. Our next question comes from the line of Anja Soderstrom of Sidoti. Your line is now open. Anja Soderstrom: Just curious, the contracts that are not renewing in the second quarter—how big of a shortfall is that? And can you double-click on what gives you confidence in raising the ARR guidance? Victor T. Limongelli: Sure. We have seen good progress with ARR. Those two accounts—one of them is about $2 million. That decision was taken a year ago for them to move to passwordless. It just underscores why the Nok Nok acquisition was important for us. We did not have an offering at the time, so we did not have the opportunity to even compete effectively as they moved to passwordless. We do now. Unfortunately, that decision had already been taken. So in the short run, we are going to have a little bit of a hit, as mentioned, to ARR, but we do feel good about the growth that we have seen so far, the pipeline, and the seasonality in our business. We close a lot more business in Q4 than we do in the summer, typically in most years. So we think most of that ARR reinvigoration will happen in the latter part of the year—say September through December. Anja Soderstrom: Thank you. And now that you have Nok Nok, do you feel you are getting more attention since you have that offering? Victor T. Limongelli: It is hard to provide a precise quantification on it. But if you look at the growth in our GRR, I think we are positioned better with our customers. Instead of having technology that maybe a few years ago someone would have viewed as dated, we have up-to-date, market-leading technology in critical areas. That helps customers feel that they should stick with you, that you are going to be a long-term solution. We have seen our GRR go up. I do not think it is only as a result of that because our renewals team has done a great job and we have done better engagement with customers as well, but I think it certainly helps. Anja Soderstrom: Okay. Thank you. That was all for me. Victor T. Limongelli: Thank you. Operator: Thank you. Our next question comes from the line of Erik Suppiger of B. Riley Securities. Your line is now open. Erik Suppiger: Thanks. Follow-up here. Of your 502 customers, how many of them are buying both the Nok Nok back-end software as well as the tokens? Victor T. Limongelli: To date, not too many. The Nok Nok business, of course, did not have a token business, so most of them are pure software customers. That is another area that I think, as we look ahead, we have an opportunity to do better in. It is something that we are hoping can blunt the decline in the consumer banking tokens as we move forward. Having that broad offering does give flexibility to customers—if they have a portion of their workforce that they want to have hardware authentication for, we can offer that without them needing to go to a hardware-only vendor, as an example. But to date, we have not had a ton of cross-sell on that. It is an opportunity rather than a material contributor at the moment. Erik Suppiger: Is it a synergistic sale where you are able to provide any kind of advantage by using an end-to-end solution, or is it simply standards-based and therefore there is no end-to-end benefit? Victor T. Limongelli: The Nok Nok offering has advantages. Of course, it is an open protocol—FIDO protocol—but the Nok Nok solution has additional technology built in to enable device binding of keys, which financial institutions like a lot. Not to get too much into the weeds, but keys synced to Google or other cloud providers can sometimes make banks nervous, and the Nok Nok offering has the ability to have device-bound keys that are not synced—on the software side. On the hardware side, again, it is an open protocol, so they could buy hardware from someone else. It is advantageous having the same vendor. We do very nice branding on the devices, which we have a history of having done with banks for many, many years. To the extent that they like that, it is an appealing offering. But again, open protocol, so there is not a vendor lock-in situation when it comes to hardware. Erik Suppiger: Very good. Thank you. Operator: Thank you. Our next question comes from the line of Catharine Anne Trebnick of Rosenblatt. Your line is now open. Catharine Anne Trebnick: Thanks for taking my question. Now with subscription revenue roughly 80% of total, and you have a good track record—digital agreements and cybersecurity subscription are growing—can you lay out a plan for whether it will always be 80% to 85%? What is going to happen with the hardware over the next twelve months? I know it has been lumpy and there are obvious changes—just lay out a roadmap. Thank you. Victor T. Limongelli: Let me talk about the underlying business trends. The consumer banking tokens we expect to continue to decline. We do not think they will go to zero. We think there will be some portion of consumers in Europe and Asia that are using tokens to authenticate because they are doing web banking and not doing their banking through a mobile banking app. If you ask banks, a lot of them will say 80% of their traffic is now through their mobile app versus laptops or desktops. The hardware piece—the part that could offset that ongoing decline that has been going on for over a decade—is the FIDO2 security piece. If we can get that piece to grow, we could offset that and keep the hardware business at a stable rate. Of course, most of our focus, most of our attention, is on growing the subscription, growing the ARR, and driving value that way. Jorge, anything to add on modeling? Jorge Martell: For purposes of 2026, Catharine, we did not change our guide for hardware. Where it goes in 2027 or 2028—nobody has a crystal ball. It is obviously still in secular decline, but to Vic’s point, we do not think it is going to go to zero. Corporate banking, for example, is still done through hardware tokens—it is the safest way to do high-value transaction signing and things of that nature. There will be a target customer base that will continue to use that device. Hopefully it stabilizes and finds a new baseline soon. Catharine Anne Trebnick: Alright. Thank you very much. Sorry to keep asking that question, but it keeps coming up. Bye-bye. Victor T. Limongelli: Thanks. Operator: Thank you. This concludes the question-and-answer session. I would now like to turn it back to Joseph A. Maxa for closing remarks. Joseph A. Maxa: Thanks for joining today, everyone. We look forward to talking with you again next quarter. Have a great evening. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Independence Realty Trust First Quarter 2026 Earnings Conference Call. As a reminder, today's call is being recorded, and a replay will be made available on the Investors section of the company's website shortly after this concludes. At this time, I will turn the call over to Stephanie Krewson-Kelly, Senior Vice President of Investor Relations and Capital Markets. Ms. Krewson-Kelly, you may go ahead. Stephanie Krewson-Kelly: Thank you. Good morning, and welcome to Independence Realty Trust conference call to discuss first quarter 2026 results. On the call with me today are Scott Schaeffer, Chief Executive Officer; Jim Sebra, President and Chief Financial Officer; Janice Richards, Executive Vice President; and Jason Lynch, Senior Vice President of Investments. Before we begin, please note that any forward-looking statements made during this call are based on our current expectations and beliefs as to future events and financial performance. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially. Such statements are made in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and IRT does not undertake to update them, except as may be required by law. Please refer to IRT's press release, supplemental information and filings with the SEC for further information about these risks. A copy of IRT's earnings press release and supplemental information is attached to IRT's current report on the Form 8-K that is available in the Investors section of our website. They contain reconciliations of non-GAAP financial measures referenced on this call to the most direct comparable GAAP financial measure. With that, it's my pleasure to turn the call over to Scott Schaeffer. Scott Schaeffer: Thanks, Stephanie, and thank you all for joining us this morning. First quarter results were in line with our expectations and represented a solid start to the year. Same-store revenue and NOI increased, reflecting stable year-over-year occupancy and a 40 basis point increase in effective rents. Our performance this quarter reinforces 3 themes: portfolio stability, improving market fundamentals, and disciplined capital allocation. While certain markets are still working through late cycle supply, the trajectory we are seeing in asking rents, along with the stability of demand supports our outlook for sequential improvement in revenue as we move through the leasing season. On the supply front, new deliveries in our markets continue to decrease and are trending well below the long-term average. On a macro level, job growth, population growth and household formation in our markets are forecasted to meaningfully outpace the national average. First quarter operating results reflect these improving market fundamentals. Average occupancy was stable at 95.2% and resident retention of 60.5% remained high, both consistent with our expectations. Asking rents in our markets have increased an average of 2.8% this year, and every one of our markets has seen asking rents increase since January 1. Our recent strategy of prioritizing occupancy now positions us to prioritize rental rate growth during the upcoming leasing season. Concession activity has started to moderate, but is still elevated compared to historical levels. The combination of normalizing concessions and the trajectory of market rent growth against our known lease expirations supports our confidence that new lease trade-outs will reach breakeven this leasing season. Turning to capital allocation. Value-add renovations continue to be our most attractive investment opportunity. During the quarter, we completed 426 units, generating an average unlevered return of 15.4%. First quarter volume supports our full year assumption of completing 2,000 to 2,500 units in 2026. On the capital recycling front, we continue to make progress on the 2 assets held for sale and our joint venture in the Las-Colinas submarket of Dallas, known as The Mustang, is currently marketed for sale. The proceeds from these recycling efforts will be redeployed based on the best risk-adjusted return opportunities at that time, including stock repurchases, deleveraging and/or new investments. Finally, during the quarter, we took advantage of the ongoing dislocation in the public markets by repurchasing 1.8 million of our shares at a cost of $30 million, bringing total repurchases since the fourth quarter of last year to 3.7 million shares and $60 million. With that, I'll turn the call over to Jim. James Sebra: Thank you, Scott, and good morning, everyone. Core FFO per share for the quarter was $0.26, in line with our expectations. Same-store NOI grew 1% during the quarter, driven by revenue growth that was consistent with expectations and modest outperformance on operating expenses. Same-store revenues grew 1.4% year-over-year, supported by stable occupancy of 95.2%, higher average rental rates, growth in other income and bad debt that is 60 basis points lower than Q1 of last year. On the expense side, lower property insurance and repairs and maintenance partially offset higher personnel and utility costs, resulting in same-store expense growth of 2%. The leasing environment remains competitive but continues to improve as new supply is absorbed. Asking rents across our same-store portfolio have increased 2.8% since the beginning of the year, up significantly from the 73 basis points we cited on our February call. Within our top 10 markets, those with the largest asking rent increases to date are Raleigh, which is up 5.7%; Indianapolis, up 5.2%; Oklahoma City, up 4.8%; Columbus, up 4.6%; and Nashville, up 4.5%. In our 2 largest markets, Atlanta is up 80 basis points this year and Dallas asking rents are up 2.1% year-to-date. Concession activity increased materially late last year and continued into the first quarter. In the first quarter, approximately 27% of our right-term leases had a concession that averaged $1,241. Early second quarter trends are directionally encouraging as leasing activity accelerates in the peak leasing season. Blended rent growth of 70 basis points for the first quarter was in line with the trajectory of our full year guidance assumption of 1.7%. Renewal rate growth of 3.2% and resident retention of 60.5% were also in line with our expectations. April and May renewal trade-outs are tracking modestly ahead of plan at approximately 4% and retention has remained steady. New lease trade-outs of negative 4% in the quarter were in line with our previous commentary and our expectations. Given the rise in asking rents, our gross lease trade-outs are at breakeven levels with almost all of the negative trade-out on new leases due to the higher-than-normal concession activity in the first quarter. As mentioned previously, we are seeing an improvement in concessions early in Q2 and expect them to continue trending lower during leasing season. Before moving on to our balance sheet, let me give you an update on our property WiFi initiative. As mentioned previously, we are installing property WiFi across 19,000 units this year with an expectation that all will be done and operating on July 1. I'm pleased to announce that we are slightly ahead of schedule with residents excited about the new gig-speed WiFi and halfway converting over to the program. I look forward to updating you further on our Q2 call later this year. Our investment-grade balance sheet remains strong with ample liquidity and no debt maturities to refinance until 2028. Net debt to adjusted EBITDA was 6.5x at quarter end, reflecting seasonally lower first quarter EBITDA and the impact of consolidating our Austin joint venture asset in January. We expect leverage to trend lower towards the mid-5s over the course of the year. As Scott mentioned, we expect to use some of the proceeds from pending asset sales to reduce leverage. And longer term, we will further reduce leverage organically through EBITDA growth. Based on the results to date, we are affirming our full year core FFO per share range of $1.12 to $1.16 and are comfortable with the major assumptions that support that range. Scott, back to you. Scott Schaeffer: Thanks, Jim. We are firmly on track to achieve our 2026 plan. Portfolio performance remains in line with our expectations and market fundamentals are improving. While select markets continue to work through elevated concessions, demand in our submarkets remains durable and continues to be supported by population inflows into the Sunbelt and Midwest for quality of life, employment opportunities and long-term affordability trends. We are encouraged by the increase in market rents to date and our ability to capture market pricing without meaningfully sacrificing occupancy. Early signs of improvement in new lease trade-outs during April represent a constructive start to the leasing season, and we believe we are well positioned to benefit as conditions continue to normalize. We thank you for joining us today. And operator, you can now open the call for questions. Operator: [Operator Instructions] Your first question is from the line of Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: Scott, you highlighted in your prepared remarks about prioritizing lease rate growth over occupancy. Just wondering if this is a change in the operating strategy or consistent with what was assumed in initial guidance? And can you kind of share where you're sending out renewals for the months ahead, what you expect to achieve and just how aggressive you really think you can be on renewals given the competitive landscape? Scott Schaeffer: Thanks, Austin. It is clearly consistent with our original guidance. This was the plan that we put in place towards the end of last year as we saw the pressure of new supply starting to subside. So during that period of excess deliveries, we really were focused on keeping our occupancy high. And now we feel that we're well positioned with that stable occupancy and the supply-demand equation flipping better to for landlords that we can now start pushing rents while still keeping occupancy stable. I'm going to let Jim talk about what we're doing with growth tradeoff. James Sebra: So on the -- you asked a question about renewal growth and what we're sending renewals out in the future. Obviously, April is done, May is almost done. We're right in the kind of the low 4% range for those 2 months. June is still a little early, so I don't want to get too far ahead, but it's approximately a little bit ahead of that 4% and then July is even a little ahead of that. So again, we expect to -- and they are the rate that we expect to secure. So we actually see a lot of really great opportunity here to capture rate during peak leasing season. Austin Wurschmidt: Then just kind of sticking with the lease rate growth, you underwrite an improvement through the year in new lease rate growth as well. And I think, Scott, you even mentioned kind of that hitting kind of positive territory in the months ahead. How confident are you that, that trajectory is kind of consistent with what you originally underwrote, again, going back to the competitiveness that you highlighted earlier in the call? James Sebra: Yes. Good question. I'll take it for Scott. I think from a new lease perspective, we kind of commented on it pretty much kind of in line with what we expect in the first quarter. We see new lease pricing improving kind of as you move into April and certainly May. I think it's right around the kind of plus or minus 130 basis points better in April and May. And we just see the opportunities there -- it's in our prepared remarks, we see this kind of asking rents have improved, and we do see concessions beginning to come down a little bit that gives us that confidence around kind of hitting that breakeven level here during that leasing season. As you kind of look out into kind of the May, the June, the July months and you look at what our expiring rents are, they are all lower than our current asking rents, meaning we are clearly moving in the positive territory. It just comes down to kind of the concessions ebbing and flowing in the market dynamics, which we are still very much positive on and is developing as kind of we expected. Operator: Your next question is from the line of Eric Wolfe with Citigroup. Eric Wolfe: You mentioned that asking rents were up 2.8% year-to-date. You're seeing improved new leases in April, lower concessions. Can you just put that in context for us? Is that normal seasonality? Did the same thing on concessions happen last year? I'm just trying to understand what's normal seasonality from your perspective versus maybe signs that supply impact is easing? James Sebra: Yes. So the 2.8% asking rent growth is a little bit ahead of what we would say is a normal growth in the beginning part of the year. Again, this is pretty kind of supply ebb and flowing. The concessions in terms of broad views right now in the first quarter and certainly in April, they're all higher than historical periods, right? We do expect them to continue to wane. So I would say that kind of the plus or minus on the asking rent side, again, is kind of slightly ahead of where you would see a typical seasonal pattern. Eric Wolfe: I guess based on your answer to the previous question, June and July, it sounds like the expirations are a bit lower. I guess my question is, you're expecting this big sort of ramp in the back half of the year. I guess when do you think we'll see signs of that happening? Is it sort of in the June, July time period that you'll see that sort of plus 2% type of blend? Because I guess at some point, you would expect, right, for asking rents to be sort of better than normal seasonality or maybe it's just the comp is so easy. I'm just curious when you kind of see that sort of 2% blend that you're expecting. James Sebra: Yes. You start seeing that not as much in the month of July, but you start seeing that in the kind of the September forward months, especially because, again, the concessions in 2025, you suggest the comp is easier. I think the concessions were heavier. So the renewal growth that we're anticipating in the back half of the year is expected to be sizably better in the first part of the year. Operator: Your next question is from the line of Jamie Feldman with Wells Fargo. James Feldman: Can you talk more about your blended rent growth across your key markets and how this compares to your expectations? And then I know you've kept your outlook for the year, but any that are trending better or worse than you would have thought on both the blended rent side and the concession side? James Sebra: Yes. I'll ask Janice or Jason to kind of jump in here in a minute. But I would just say, broadly speaking, the trajectory of the kind of the blended rents and stuff -- for this year are very much kind of trending aligned with what we expected. As I mentioned, concessions are a little heavier. But as we said, we're getting a little bit better asking rent growth, but Janice will go through it market by market. Janice Richards: Sure. From a market perspective, we've got Atlanta, Raleigh and Nashville showing positive momentum supported by moderating supply and improved pricing power year-to-date. Atlanta achieved an 80 basis point rent buildup on top of what we saw at the tail end of last year. Raleigh is leading with the 5.7% growth, as Jim alluded to, and then followed by Nashville at 4.5%. Looking ahead, both Raleigh and Atlanta are expected to benefit from this meaningful decline in supply as a percentage of inventory, down 31% and 69%, respectively, compared to 25%. So that further supports continued rent growth and stabilization of occupancy. James Feldman: Any other markets to call out? Janice Richards: I mean, we have some markets that we're keeping close eye on as well. So relative to expectations, all of our markets are generally in line. Denver and Austin remains supply driven and will continue to experience pressures from elevated new deliveries. However, Austin continues to stand out with the highest household formation across all of our markets at 2.3%, which would help support absorption as supply begins to moderate. Orlando, Tampa and Houston showed some softness in Q1. In Houston, we believe the softness is temporary as the second half of the year will benefit from continued strength in oil production. Anecdotally, in Orlando, we're seeing some movement tied to return to office activity while still working through late cycle supply pressures. And in Tampa, we're seeing some impact from the hurricane-related displacement that followed in Q4 of 2024. However, as Tampa local, I remain very encouraged with the growth coming in the market and optimistic about the back half of 2026. James Feldman: Then just thinking about like the other income contribution to same-store revenue in the back half of the year. Can you talk about any change? I know you kept your guidance again, but like how are you trending on that part of the earnings model? And anything we should be thinking about in terms of your ability to hit those numbers? James Sebra: So yes, I think generally speaking, for the first part of the year so far, other income has grown about 5% over the prior year. We obviously expected in our guidance a fairly significant ramp with the property WiFi program. And as I mentioned in my prepared remarks, we're ahead of schedule. We're obviously not prepared at this very moment to give any kind of significant update to that, but we do see a little bit of potential upside to that assumption with respect to guidance. Operator: Your next question is from the line of Brad Heffern with RBC Capital Markets. Brad Heffern: On Atlanta, you called it out as having positive momentum, but you also quoted, I think, the lowest asking rent changes of any of the numbers that you quoted. I guess, can you just give a broader perspective on that market given it is your largest and maybe reconcile those things? James Sebra: Yes. Brad, I'll start and then maybe I'll ask Janice to kind of chime in here. If you look at the asking rent growth that we talked about on our third quarter call in Atlanta, that was one of the biggest in 2025 by almost 5%. And Janice's prepared remarks were another 80 basis points on top of that. So a lot of really great things are happening. When you look at kind of blends for the first quarter, Atlanta was roughly 1.5% blended rent growth, and that's double what it was in the fourth quarter. So that's the kind of the positive trajectory that we're seeing there. Janice, feel free to add. Janice Richards: No, I think from Atlanta, what we're also seeing on the concession side is we're seeing some decrease in submarket specific areas where we're going to be able to optimize and grow revenue holistically without the use of concessions. Brad Heffern: Jim, I just wanted to clarify your comments on reaching breakeven on the new lease side. When you say that expiring rents are below asking rents, is that including the impact of concessions? Like if concessions are flat year-over-year, would you get to positive leasing spreads in the summer months? Or does that need concessions to go away? Basically, just wondering like what you mean by asking rents and expiring rents and how those incorporate concessions. James Sebra: All great question. I think if concessions kind of stay at the current level, we should still reach breakeven. Operator: Your next question is from the line of Ami Probandt with UBS. Ami Probandt: How much of an impact, if any, do you think that the winter storms had on your blended rent growth, which decelerated in the first quarter? Janice Richards: We did see some change and some slowness in demand in January and February. However, we've seen it pick back up and come back within expectations. We actually exceeded our demand expectations by about 10% for Q1 holistically. So I think we're good to go with the expectation going into leasing season to have that demand back in place. Ami Probandt: There have been some soft results in some of the smaller markets like Huntsville. Could you highlight what's happening in some of those markets? Is it competitive supply? Or have you seen any demand challenges? Janice Richards: Huntsville is still working through supply pressures. We actually were just in Huntsville recently on a town hall and joining with the team and really saw some great opportunity there and are still very bullish on the market. So no challenges from a demand side as we work through this lingering supply. Operator: Your next question is from the line of John Kim with BMO Capital Markets. John Kim: Your value add -- so your value-add performance, it's underperformed your non-value-add portfolio in terms of both blends and occupancy. I'm wondering how you see that trending for the remainder of the year? And how much of a driver is the value-add portfolio to the improvement in blended lease growth in the second half of the year? Scott Schaeffer: Good question, John. I think from an occupancy perspective, the value-add portfolio is inherently going to run at a lower occupancy just because it's -- the units are vacant for plus or minus 20 to 30 days, where a typical turn time in our non-value-add portfolio -- sorry, I get this in my head. Non-value-add portfolio is 7 to 10 days, right? So inherently, the occupancy there is going to be always a little bit lower structurally than a typical non-value-add portfolio. I think from a blend perspective in the first quarter, you saw just a desire to kind of keep retention a little bit higher and therefore, a little bit, call it, softer blend growth because it's the retention renewal growth. The renewal rate growth wasn't as strong in the value add as opposed to the non-value add. But I think fundamentally, when you look at the whole value-add portfolio versus the non-value-add portfolio from an NOI perspective, the value-add portfolio generated about 3.2% NOI growth in the first quarter versus about 50 basis points of NOI growth in the non-value-add portfolio. So we're really still very bullish on it. We really think it's going to continue to produce the returns. Now for the rest of the year, I think, obviously, the guidance is pretty strong with respect to kind of the benefits the value-add provides to that, and we still expect it to do what we -- we still expect to hit those targets. John Kim: I may have missed this, but did you provide the blended that you've seen in April and what you're seeing in terms of how the rest of the quarter plays out? Scott Schaeffer: We had spoken about it on one of our first questions here. But from the standpoint of as we see kind of April and May developing, specifically on renewal rates, April and May are kind of right around the low 4%, 4% range. June is a little bit higher than that, but June is still a little bit early. On the new lease trade-outs, April and early kind of May, we do see them kind of getting better to the tune of about 130 basis points from where they were in the first quarter. Operator: Your next question is from the line of Jason Wayne with Barclays. Jason Wayne: Thinking about capital allocation from here. So you said you wanted to pay down debt, but just wondering how you're thinking about more share repurchases from here? James Sebra: So obviously, capital allocation is very important as we move forward. And we are continuing to analyze the portfolio for -- to recycle capital, recycle out of properties where we think the capital has a better use long term. And as that recycling happens, we will then consider what the best use is. And our stock price will help determine whether share buybacks are better than deleveraging and/or new investments. So it's hard to say sitting here today what the use of that capital will be. We have to really determine it when the capital is available and then determine what the best use is. Jason Wayne: Yes, makes sense. And just on the value-add completions, I think you gave a guidance range last quarter of 2,000 to 2,500 completions this year. Is that still the assumption? And how are you trending on that this year so far? James Sebra: Yes. As Scott had mentioned in his prepared remarks, that's still the expectation and 426 units that we did do in the first quarter are right in line with that goal for the year. Operator: [Operator Instructions] Your next question is from the line of Mason Guell, Baird. Mason P. Guell: How the development performing so far versus expectations? James Sebra: The 2 on-balance sheet developments -- well, there's 2, call it, historical on-balance sheet developments. That's the Arista in Broomfield, Colorado, and Flatiron in Broomfield, Colorado. Arista is fully occupied, stabilized. It's in our same-store pool, so performing just fine. Flatirons, as we mentioned last year, is in the process of lease-up. As we disclosed in the supplement, 82% leased and it's about 66% occupied. It should hit stabilization here in the low 90% in the month of June, maybe early July. And again, as we mentioned, rental rates there are a little behind our initial underwriting expectations, but we believe it's still a great market and a good long-term investment, and we'll be able to push rate once we get it stabilized. The additional asset that was added to our in-development disclosure in the quarter is our joint venture asset called the Tisdale at Lakeline Station in Austin, Texas. That deal is in lease-up is still very early. It's about 33% leased -- 37% leased. 33% occupied, 37% leased, which is up from roughly 25% occupied when we took it over. So again, leasing up as we would have expected at this point since we now are managing it and consolidating it. Mason P. Guell: Great. And is the anticipated timing for the 2 consolidated held-for-sale properties still around midyear? James Sebra: Jason will answer. The question is what's the timing of disposition for the 2 health care. Jason Lynch: Sorry. Yes, we're still aiming towards the midyear. We are actively marketing those and working towards a sale. Operator: At this time, there are no further questions. I will now hand the call back over to presenters for any closing remarks. Scott Schaeffer: Well, thank you all for joining us this morning, and we look forward to seeing many of you at NAREIT and then speaking with you again next quarter. Operator: This concludes today's call. Thank you for joining. You may now disconnect your lines.
Operator: Good day and welcome to the MoneyHero Group Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] Also note that this call is being recorded. I would now like to turn the call over to [ Gretchen Kwan ], Corporate Communications Lead. Please go ahead. Unknown Executive: Hello, everyone, and welcome to MoneyHero 2025 Q4 and Full Year Earnings Conference Call. I'm Gretchen Kwan, Corporate Communications Lead at MoneyHero. Before we begin, I would like to remind you that today's call will include forward-looking statements, which are inherently subject to risk and uncertainties and may not be realized in the future for various reasons as stated in our earnings release, which was issued earlier today and is also available on our IR website. In addition, please note that today's discussion will include both IFRS and non-IFRS financial measures for comparison purpose only. For reconciliations of these non-IFRS measures to the most directly comparable IFRS measures, please refer to our earnings release and SEC filings. Lastly, a webcast replay and a script of this conference call will be available on our IR website. Joining me on the call today is Danny Leung, Interim CEO and CFO, who will go over our strategy and business updates, operating highlights and financial performance of the Q4 and full year 2025. This will be followed by a Q&A section. With that, let me turn the call over to Danny. Danny Leung: Thank you, Gretchen. Good evening, everyone, and thank you for joining us today. It is a privilege to speak with you as we close out what has truly been a transformative year and quarter for MoneyHero. Before diving into our results, I want to briefly address the leadership transition announced earlier this month. Since stepping into the interim CEO role, I've reflected on my time with MoneyHero since late 2024 when the company began navigating a strategic repositioning. I want to thank Rohith for his contribution during his tenure. As MoneyHero pivots to scaling profitable growth, the Board has initiated a search for permanent CEO to lead this next phase. Having guided us through our 2-year transformation, I'm fully confident in our management team's ability to execute seamlessly during this interim period. Our strategic vision remains unchanged and our focus is entirely on capitalizing on the opportunities ahead and those opportunities are built on a rapidly strengthening foundation. I'm pleased to report that we delivered fourth quarter net profit of $0.5 million, a significant turnaround from a net loss of $18.8 million in the same period last year. This was achieved alongside adjusted EBITDA of $0.7 million marking our first-ever adjusted EBITDA gain since we listed on NASDAQ. Our performance throughout 2025 demonstrates this clear sequential execution towards achieving better revenue mix, cost base and technology platform. This momentum was built consistently throughout the year with our adjusted EBITDA path improving quarter by quarters. We systematically progressed from an adjusted EBITDA loss of $3.3 million in the first quarter to a loss of $2 million in the second quarter, narrowing further to a loss of $1.8 million in the third quarter before finally crossing the breakeven point this quarter. For the full year, adjusted EBITDA loss improved 73% to $6.4 million from $23.7 million last year. And our net loss narrowed 86% to $5.2 million from $37.8 million. This performance validates our strategic repositioning towards achieving better revenue mix, cost base and technology platform. Fourth quarter revenue grew 27% year-over-year to $20 million driven by a strong performance in our core markets with Singapore revenue surging 56% year-over-year and Hong Kong growing 27% year-over-year. Together, these 2 markets represent 86% of revenue during the quarter, up from 79% a year ago reflecting our deliberate concentrations on markets with the strongest unit economics. At the same time, Taiwan and the Philippines continue to gradually recover as the operational issues seen earlier in the year following the exit of Citibank fade. Full year 2025 revenue was $73.4 million representing our strategic pivot towards healthier revenue quality and accelerating momentum toward year-end. Crucially, our cost of revenue for the full year also declined 7 percentage points year-over-year to 51% of revenue. This structural improvement was driven by a shift in revenue mix and optimized reward cost. Our deliberate shift towards higher-quality, higher-margin verticals, particularly insurance and wealth, is directly expanding our margins and reinforcing the structural strength of our business. During the fourth quarter, revenue from insurance and wealth products together accounted for approximately 30% of revenue highlighted by wealth revenue accelerating strongly with 50% year-over-year growth. We see a clear path for our high-margin verticals to make a meaningfully larger share of our revenue mix over next few years. These verticals already delivered twice the incremental profitability of our lower-margin verticals and generate steady recurring customers even before AI upside. This deliberate mix shift we have seen signaling all year combined with disciplined capital allocation into these segments is central to how we are building durable compounding earning power rather than chasing volume-led growth. Ultimately, this structural evolution in our mix coupled with better approval rates and optimized reward cost is expanding our margins and elevating the overall quality of our earnings. For the full year 2025, total operating cost and expenses, excluding foreign exchange difference, fell 27% year-over-year while fourth quarter expenses declined 15% year-over-year. Technology costs dropped 59% and employee benefit expenses fell 33% in the full year supported by AI automation, which now touches up to 70% of customer service queries. This is a clear demonstration of margin first execution. In practical terms, this means our cost base will not reinflate as we scale. Instead, incremental revenue will increasingly flow through to the bottom line reinforcing our confidence in sustaining and compounding the profitability we have now achieved. We have made strong progress with our AI initiatives. During the year, AI automation touched up to 70% of customer service queries. Crucially, in December 2025, AI successfully resolved 47% of customer service queries without any human intervention demonstrating how we are scaling operations and product support without proportionally adding headcount. The impact of this leverage is already highly visible in the fourth quarter allowing us to deliver 12% more approved applications year-over-year in the fourth quarter while simultaneously cutting employee benefit expenses by 32%. We are systematically driving improvements in approval quality, customer acquisition cost efficiency and funnel conversion. For example in Singapore, our Car Insurance SaverBot is now in beta in WhatsApp delivering a natural conversational AI experience that replaces complex forms and meaningfully reduce acquisition cost. In Hong Kong, Credit Hero Club is building a recurring base of high intent users through personalized credit insights and monitoring. Importantly, our AI are continuously trained on proprietary intent, behavioral and approval data from our 9.4 million members. This creates a highly defensible data mode positioning MoneyHero as one of Southeast Asia's most advanced AI-native financial decisioning platform. I will take the next few minutes to walk through the mechanics of our P&L focusing on the data, the operational drivers behind these numbers and how our financial profile has structurally evolved across both the fourth quarter and the full year. Let me begin with revenue. For the fourth quarter, we reported $20 million in revenue, 27% year-over-year increase. This represents the strongest quarterly top line growth we have seen in 2025 proving that the recovery pattern we established midyear has compounded into sustainable momentum. When looking at the full year, revenue fell 8% year-over-year to $73.4 million. That decline needs to be interpreted precisely in the context of the deliberate reshaping of our volume mix, particularly in the first half of the year. We intentionally scaled back low-margin, high-volume products to prioritize margin discipline and healthier revenue quality. Crucially, this strategy yields exactly the structural leverage we intended. Our cost of revenue for the full year decreased by 19% year-over-year to $37.3 million dropping 7 percentage points to account for just 51% of revenue. The modest annual headline revenue decline is a sign that our strategic pivot is a success. We shed unprofitable volume, optimized reward cost and are now growing rapidly again on structurally stronger higher margin base. What gives us absolute confidence in this path is the rapidly improving quality of our revenue base. During the fourth quarter, combined revenue from insurance and wealth products increased 31% year-over-year to $5.9 million accounting for 30% of total revenue. Looking at the full year, wealth revenue grew 19% to $10.1 million accelerating to a massive 50% year-over-year growth in Q4 alone while insurance revenue grew 11% to $9.1 million. Together, they now represent 26% of our full year revenue, up from 21% a year ago and just 12% in 2023. The fundamental shift in our foundation is the core engine of our margin expansion, improving the predictability and durability of our earnings. At the same time, we saw a resurgence in our core credit card vertical, which grew 38% year-over-year in the fourth quarter proving we can rapidly expand high margin products without sacrificing the strength of our core business. Looking geographically, Singapore and Hong Kong continue to serve as the primary growth engines. Singapore was a standout performer in the quarter with revenue surging 56% to $7.9 million. Hong Kong also delivered exceptional growth, up 27% to $9.4 million demonstrating our ability to build a recurring base of high intent users. Together, these 2 high unit economic markets represent 86% of our total Q4 revenue. Meanwhile, Taiwan and the Philippines generated $1.2 million and $1.5 million, respectively, in the fourth quarter. These markets are steadily recovering as the operational disruption seen earlier in the year following the exit of Citibank are now firmly behind us. Now let me turn to operating expenses. Our focus has been on driving operating leverage across every major category. Total operating costs and expenses, excluding foreign exchange differences, decreased 15% year-over-year to $21.4 million in the fourth quarter and 27% year-over-year to $84.2 million for the full year 2025. Looking at the specific expense lines. Technology costs declined sharply by 71% year-over-year to $0.4 million in Q4 and 59% year-over-year to $3 million for the full year. By retiring legacy platforms, consolidating vendors and embedding AI-driven automation; we are enabling the business to ship features faster without inflating our cost base. Advertising and marketing expenses decreased 20% year-over-year to $17.3 million for the full year reflecting more target data-driven campaign allocations. Employee benefit expenses were notably lower decreasing 32% year-over-year to $4 million in Q4 and 33% year-over-year to $16.2 million for the full year. As we highlighted earlier, this sets the stage for multiyear operating leverage. Increases in approved application volumes, which grew 12% this quarter, no longer require proportional increase in personnel. For the fourth quarter, it contributed to our first positive adjusted EBITDA of $0.7 million and a net profit of $0.5 million, a substantial turnaround from the $18.8 million net loss a year ago. For the full year, our adjusted EBITDA loss narrowed sharply by 73% to $6.4 million, and our net loss improved at 86% to $52 million (sic) [ $5.2 million ]. From a balance sheet perspective, we are operating from a position of resilience. We ended the year completely debt-free with $31.2 million in cash and cash equivalents and $37.5 million in net current assets. Crucially, our cash position represents a sequential increase of $3.3 million from $27.9 million from Q3 highlighting our gradual transition into a cash-generative business. We have now reached this profitability point in Q4 as we have been working toward. These milestones validate the difficult, but deliberate choice we made over the past 2 years and set a strong foundation as we transition from turnaround to sustainable cash generative growth in a capital-light member-centric model. Looking ahead, we expect our full year 2026 adjusted EBITDA to exceed 2025 levels. This will be driven by the continued expansion of our high-margin insurance and wealth verticals, AI-driven operating leverage and the strong conversion of member base into recurring multiproduct customers. Thank you. So perhaps, we can start the Q&A section. Operator: [Operator Instructions] And our first question comes from William Gregozeski with Greenridge Global. William Gregozeski: Danny, congratulations on the great quarter. Can you provide a bit more color on the sudden leadership transition? Why was the decision made to change CEOs right as the company hit profitability inflection point? Danny Leung: Sure. Thank you for the question. I understand why the timing might seem sudden, but this transition is actually very deliberate and comes at a pivotal moment for us. We have just finished a 2-year strategic repositioning of the entire company. As you can see from our fourth quarter results specifically hitting our first adjusted EBITDA profit since listing, that foundational work is now successfully complete. Essentially, we are moving into a scaling phase. Because the mission has changed, the Board decided it was the right time to find a permanent CEO whose specific expertise aligns with this next chapter of the profitable growth. While that search is underway, my focus is on maintaining the absolute operational discipline that got us to where we are in the first place. I want to focus on improving our EBITDA in 2026 from 2025. Our strategy is already clearly mapped out in our financials. We are shifting our revenue mix toward those higher-margin insurance and wealth products, keeping a very tight lead on cost and using AI to drive massive operational efficiency. So this leadership transition isn't a change in direction. It is about supporting our momentum and ensuring we have the right leadership structure in place as we execute on the next level of growth. Operator: Our next question comes from [ Calvin Wong ] with [indiscernible]. Unknown Analyst: I have a few questions. Maybe I'll ask one by one. What are the key -- the first one is about the business segment. What are the key opportunities to grow within the insurance segment? Are there more insurance verticals the company can start offering? Are you having measurable success with the SaverBot beta on WhatsApp? Danny Leung: Thank you, Calvin, for the question. Yes, insurance is a core high-margin part of our business and the growth we are seeing there is incredibly strong. To give you the hard numbers. Our full year 2025 revenue for this segment grew 11% to $9.1 million with $2.3 million of that coming in just the fourth quarter. What is even more exciting is how much this segment is shifting the weight of our entire business. If you look back to 2023, insurance and wealth made up only 12% of our total revenue. That jumped to 21% last year and today, it represents over 1/4 of our business at 26%. We see a significant runway to keep this going by leaning into deeper partner integrations and using AI to personalize the experience for our users. We are also looking at expanding our product offering even further by leveraging the dominant market positions we already hold in Singapore and Hong Kong. Moving on to your question about SaverBot. The early results from our beta in Singapore are very encouraging. The bot provides a seamless conversational experience on WhatsApp that fundamentally change how users discover products. It is a triple win for us because it simplifies the journey for the customer, lowers our acquisition cost and improves the quality of the application we send to our partners. This isn't just a pilot project. It's a core part of our infrastructure that is already driving real operating leverage. You can see the proof in our efficiency metrics. In December 2025 alone, our AI successfully resolved 47% of all customer service queries without any human intervention at all. We can scale our volume significantly while keeping our costs under control, which is exactly why we plan to continue driving profitable growth. Unknown Analyst: Great to hear that. My next question is more related to the revenue. We've seen that full year revenue was down 8%. By looking at the current quarterly trends, do you feel you have now established a stable baseline for future revenue growth? Danny Leung: That's a very good question again, Calvin. To answer your question directly, yes, we absolutely feel we have established a stable and much healthier baseline. While the full year revenue of $73.4 million was down 8%, that was actually a very deliberate result of our strategic transition. We moved away from a model that was focused on scaling top line and moved towards one focused on healthy unit economics and real profit. It is important to remember that our 2025 results were compared against a very high base from the first half of 2024, which is a period where the company was spending aggressively to grab market shares. Since then, we have completely repositioned the business to prioritize the quality of our revenue over the size of it. If you want to see our new baseline, the fourth quarter is a better indicator of where we are now. In Q4 our revenue actually grew 27% year-over-year hitting $20 million, but the real story is the mix of that revenue. We are shifting towards much higher-margin products. For example, wealth and insurance grew to represent 30% of our total revenue this quarter with wealth specifically growing by 50% year-over-year. By focusing on these high-margin areas and keeping a strict eye on our expenses, we managed to bring our group-wide cost of revenue down from 58% to 51% for the full year. What we have built is a structurally resilient engine. It is designed to be efficient ensuring that we generate real profit on every single incremental dollar we bring in from here on out. Unknown Analyst: Looks amazing. I have 2 other questions, if I may. Maybe I'll start with the first one, which is more related to the expenses side. You reported a significant 27% reduction in total operating cost this year with technology costs specifically falling by 59%. As the business stabilizes, as you mentioned, how much of this cost savings is permanent? And how are you using AI to ensure you can scale efficiently without cost returning to negative levels? Danny Leung: Thanks, Calvin, again for the questions. Yes, the efficiency gains you are seeing are structural not just a temporary dip. We didn't simply cut spending. We fundamentally changed how we operate by retiring our legacy systems and consolidating our entire technology stack. A major driver for this shift is our transition into an AI-first organization. We are already seeing the financial benefits of this transformation in our daily operations. Today, a significant majority of our customer service interaction involve AI automations. What is even more promising is the resolution rate. Our AI tools have reached a point where they can fully handle and close a large portion of all customer queries without any help from our staff. It is exactly how we are able to support a much larger user base while keeping our team significantly leaner. Beyond customer service, we are using advanced tools and generative AI to boost productivity across every department. For example, we are piloting solutions that help our team scale content production much more efficiently than before. By embedding these technologies directly into our workflows and our conversational interface like SaverBot, we have built a highly automated engine. This allows us to handle much higher transaction volumes like the 12% growth in approved application we saw this quarter while maintaining the disciplined cost structure we have worked so hard to build. This efficiency is exactly what led to our Q4 net profit of $0.5 million and our first ever positive adjusted EBITDA of $0.7 million. So we are confident that we can continue to grow our top line without letting our costs return to those old legacy levels. Thanks again for your questions. Unknown Analyst: Great to hear about the AI deployment. Okay. Sorry to keep it long. But finally, just a small question. Why did you restate your historical members and applications metrics this quarter? Danny Leung: Thanks again for the question. It's very good that someone caught that information. Just to explain the reason. As part of our broader structural repositioning, we conducted a full audit of our legacy data infrastructure and then we realized that some of our old methods for tracking operational metrics were based on fragmented logic that simply couldn't scale as we grew. So because of that, we have updated our numbers to ensure they are accurate moving forward. Just to give you an example, we found 2 main issues with how we are counting members. First, there was a legacy processing error where certain e-mail address weren't being standardized properly before they were encrypted. This occasionally led to the same person being assigned multiple IDs, which created duplicate counts. Second, specifically in the Philippines, we have moved our source of truth directly to our core CRM. This eliminates the discrepancies we were seeing from our older layer reporting systems. We saw something similar with how we track applications. Historically, that system was a bit of a patchwork. It relied on very specific hard-coded rules for different banks or dual stage. The problem was that if we added a new partner or a new stage, it didn't perfectly match that old logic. Some valid applications were accidentally left out of the total count. We have now replaced that with a standardized system-wide definition for submission dates. So we are capturing our true volume accurately across every partner we work with. It is important to note that these revisions had absolutely no impact on our financial statements. Our revenue has always been recognized based on actual confirmed product approvals and fulfilled actions with our partners. This change was strictly about cleaning up our internal operational metrics to make sure that the data we use to run the business is as precise and accurate as possible. Operator: [Operator Instructions] And our next question is a follow-up from William Gregozeski with Greenridge Global. William Gregozeski: Danny, 2 more questions. I'm going to ask them together real quick. How is your AI initiative advancing beyond the cost reductions and what are the CapEx and OpEx implications for that for 2026? And then second is, if you can, can you comment on the news article talking about the merger talks with you and Voltech? Danny Leung: I'll get your first question first about AI. So our AI transformation is doing a lot more than just cutting cost. It is fundamentally reshaping how we generate revenue. To give you an idea of the operational side first, the benefits have been structural and very clear. By consolidating our platforms and embedding AI across the business, our technology costs dropped by an incredible 71% in the fourth quarter and 59% for the full year. Today, AI automation handles up to 70% of all customer service queries. This is a game changer because it allows us to scale our user base significantly, but without needing to hire a proportional number of new staff. And moving forward, we are shifting our focus to the revenue side as well essentially using AI as an advanced marketing engine. We are already seeing this work through better approval quality, more efficient customer acquisition costs and higher conversion rates. You can see this leverage play out in our core credit card business, which grew 38% year-over-year in the fourth quarter. We have proven that we can scale volume efficiently. In Q4 our approved application grew by 12% to 190,000. Yet at the same time, our employee benefit expenses actually declined by 33%. So this shows that we are getting more output from a leaner, more tech-driven organization. And as we look forward to 2026, the beauty of this strategy is that the savings we have generated from AI are now actively funding our next round of innovation. Because of this, we don't anticipate needing any outsized capital expenditure. Our goal for the coming year is to integrate our back-end system directly with our AI to hit a 60% 0 touch resolution rate even for more complex inquiries. This will allow us to provide true 24/7 support and continue to grow our top line revenue without reinflating our cost base. We are effectively decoupling our growth from our expenses. And on to your second question about the recent news about the acquisition, the merger between Voltech and MoneyHero. Yes, we are aware of the recent media reports regarding potential acquisition activity involving MoneyHero Group. As a matter of company policy, we do not confirm, deny or comment on market speculations. Our management team remains fully focused on executing our long-term strategy. Our priority is now sustaining and scaling profitability. This includes driving growth across our high-margin insurance, wealth and lending verticals while continuing to leverage our AI-driven operating model across our 4 core markets. Shareholders are reminded to rely only on official announcements and disclosures made by the company and to exercise cautious when considering information from unofficial or media sources. Operator: Thank you. This concludes our question-and-answer session. I'd like to turn the call back over to Danny for any closing remarks. Danny Leung: Thank you, Michelle. So thank you all for being here today. 2025 was a crucial year for MoneyHero. We have successfully completed our 2-year strategic repositioning by delivering our first-ever adjusted EBITDA gain and a net profit this quarter. As we head into 2026, our mandate is clear. We are here to scale profitable growth. A central part of that evolution is our shift into an AI-first organization. We have already used AI to separate our operating cost from our growth and our road map for 2026 is focused on plugging that AI even more deeply into our revenue engine. We are excited about the momentum we have and we look forward to sharing our next set of results with you on the next call. Thank you, everyone. Operator: Thank you for your participation. You may now disconnect. Everyone, have a great day.
Operator: Good morning, and welcome to the Darling Ingredients Inc. conference call to discuss the first quarter 2026 financial results. [Operator Instructions] Today's call is being recorded. I would now like to turn the call over to Ms. Suann Guthrie, Senior Vice President of Investor Relations. Please go. Suann Guthrie: Thank you for joining the Darling Ingredients First Quarter 2026 Earnings Call. Here with me today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer; and Mr. Bob Day, Chief Financial Officer. Our first quarter 2026 earnings news release and slide presentation are available on the Investor page of our corporate website and will be joined by a transcript of this call once it is available. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's press release and the comments made during this conference call and in the Risk Factors section of our Form 10-K, 10-Q and other reported filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. Now I will hand the call over to Randy. Randall Stuewe: Thanks, Suann. Good morning, everyone, and thanks for joining us. Over the last few years, public policy uncertainty and deflationary and volatile commodity markets created a challenging operating environment. During that time, Darling Ingredients remained laser-focused on controlling what we could control. We prioritized operational excellence and maintained strict, disciplined capital allocation with a goal to achieve a meaningful debt reduction. Headwinds have now shifted, and the results we share today confirm a much more favorable operating environment. We are moving forward with significantly improved earnings power, stronger cash flow potential and a more robust foundation for long-term value creation. For the first quarter of 2026, we saw the operating environment allow for expected EBITDA growth and sequential gross margin improvement. Darling's core ingredients business really delivered this quarter, with improved global operations, margin expansion and focused commercial execution. Combined adjusted EBITDA for first quarter was $406.8 million, including $255.6 million from our global ingredients business and $151.2 million from Diamond Green Diesel. Our Feed Ingredients segment had a fantastic quarter. We saw steady volumes with a strong global poultry volumes offsetting stagnant North American cattle herd. Operational excellence remained a key focus this quarter, driving improvements in throughput, cost reduction and product quality, that translated into stronger gross margins. At the same time, our commercial agility allowed us to pivot sales to higher-priced markets. While fat prices were softer earlier in the quarter, our disciplined risk management approach combined with spot sales helped us mitigate the typical lag impacts we would see in that environment. The renewable volume obligation announced at the end of March has been extremely constructive for Darling and DGD. We are already seeing a favorable movement on fat prices as renewable diesel demand grows. DGD overcame a shutdown at Port Arthur that briefly interrupted our supply chain. As those dynamics continue to play out, we anticipate this to be a nice tailwind for our Feed segment for the remainder of 2026. Turning to our Food segment. We are seeing nice growth in collagen, particularly in Europe and Asia. Sales in both collagen and gelatin improved year-over-year, reflecting not only increased customer demand, but new applications for collagen in food, nutrition and health products. Our Nextida glucose control product is currently pending a patent in both in the U.S. for production processes and the use of Nextida as a dietary supplement ingredient, offering a nonpharmaceutical option targeting lower blood glucose. With an interest in food as medicine and increased demand for protein, collagen continues to be positioned well for growth. Now as you can see in our results, our Fuel segment is at an inflection point as renewables margins turned a corner with finalization of the renewable volume obligation. With a very constructive RVO and now a clear path forward, we expect DGD's results to continue to strengthen throughout the year. Diamond Green Diesel delivered a strong quarter with $151.2 million of EBITDA or around $1.11 EBITDA per gallon. Our non-DGD Green Energy businesses continue to deliver stable earnings and will have the opportunity for a slight tailwind due to increased energy prices in Europe. Now with that, I'd like to hand the call over to Bob to take us through some financials. Then I'll come back and discuss my thoughts on the second quarter. Bob? Robert Day: Thank you, Randy. Good morning, everyone. As Randy said, first quarter was very strong across all measures, and the Darling platform is poised to move forward with significantly improved earnings power. For the quarter, combined adjusted EBITDA was $407 million, versus $196 million in first quarter 2025 and $336 million last quarter. Core ingredients, non-DGD, improved both year-over-year and sequentially. For first quarter 2026, core ingredients EBITDA was $256 million, versus $190 million in first quarter 2025 and $278 million last quarter. Total net sales were $1.6 billion, versus $1.4 billion. Raw material volume was 3.8 million metric tons, essentially unchanged. Meanwhile, gross margins for the quarter improved to 26.1%, compared to 22.6% in the first quarter last year and from 25.1% last quarter. Looking at the Feed segment for the quarter, EBITDA improved to $169 million from $111 million a year ago, while total sales were $985 million versus $896 million, and raw material volume was flat at approximately 3.1 million metric tons. Gross margins relative to sales improved nicely to 25.3% in the first quarter, versus 20.3% in the first quarter from last year and 24.6% in the fourth quarter of 2025. In the Food segment, total sales for the quarter were $405 million, compared to $349 million in the first quarter of 2025. Gross margins for the Food segment were 28.9% of sales, compared to 29.3% a year ago. And raw material volumes were flat at around 330,000 metric tons compared to the same time last year. EBITDA for first quarter 2026 was $81 million, versus $71 million in the first quarter of 2025. In the Fuel segment, starting with Diamond Green Diesel, Darling's share of DGD EBITDA for the quarter was $151 million, which includes a favorable LCM inventory valuation adjustment of $97 million at the DGD entity level and sales of around 272 million gallons, an average EBITDA margin of $1.11 per gallon. Darling contributed approximately $190 million to DGD during the quarter, mainly to provide short-term working capital, most or all of which is expected to be returned in subsequent quarters. In addition, during the quarter, Darling monetized $45 million in production tax credit sales, the proceeds of which will be paid in the coming quarters. Other Fuel segment sales not including DGD were $160 million for the quarter versus $135 million in 2025, on strong energy and biogas prices in Europe and relatively flat volumes of around 370,000 metric tons. Combined adjusted EBITDA for the full Fuel segment including DGD was roughly $180 million for the quarter, versus $24 million in the first quarter of 2025. As of quarter-end, total debt net of cash was approximately $4 billion, versus $3.8 billion ending fourth quarter 2025. The increase in debt results from contributions to DGD mentioned earlier and timing of production tax credit payments, some of which will come in the second quarter. Capital expenditures totaled $95 million in the quarter. Our bank covenant preliminary leverage ratio was 3.17x as of quarter-end, versus 2.9x at year-end 2025. In addition, we ended the quarter with approximately $1.1 billion available on our revolving credit facility. We recorded an income tax expense of $38.6 million for the quarter, yielding an effective tax rate of 22%. That rate excluding the impact of the production tax credit and discrete items was 32%, and we paid $20.5 million in income taxes in the first quarter. For 2026, we expect the effective tax rate to be around 25% and cash taxes of approximately $60 million for the remainder of the year. Overall, net income was approximately $134 million for the quarter or $0.83 per diluted share, compared to a net loss of $26 million or negative $0.16 per diluted share for the first quarter of 2025. Last quarter, we mentioned that we have some assets held for sale that are not considered strategic for our business. Those asset sales continue to move forward but have not yet closed. Of those, we have signed an agreement to sell the majority of our grease trap environmental service assets. The sale is pending some permitting transfers, which we expect to be completed in the next few months. We'll have more to say about the trap and other businesses for sale at a later date. With that, I will turn the call back over to Randy. Randall Stuewe: Thanks, Bob. In closing, the progress we shared with you today reflects the discipline and focus we have maintained through a challenging cycle. By controlling what we can control, driving operational excellence, prioritizing capital and focusing on balance sheet strength, we position Darling Ingredients to emerge stronger. With improved but volatile market conditions and a much improved regulatory framework, we believe the company is entering its next phase with momentum that we expect to build as the year progresses. We believe that as the year progresses, we'll drive improved earnings, stronger cash flow, additional debt reduction and long-term value creation for our shareholders. Ultimately, our improved performance will once again provide the company with many opportunities. This confidence is reflected in our core ingredients EBITDA guidance for Q2, which we are now setting at $260 million to $275 million for the quarter. With that, we'll go ahead and open it up to Q&A. Operator: [Operator Instructions] Our first question comes from the line of Heather Jones with Heather Jones Research LLC. Heather Jones: I was just wondering on, first of all, on Diamond Green. Should we expect the hedging and LIFO losses, do you expect that to reverse in Q2? Or will that take longer throughout the year? Robert Day: Heather, this is Bob. So we did realize a lower of cost or market benefit in the first quarter. And I think just to make sure everyone is aware, in order to have the opportunity to realize the benefit in lower of cost or market, you have to have previously taken a loss from that. This quarter, that $97 million at the DGD entity level, that exhausts all available lower of cost or market. So going forward, as long as the business is profitable, we do not anticipate any lower of cost or market benefits. And so then to your question of LIFO, the LIFO will be based on an average cost paid for feedstock during the period. And as the average price increases, if it increases, then we would realize a LIFO loss that is embedded inside of the results. If feedstock prices on average decrease, then there would be a LIFO gain. So really the answer to your question depends on your view of feedstock prices as the average cost of feedstocks paid in the period in question relative to the period prior. And hedges... Heather Jones: And what about on the hedging side? Yes. Robert Day: Yes. So hedges, I guess what I can say about that is, at DGD, we do hedge. We're very disciplined about hedging. There is some flexibility in terms of which instruments we use to hedge our risk, and we don't disclose that for competitive reasons. I think what you can point to this quarter is that clearly we had a significant increase during the period in heating oil futures, in crude oil futures, in soybean oil, whatever sort of instrument you're looking at. And we managed to absorb the cost of whatever hedges we had and still put out a very positive result. And I think it just speaks to the risk management capabilities of the business. Heather Jones: Okay. And then my follow-up is just given the volatility we're seeing in the energy markets and the feedstock markets, this question seems pretty particularly relevant. So I was wondering if you could update us on how we should be thinking about the lags in your model, both core DAR and Diamond Green. I remember at one point, it was more like 30 to 60 days and then I think it increased to 60 to 90. But if you could just update us on how we should be thinking about that. Randall Stuewe: Heather, this is Randy. So clearly, you've kind of framed it pretty well. I mean what we saw in Q1, remember, as we came out of Q4, if you remember, we had forward sales into DGD getting ready to run full that were put on in October as we anticipated the RVO. And then we saw prices soften as the RVO kept getting kind of delayed and delayed. And so ultimately, as we came into Q1, cash prices, FOB, most of the North American factories were actually flat or lower than Q4. Those have now accelerated. They started to accelerate in, really, here in March for us. That will start to flow through very nicely in Q2. When we look at our global rendering business, what we've seen is the tariffs have impacted Brazil pretty sharply. We've had to adjust all of our formulaic or our pricing models down there, what we procure raw material from. That takes 30 to 60 days. So I think we've righted that now. So overall, the ingredients business will have a stronger Q2. How much of the acceleration in prices flow through, that would be reflected in kind of our conservative approach to guidance there. Remember, as I was telling the team here, this is the first call we've done where we haven't ever seen period 1 of the next quarter. And we won't see those numbers here for another week or 2, 1.5 weeks. And ultimately, so really, we're looking at basically a March run rate and extrapolating that with some improvement. And so you'll see that. Conversely, as DGD has done a very nice job of getting out in front of this, I mean we've had a strong bias that feedstock prices would accelerate once the industry wakes up, and so that should flow through in much better margins in DGD as we go through Q2 and through the balance of the year. Operator: Our next question comes from the line of Tom Palmer with JPMorgan. Thomas Palmer: Maybe start out with an industry question, especially when we, I think, think about the biofuel side, there's probably a good amount of idle capacity. I wonder what you think the U.S. biofuels industry is capable of producing currently and then once kind of it fully ramps, and whether that's going to be enough to kind of fulfill mandates or if we do need to kind of shift to imports even with the maybe less favorable tax treatment. Robert Day: Tom, this is Bob. I mean, look, the first thing I'd say is we do believe that quite a bit of biofuel capacity is back online. Margins are attractive enough to bring a lot of that back. There's still an opportunity to bring some more. Ultimately, to answer your question about what we're capable of, it's going to depend a lot on run rates as well as just kind of bringing idle capacity back on the market. And I think as everyone knows, keeping a renewable diesel unit up and running is -- it's got its own challenges to it and circumstances. So it's going to depend a lot on that. Bottom line is we think that the industry is capable of meeting the mandate of the -- or the demand of the RVO. It probably is a combination of some of the things you talked about. It will include some imports of fuel, probably fewer exports as the U.S. market margins need to just incentivize U.S. production to stay in the United States. When you put all those things together and adding capacity and running hard as an industry, and you look at what we did in 2024, it's reasonable to expect that we can meet the demands of the RVO. Thomas Palmer: And a follow-up on second quarter expectations. When we think about 2Q, what are kind of the key drivers of the increase in terms of EBITDA in the base business? Is it mainly just higher market prices in terms of fat? And does that range contemplate where prices are today or that there are any changes relative to that run rate? Randall Stuewe: Yes. There's always a bit of seasonality in the business here. I've always said when the ball park's open, at least in North America, that's -- you'll see a few more in barbecue season. So really, at the end of the day, raw material volumes globally are strong and very strong in South America. Poultry volumes in the U.S. are exceedingly strong, while the downside of that is the cattle herd is really stagnant and at a 75-year low. What's relevant about that, Tom, is that, remember, there's -- it's just like the red meat, white meat discussion here. Red meat has more fat. And so we can process more poultry and still not make as much fat as we were when we were making -- running all the beef. So a little less fat into the discussion. As far as the modeling of guidance here, like I said, that's really March extrapolated with some improvement that's out there. Clearly, towards the -- fat prices are exceedingly much higher than they were in Q1 cash prices right now, and we're out there selling it. So you'll see that flow through. How much goes into Q2 versus Q3, we will see, but we're clearly picking up some speed there. The Rousselot business is doing quite well around the world right now. Gelatin and collagen margins are good. Remember, that business -- remember, 80% of that byproduct that comes out of that business is fat and protein, and so it's feeling a benefit. We're seeing the tariffs had their impacts on our -- what we're going to call our specialty proteins business, and those markets are back open again with the lower tariffs. And so we're seeing a nice improvement in protein prices. But clearly, fat prices that are -- I think the DGD bid right now today is close to $0.80 a pound. Those are big numbers that are down there right now. And those are up anywhere from $0.20, $0.25 from where they were in October, November. So that will start flowing through very nicely here as we get towards the end of the quarter. Operator: Our next question comes from the line of Pooran Sharma with Stephens. Pooran Sharma: Congrats on posting really strong results. Maybe just on Fuel here, and DGD and really just RD. What are your thoughts on kind of diesel prices in regards to kind of what extent you think there are structural constraints, whether infrastructure, refining capacity or even just intermediate-term logistics that could keep diesel markets tighter for maybe longer than people were anticipating? Randall Stuewe: It sounds like a question for our partner, Valero, than us. But Bob, you'll take a shot at it. Robert Day: Yes. I mean -- and I -- look, I think we're not really qualified to answer questions about diesel capacity and constraints and things like that. But I think what we can point to is just an increased cost of the raw material inputs that everyone is using to make fuel energy products. I think what's interesting from our perspective is just how much tighter today renewable fuels are and total cost relative to conventional fuels, and sort of what this conflict has done in terms of bridging the compliance gap in the RVO. I mean, ultimately, I think we fully expected that we would see the margins that we're seeing today in the market. But we thought that it would perhaps take a little bit more time until compliance dates sort of force convergence and cause that margin to occur. This conflict and the higher energy prices underlying all of this is allowing margins in renewable fuels to sort of move to what they probably should be as a result of a strong RVO, and it's just allowing it to happen more quickly. It's also I think showing the world that renewable fuel is an important component of total supply. And without it today, we'd have much higher prices of conventional fuels. Randall Stuewe: Yes. I think the other thing that Bob highlights there is, I mean, as most of you know, I mean, fossil diesel or conventional diesel in Scandinavia is $10 a gallon, and in the Netherlands, it's $12 a gallon. And RD is actually cheaper by almost 25% today. So the industry is going to run as hard as it can. And what's special about RD is it can be used in either at 100%. So you're going to see anybody that can produce RD running at full capacity right now. You're also seeing a lot of other countries in the world that have -- or producers of fats and oils that can use fats and oils within their energy system, meaning the palm oil. You magically start to see palm oil disappear back into energy when the price per barrel gets to where it's at right now. Usually, it starts when it's about $80 a barrel. And clearly, there's a huge incentive right now globally to continue to move fats into energy. And that's going to keep the world feedstock markets pretty constructive until things back off. Pooran Sharma: Appreciate the color. And maybe just shifting to the balance sheet, I wanted to understand with -- I know you're not guiding to DGD, but just kind of the implied step-up in EBITDA, in just the overall business. I think that leverage should just come down naturally. And so I wanted to get a sense of how you're thinking about actively deleveraging versus allocating capital elsewhere. Robert Day: Yes, this is Bob. So I think we've been pretty clear in recent quarters that we're focused on paying down debt. We've talked a lot about trying to get our debt down below $3 billion. We're still committed to that. We do have an Investor Day on May 11. And at that time, we're going to be able to talk more about what our capital plans are. But I think what I'll just summarize right now is just to say that we're focused on getting that debt number down to about $3 billion. At that point in time, that opens up a lot of potential options for Darling in terms of what we do going forward. It will depend on what our outlook is when we get there. But we're certainly very encouraged by the EBITDA run rate that we see from the first quarter and what we're expecting for the balance of the year. And we think we'll get down to that $3 billion number relatively quickly. And at that point in time, we think the outlook is still going to be very strong. Operator: [Operator Instructions] Our next question comes from the line of Manav Gupta with UBS. Manav Gupta: I actually wanted to ask a little bit of a policy question. So you know how EPA is proposing starting 2028 you get 50% RIN on foreign feedstock. And I'm just trying to understand whether it's positive for DAR if that goes through. I mean your domestic UCO and tallow would price higher. Also I think some of the other competitor facilities which are overly dependent on foreign feedstock might be forced to quit the business. But at the same time, I think you are also importing a little bit of tallow through FASA for some of your plants. So I'm just trying to understand the puts and takes if this policy change does go through and you only get 50% RIN for foreign feedstock. Robert Day: Manav, this is Bob. I think the answer -- to be able to answer that question, we'd also need to understand what the tariff structure is at that point in time. I think if we're looking at a 50% RIN and there are no tariffs -- no origin tariffs on any of the feedstocks that we're importing, then it's going to depend on what is the demand for those feedstocks outside the United States and does the value of those international feedstocks adjust for that 50% RIN and the 45Z credit. Ultimately, if the U.S. is the strongest market at that point in time and international feedstocks discount themselves so they can be competitive coming into the United States, then we see all of it as a pretty big positive for Darling because it would be very supportive to our U.S. and Canadian feedstock prices and the DAR core business. But it would also give DGD access to international feedstocks to be able to make fuels, sell those into the United States or re-export for anywhere else. So it's going to really depend on the dynamics and what's happening with fuel markets and feedstock markets outside the United States. But overall, we don't see it as a negative. Manav Gupta: Perfect. My second quick question, on 2Q guidance and where the Street is. When we look at the Street numbers, which I think are closer to 440, and your guidance, to get to that guidance, Street estimates versus your guidance, DAR -- DGD would have to give you about 170 million. That's roughly my calculation. And given where their margins are on DGD, it seems very possible that DGD could easily give you 170 million. So if you could talk a little bit about your guidance versus where the Street is on 2Q, I'd be very grateful. Robert Day: I think, Manav, we won't guide DGD. I think we did say we expect 320 million gallons for the quarter. We are willing to say that we think that second quarter at DGD will be stronger than the first quarter. So if you kind of put all that together, I think what you're saying and backing into doesn't sound unreasonable. But there isn't a lot more we can say about that in DGD's numbers. Randall Stuewe: Yes. I mean, Manav, this is Randy. Bob said it really well, I mean, the DGD margin environment is constructive right now. It's still sorting its way out. We're running at capacity. 320 million is the gallon that we're going to put out there for Q2. And then I suspect Q2 earnings power is greater than Q1 and Q3 will even be stronger. But life is pretty good there right now, but we've just kind of opted to kind of stay away from trying to guide because it's very, very difficult because of timing, et cetera, of sales and then feedstocks. Operator: Our next question comes from the line of Derrick Whitfield with Texas Capital. Derrick Whitfield: Congrats on a strong quarter. For my first question, I wanted to start with Feed. Since March, we've seen a near $0.20 per pound increase in waste FOGs, as I think you highlighted earlier, Randy. While I understand your rendering contracts include purchase price considerations for downstream value, how should we think about the strength of waste FOG realizations flowing through to higher EBITDA from a price sensitivity perspective over the course of the year if prices remain elevated? Randall Stuewe: Yes. I think we've kind of, Derrick, tried to address that. I mean, clearly, obviously, I'm reverting back to I haven't seen April yet, so to see how it's truly flowing through. But what I can tell you around the world is Europe has been truly lagging from where the U.S. run-up has happened because it's now a domestic feedstock game. South America got impacted very hard due to the tariffs, and also higher ocean freight. And so that's trying to -- we always look back. We've always tried -- why we built DGD was to own the arbitrage between animal feed and fuel. Animal feed value today is less than $0.30 a pound and fuel prices are north of $0.70 a pound FOB. So clearly, we've made the right decision there. What we're going to see is as we go into May and June, you will start to see a lot of that flow through. I think we're calling a bottom now in Brazil. We've kind of figured that one out. We had to adjust our spreads. It's a spread management game. In Europe, much more resilient, but it's starting to move up. I've seen South America move, in the last 3 or 4 sales up $50, $100 a ton from the start or mid -- really start of April. So that will start to flow through. That's where I would categorize the guidance that we're putting out there on the core business as potentially somewhat and very conservative right now. But how we see how it flows through, it's kind of hard to call right now. Protein prices have improved. Rousselot, because the tariffs are down. So we're having some improvement all across the line. Our biogas businesses in Europe are very strong right now. So I mean, it's really the tailwinds are building right now. We're just trying to -- maybe we were a little gun shy, would be what I'd say right now, from the last couple of years. So we'll see what they flow through here. Derrick Whitfield: Perfect. And then maybe shifting over to DGD. Given the higher diesel and jet crack spreads we're seeing, really outside of the U.S. but across the world, how are you viewing the international markets relative to what you can get in the U.S.? And if favorable, what degree of flexibility does DGD have to further increase sales into those markets? Robert Day: Yes. Derrick, this is Bob. DGD has always maintained a lot of flexibility and agility in terms of markets it can sell to. We have seen very attractive opportunities all around. I think DGD has been a consistent exporter. We expect that to continue. But I think when you look -- looking forward, and the strength of the RVO in the U.S., it really points to a U.S. market that should continue to increase in margins and keep barrels inside the United States. And I think over time, we'll see the market create that. It won't be because of -- it will be market-driven, and that's what we're expecting to see. Operator: Our next question comes from the line of Dushyant Ailani with Jefferies. Dushyant Ailani: Congrats on a strong quarter, guys. I know the focus has been on RVOs. I just want to pivot a little bit to LCFS where pricing has been weak. It's starting to trend a little higher. Want to just get your thoughts on how you're seeing the California market evolve through the course of the year maybe. Robert Day: Yes, Dushyant, this is Bob. So LCFS, it's an interesting market. It's dynamic and hard to understand, quite frankly. But I think what we saw initially immediately after the RVO was an increased amount of production and more sales into California. So on a very short-term basis, we created some more credits there than -- at least at a rate that was a little bit higher than what we had. But the reality is California has only got around 3.6 billion gallons of total diesel demand. 300 million or 400 million of that is going to be satisfied with biodiesel. And there's probably a little bit of conventional diesel that's going to always stay there. So you're looking at kind of a 3 billion gallon demand market for renewable diesel. And the RVO essentially mandates more production than that. And so if you add up all the LCFS programs in the United States, there's -- the RVO is larger. And certainly, when you include imports as well, it's larger than all those LCFS programs. So we do think we're going to have a lot of supply into those states. But we can't satisfy all of the requirements from the California Air Resources Board just with renewable diesel. So what we expect is we're going to see LCFS credits continue to increase in value. And we'll probably see renewable diesel trading at a discount into California because it's going to be offset by LCFS premiums. So it's a complicated one though, but it's a long way of saying we think LCFS credit premiums are going to increase. Dushyant Ailani: Got it. And then my follow-up, maybe just going back to the core business. I know you guys have been -- your margins have been strong in 1Q, you guys gave some thoughts there. But maybe how do we think about -- obviously, pricing expectations are expected to be elevated. But how do we think about margins across the board, Feed, Food as well? How does that kind of shake out? And maybe operationally, if there are any tweaks that you guys are making, if you can talk to that. Randall Stuewe: Yes. If you look across the ingredient portfolio and kind of a little bit right to left, in the Fuel segment, non-DGD, very much an annuity business, but it's going to get a little bit of lift from the biogas business in Europe as we move forward through the year. Rousselot, very much predictable, more closer to consumer-type business, some where we're getting some tailwind there now as global collagen demand is really picking up. And when you make -- when you do the extraction, you make a raw material or a feedstock, then you can make gelatin or collagen. And as you defer -- directed to the collagen pipeline, you then take it away from the gelatin. And so ultimately, we're seeing some improvement there because gelatin margins came under some pretty significant pressure in the last couple of years due to some capacity additions in South America and China. So ultimately, we look at that segment as pretty stable, maybe a little bit of improvement. Clearly, the Feed segment has the most commodity exposure. It's really just, as we say, a timing exercise right now and how the better proteins and fats on the 3 big rendering continents of North America, Europe and South America all start to flow through. So you'll see some additional, what I'm going to call, margin expansion there. I think that that's really the thing that Bob and I feel so proud about is, is that the businesses in the rendering side are really operating at a high level of capacity and efficiency right now. Any of the challenges that we had in the prior years I think are behind us now, or I believe, I know they're behind us, and we're really starting to do well. The only downside, if we look back at years when there were commodity uplifts like this, we've got less beef in our system today than we've had in the past. And like I said, a chicken is less fat than red meat. So that -- you won't get 100% of what -- if you're trying to extrapolate prior years, but it's still going to be darn good. And it should accelerate throughout the year here. Operator: Our next question comes from the line of Andrew Strelzik with BMO Capital. Andrew Strelzik: I just wanted to follow up on the point that you were just making on kind of the internal improvements in the base business. Is there a way to kind of frame or quantify how much better your plants are running, how much more margin opportunity there is relative to the last time we saw fat prices at these levels kind of net of what you're saying on beef versus chicken? Robert Day: Andrew, yes, this is Bob. I think probably when you think about like the operations of our business and you point back to 2022 and 2023 and the large acquisitions that Darling made with Valley Proteins, FASA and Gelnex, the operations and sort of understanding how these assets all fit together are probably manifesting themselves most right now in the form of the high-quality proteins that we're making and the premiums we're able to capture because of the markets we're able to reach, whether it's high-end pet markets or high-end international markets. As those operations have come together and we understand the quality and demonstrate the consistency that we're able to produce, we're able to hit those markets more consistently. Same is true for the Gelnex acquisition and Rousselot. This is a very complex global supply chain. And our ability now really to leverage the value of these assets by consistently meeting customer needs, moving product internationally from Brazil or wherever in the world to Europe and the United States, we've really been able to identify what are the right origins and destinations, and get maximum value out of that. The value that you see, it's really incremental quarter-to-quarter. But a lot of what's sort of underpinning the strong results that we've had and what we're expecting as we go forward is improvement in our own operations and coordination. It isn't just market tailwinds. Andrew Strelzik: Okay. That's helpful. And then I also wanted to ask on kind of the RIN outlook generally, and I appreciate that there's a lot of focus in the market on the near term right now. I would just be curious to kind of get your perspective on the RIN landscape beyond '26 now that we have the RVOs, and kind of how you're thinking about comparing what the environment could look like then versus what we're seeing today, how much of a kicker that could be versus kind of where we stand today now that we have a formal policy in place. Robert Day: I mean right now, what we can see out as far as through to the end of 2027, that's the RVO that's in place, a lot of the answer to your question, it's going to depend on global prices of fuel energy, conventional energy. It's going to depend on tariffs. It's going to depend on how well the industry performs in the United States and the amount of production and supply that we create for the market. All of those things are -- I'd really have to know the answers to those to answer the question about where RINs are going to go. But what we do see when we look at this RVO through 2027 is that the industry needs to produce, it needs to run really hard. And even when it does, margins need to remain very strong in order to continue to incentivize all of the players to make enough product to meet that RVO. That's the picture we see. And so bottom line is RINs need to play their role in all that to be the great equalizer that creates a good renewable diesel and sustainable aviation fuel margin. Operator: Our next question comes from the line of Ben Kallo with Baird. Ben Kallo: Just a couple of questions on the Food business. Could you just talk about progress there with JV and then just like with a larger partner for the peptide side of the business? And then Randy or Bob, just on the acquisition front, you guys commented last quarter there are some smaller acquisitions. But just use of proceeds of cash, if you could give us an update there? Robert Day: Yes. So starting with the joint venture agreement that we've signed with Tessenderlo and we're hoping to close sometime soon, I think we've been pretty clear that we're in an antitrust review process. And that's really what we need to get through before we're able to close on that deal. Look, we haven't been -- we've never been more excited about the potential of forming that joint venture than we are right now. We continue to see significant increase in demand for hydrolyzed collagen. We continue to develop science and technology around the Nextida portfolio of products. What PB Leiner, the Tessenderlo business, would bring the overall Darling collagen business is added capacity that enables us to really efficiently utilize what they have and be very cost effective in production and continue to increase sales to really feed into this strong and growing collagen market. They also offer the opportunity to originate product and raw materials in a couple of countries where we don't have presence. And so it allows us to continue our growth without having to invest a lot of new capital and which also takes time to add that capacity. So that's still going forward. We're still in this process. And we hope to conclude it sometime soon. The proceeds that we used before that I think you're referring to, is we participated in an auction to buy 3 rendering assets from the Patense Group in Brazil, which was a really fantastic opportunity, through a Chapter 11 process for us to add assets that fit very well with the FASA network of assets that we previously acquired in 2022. Those are the kinds of things that we really look forward to and hope will continue to arise, essentially buying assets at a discount to full value, that fit very well with our network. Operator: Our next question comes from the line of Conor Fitzpatrick with Bank of America. Conor Fitzpatrick: Feed prices continue to run up. Forward soybean oil is in the mid-70s right now. And I guess the question is, how much more room do feed prices have to run up from here? And to answer that, I think we need to know why the ramp in biodiesel utilization appears to be lagging a bit in March. It's possible that higher pricing for physical delivery in parts of the Midwest or cash constraints on realizing 45Z credits or general hesitancy to restart facilities could explain it. Are you seeing any of those factors weighing on marginal biodiesel production and overall feed consumption in the market? Randall Stuewe: Yes. I think Bob and I can tag-team this. I mean, clearly, on the Gen 1 biodiesel business, restarting those plants coming out of winter just takes a little bit of time here. There's a seasonality of demand of that product. Trying to rebuild supply chains that have been shut down for 1.5 years take a little bit of time. So I think you'll see that industry start to ramp up from where it was. Interest rates are higher too. So working capital, people forget that when you don't have that blenders' tax credit, you've got to have a working capital line to run those plants. Clearly, the integrated guys, that's an easy switch for them, and you're seeing that. But the free-stander takes just a little bit longer to get there, would be my read on it. I don't know, what do you think, Bob? Robert Day: Yes. I think the other thing a lot of people miss on this one is for the small, independent biodiesel producer, they really don't have access to the production tax credit, practically speaking. Ultimately, they can get it. They certainly can generate the credit, they can eventually find a way to sell the credit, it would come at a pretty big discount to 100 cents on the dollar. But in the near term, they're not going to have access to that revenue. And so margins need to really increase from where we are today in order to incentivize all of these guys to come back online. It's just going to take a little bit more time. But eventually, that capacity is going to be valuable, in our opinion, because margins are going to move to levels that cause it to be. Conor Fitzpatrick: Okay. Great. And I guess relatedly, since a lot of those biodiesel producers are kind of constrained on the feed optionality side, not having pretreaters, what's kind of the split between opportunity for veg oils which require less pretreating and fat oils and greases that Feed Ingredients produces? The entire complex should run up, but veg oils might have a chance to run up a bit more. Robert Day: Yes. I mean, look, I think the reality is there's enough demand out there that can now utilize the non-veg oil feedstocks where we're probably going to just continue to trade at sort of their CI score adjusted values. So we're not really expecting to see veg oil run up relative to the other products just because, like I said, there's enough capacity that can utilize that. The thing with biodiesel is that it doesn't -- as long as it can buy refined oil or it's able to pretreat or clean the oil from that standpoint, then it doesn't need as much pretreat capability and biodiesel can run on 100% soybean oil. Operator: Our next question comes from the line of Matthew Blair with TPH. Matthew Blair: Could you talk about the feedstock slate at DGD? I know in the past you ran 100% low CI feed. Has that changed? Are you running more soybean oil in 2026 with just some of the changing credit values around 45Z and providing more of a subsidy for veg oil based feeds? Robert Day: Yes, Matthew. DGD is well setup to maximize opportunities depending on what is the lowest cost, net of CI score, feedstock and run for that barrel. That implies that there's an increase in the utilization of veg oils into the mix. I think that -- it's fair to say that that's occurring. But it's just going to depend on -- these markets are -- they move around quite a lot. And so they're just going to be able to take advantage of the opportunity, whichever it is. Matthew Blair: Sounds good. And then the comments earlier I thought were pretty interesting. You mentioned that the RVO will basically require more RD than what the West Coast LCFS markets can handle. And so the implication to us is that the marginal U.S. producer will actually have to sell into non-LCFS markets. But of course, the market will still need the RINs from those marginal producers. So overall, it just seems like a steepening of the cost curve is something that should continue to be pretty supportive for margins, probably likely come through in stronger RIN prices. Is that your take as well? Do you agree? Robert Day: Yes. I think that is how we see it. Ultimately, yes, I think that's how we see it. RIN, at the end of the day, like I said earlier, RINs will need to be the great equalizer that creates the margin that we need to make enough volume to satisfy the RVO. And the extent to which it needs to go is going to depend on all these other factors: feedstock costs, global fuel prices. Certainly, the environment that we're in today eases the burden of the RIN. But even with that, we're seeing very strong RIN values. Operator: Our next question comes from the line of Betty Zhang with Scotiabank. Y. Zhang: I wanted to ask on DGD, the 2Q guide is 320 million gallons. Is that essentially you're running at maximum levels? And if not, is there any reason to not run at max? Robert Day: Betty, it's close to max. I think right now, yes, you look at the margin environment, we are incentivized to run as hard as we can. 320 million is pretty close to max. I don't know what else there is to say. Randall Stuewe: You're being slightly positive, Bob, but it's -- that it's pretty close to full out. Robert Day: Yes. I mean we're going to do our best to run full out in this environment. Y. Zhang: Okay. Perfect. And then I wanted to ask on kind of the differential between SAF and renewable diesel. I know in the past, SAF has had a bit of a premium over RD. But given a lot of moving pieces, including the RVO and so on, can you just speak to maybe the economics of producing SAF versus RD currently? Robert Day: Yes. So I think the short answer is for sales into the United States and the voluntary markets, there's more of a fixed premium to RD, where SAF continues to be a better opportunity and better margin. In Europe, it is more dynamic than that. Europe is based on mandates, and we see times when margins in Europe for RD are better than SAF. We expect that to continue to be kind of volatile or up and down. But we're really happy with the voluntary market we have in the U.S. and the premiums that we can consistently get from SAF. So overall, we're still meeting our commitments from the investment we made in SAF at Port Arthur. Operator: Our next question comes from the line of Jason Gabelman with TD Securities. Jason Gabelman: Given Darling is uniquely positioned running domestic feedstocks and then not only producing but importing feedstocks to DGD from the international market, I was wondering if you could provide some color on if RIN prices today are sufficient enough to attract those international feedstocks to be run in the U.S. market, especially given those feedstocks no longer qualify for the producer tax credit? Robert Day: Yes. Good question. So the answer to that is going to depend on who's making the fuel. For Diamond Green Diesel and given our cost of production, the efficiency, the logistics that are available to us when it comes to importing those international feedstocks, we can make renewable diesel with those products and sell into the United States and make a good margin. I don't think everyone is able to say that. And so for that reason, we do think we'll continue to see margins strengthen. And we expect to see a difference in feedstock prices in North America relative to the rest of the world. Jason Gabelman: And do you expect that biodiesel producers are going to ultimately need to rely on international feedstocks as well in order for the industry to meet the RVO? Robert Day: No. I don't. I think biodiesel producers should see a sufficient amount of U.S. veg oil -- or U.S. and Canadian veg oil to supply their needs. Operator: There are currently no more questions waiting at this time. So I would like to pass the call back over to the management team for any closing remarks. Randall Stuewe: All right. Thanks, everybody, for your questions today. As you know, we'll be hosting an Investor Day on May 11 in New York. It will be simultaneously webcast. It's an exciting time for us as Suann, Bob, Carlos, myself and David van Dorselaer will lay out a lot of these topics that we discussed today in addition to what our future looks like and the 3-year road map as we see it today. So if you have any questions, follow up with Suann. And stay safe and have a great day. Thanks again. Operator: Thank you. That will conclude today's conference call. Thank you for your participation. You may now disconnect your lines.
Operator: Good day, and welcome to Acadia Healthcare's First Quarter 2026 Earnings Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Todd Young, Chief Financial Officer. Please go ahead. Todd Young: Thank you, and good morning. Yesterday, after the market closed, we issued a press release announcing our first quarter 2026 financial results. This press release can be found in the Investor Relations section of the acadiahealthcare.com website. Today, Debbie Osteen, Acadia's Chief Executive Officer; and myself, Todd Young, Chief Financial Officer, will discuss the results. To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in the press release that is posted on our website. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Acadia's expected quarterly and annual financial performance for 2026 and beyond. These statements may be affected by the important factors, among others, set forth in Acadia's filings with the Securities and Exchange Commission and in the company's first quarter news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. At this time, I would like to turn the conference call over to Debbie. Debra Osteen: Good morning, and thank you for joining us. I'm pleased to be with you today to discuss Acadia's results for the first quarter of 2026. Since returning as CEO, I have spent time in the business, listening to our teams, assessing operations and getting close to the drivers of quality and performance. Our mission is unchanged, and I continue to be impressed by the hard work and dedication of our clinicians and employees across the country and the important work we are doing to provide safe quality care for those seeking treatment for mental health and substance use issues. Across Acadia, we share a clear purpose, meeting a critical need and making a difference in the communities we serve. As the nation's leading pure-play provider of behavioral health services, we are uniquely positioned to address this growing unmet need with our 275 facilities serving more than 84,000 patients daily. We have a strong foundation. an integrated model of care, a deep focus on clinical quality and a proven operating approach. As I shared in our last call, we are focused on building on our strong foundation with operational discipline and consistent execution to deliver significant sustainable value creation. I have great confidence in our teams and in the near- and long-term direction of the company, and I am fully committed to supporting Acadia through this next phase of execution and improvement. Our first quarter financial and operating results marked a good start to 2026. We delivered revenue at the high end of our guidance range and exceeded the top end of our adjusted EBITDA and EPS range. Our revenue growth was driven by our acute inpatient psychiatric facilities with 14% growth compared to last year as we increased inpatient volumes by 6.2%. Our specialty team also delivered better-than-expected results by mitigating some of the challenges in Pennsylvania. On the CTC side of the business, while we grew 2.5% compared to the first quarter of 2025, growth slowed sequentially from quarter 4 as that business was impacted by the severe weather we noted on our February call as certain centers had to be closed during that time. The increase in volumes across Acadia reflects the continued strong demand for our services. Our revenue growth and strong focus on operational improvements and efficiencies at every level of the organization drove adjusted EBITDA to $144.2 million, $7.2 million above the high end of our guidance. Our good start in quarter 1 is allowing us to raise our full year adjusted EBITDA guidance by $5 million at the midpoint. Todd will walk through the financial results and our guidance in more detail. For 2026, our primary focus is operational execution and deriving more value from our facilities and recent bed additions. That starts with people, having the right leaders in place and supporting our operators in the field. It also requires clear decision-making and accountability at every level so we can drive stronger fundamentals and more consistent performance across all 4 lines of business. During my first 3 months, I have conducted talent reviews and reviewed our operational structure across our businesses to evaluate leadership at the facility level and the layers and scope of operational oversight above it. As a result, we have made leadership changes at multiple levels, including bringing new leaders into Acadia. As part of this review, we have reorganized and restructured our acute service line with 2 changes. First, we reduced the number of facilities and geography within each division to enable greater focus and oversight of our facilities. Second, we have created a new operating group for acute facilities, which will focus on our JV hospitals and recently opened facilities. This included hiring a new experienced leader for this group, who will be focused on continuing to build strong relationships with our JV partners and strengthening our referral networks. These changes in our acute service line are intended to support our teams in the field and improve execution. Alongside the talent work, my leadership team and I have been engaging directly with our teams to reinforce priorities and rebuild a culture of urgency around access to care and patient treatment. We have also focused on our referral relationships. These relationships are critical, and we are pleased with how the teams at the facility level are prioritizing these relationships and working with these partners. We currently have a strong, diversified referral base across all service lines and regions. Over the last 3 years, we have added over 2,500 beds in new facilities and through expansions in existing facilities. These investments expand access to care and increase the number of patients we can serve each day. The demand is there, and our goal is to meet that demand with high-quality patient care and ensure that we eliminate barriers for treatment through prompt response times. We are focused on execution, referrals and leadership at all our facilities, but particularly in locations that have not ramped as quickly as expected. We have completed in-depth reviews of facilities opened since 2023, and each of these facilities now has a clear action plan to expand access to care. As a result of this increased focus, this group's revenue and adjusted EBITDA results in quarter 1 were ahead of our expectations. We remain confident in this group delivering on $200 million of adjusted EBITDA growth relative to 2025. We continue to evaluate each facility and market on an individual basis, and we are applying learnings from past openings through a clearer, more standardized approach to new hospital launches. We are focused on our 2026 openings and have adjusted our planning process to support successful execution. In early February, we opened our JV facility with Tufts Medicine in Greater Boston. We have 24 beds open today, and once fully licensed, we will be able to serve 144 patients. During quarter 2, we expect to open 2 facilities in partnership with Premier Health Systems. our 144-bed JV facility with Orlando Health and our 96-bed facility with Methodus Jenny Edmondson in Iowa. Our joint ventures and the new beds added provide an opportunity to leverage our combined expertise and resources with a shared commitment to provide quality care and achieve strong clinical outcomes. While we are reducing our capital investment by over $300 million compared to 2025, we are finalizing investments in these new JV facilities while also adding beds to existing facilities. In the first quarter, we added 82 beds and are on track to add 400 to 600 beds over the course of the year. This focus on operational execution also drives a focus on efficiency. Over the last few years, Acadia has invested in technology, data tools and process improvements that give our facility leaders better real-time visibility into day-to-day operations. These tools help us make more informed operational decisions and deploy resources more effectively across facilities. We are aligning staffing resources more effectively with patient needs and operating conditions, improving workforce planning and reducing inefficiencies such as premium labor. We believe this more disciplined approach supports stronger operations, a better working environment for our teams and a more stable care environment for our patients while maintaining our commitment to quality, safety and care delivery. Our corporate team has also reduced headcount to reflect the renewed focus on supporting our operating teams effectively. This renewed focus on management and expense discipline across the organization contributed to adjusted EBITDA exceeding our expectations in quarter 1. As we have been evaluating all aspects of our business, the most important driver of our success is our people. We are pleased that for the eighth consecutive quarter, our staff retention has improved. We are focused on talent at every level because the right people with the right training enable us to provide the best care to our patients. We are measuring that care through enhanced outcomes tracking through more programs. The ability to measure and validate outcomes is especially important for collaborating with payers who are very focused on clinical health outcomes for their members. Positive outcomes are equally significant for our referral partners as they reinforce the rationale behind entrusting their patients to our care. As we look ahead, demand for our services remains strong, and we are focused on consistent execution across our care continuum. Above all, we remain committed to our mission and to providing high-quality care for patients and the communities we serve. With that, I will turn it over to Todd to review the financial details and our expectations for the second quarter. Todd Young: Thanks, Debbie. Turning to our first quarter results. We reported revenue of $828.8 million, representing a 7.6% increase over the first quarter of last year. Same-facility revenue grew 7.3% year-over-year, driven by a 5.6% increase in revenue per patient day and a 1.6% increase in patient days. Our Q1 revenue growth was driven by our acute and RTC businesses, which grew 14.2% and 6.3%, respectively. Acute performance was driven by increased patient volumes. In addition, we benefited from supplemental payments in line with the Q1 guidance we provided in February from Ohio and Tennessee that were not in our first quarter results last year. We were also pleased with the performance of our specialty business as it mitigated a portion of the expected volume losses in Pennsylvania from New York's decision to not provide care for their residents in our Pennsylvania facilities. We continue to be very focused on diversifying our referral base to surrounding states and Pennsylvania. The decline in our specialty facility revenue of 6.5% was driven by the previously discussed challenges in Pennsylvania and from closing specialty facilities in 2025. The closures created nearly a 6% headwind to growth. Our CTC revenue grew 2.5% compared to the first quarter of 2025, but it slowed sequentially as it was negatively impacted by the severe winter weather we called out on our Q4 2025 earnings call in February. The weather negatively impacted our total adjusted EBITDA in Q1 by $3.7 million, in line with the Q1 guidance we provided in February. Adjusted EBITDA for the quarter was $144.2 million or 7.5% growth over Q1 2025 and $7.2 million above the high end of our Q1 guidance. Our adjusted EBITDA performance relative to our guidance was driven by strong performance across our acute facilities, including, as Debbie mentioned, outperformance from our new facilities opened since 2023. We also delivered better-than-planned cost efficiencies at both corporate and at our facilities. We did have a $3.2 million benefit related to employee benefit costs that we expect will reverse in the back half of 2026. Our losses from start-up facilities were $12 million, $2 million better than our $14 million forecast, primarily from operating efficiency improvements. We had $3 million in net operating costs associated with closed facilities. On a same-facility basis, adjusted EBITDA was $199.5 million in the first quarter. From a balance sheet perspective, we remain in a solid financial position. As of March 31, 2026, we had $158 million in cash and cash equivalents and approximately $565 million available under our $1 billion revolving credit facility. Our net leverage ratio stood at approximately 3.9x adjusted EBITDA. With operating cash flow of $62 million and CapEx investments of $77 million in the first quarter, our free cash flow was a negative $15 million. Our free cash flow improved $148 million compared to Q1 of 2025. As we've previously noted, we expect our total CapEx in 2026 to be between $255 million to $280 million, with the second half of the year being lower than the first half as we opened our 3 new JV facilities in the first half of the year. We continue to expect positive free cash flow in 2026. We also collected $16 million in cash from the sale of 3 closed facilities. Moving to development activity. During the first quarter, we added 82 beds while closing 251 beds. The closures primarily related to 2 leased facilities in Pennsylvania and 2 other facilities that have been announced in 2025. Looking forward to 2026, as Debbie noted, we expect to add between 400 and 600 new beds, primarily through the opening of new facilities nearing completion. While we typically do not provide financial guidance for the second quarter, given the substantial out-of-period supplemental payments received from the State of Tennessee in the second quarter of 2025, we are choosing to do so this year to provide clarity to the investment community. In Q2, we expect to deliver revenue between $835 million and $850 million, adjusted EBITDA of $142 million and $152 million and adjusted EPS of $0.30 to $0.40. For the full year, our revenue guidance of $3.37 billion to $3.45 billion remains unchanged. While we expect to do better in mitigating our specialty headwinds in Pennsylvania, this improvement is expected to be offset by modestly higher-than-expected levels of bad debts and denials. With respect to our full year expectations for adjusted EBITDA, we are increasing the range from $575 million to $610 million to $580 million to $615 million. For adjusted EPS, we are increasing our range from $1.30 to $1.55 to $1.35 to $1.60. I want to note that given the significant EBITDA earned in Q2 of 2025 from the Tennessee supplemental plan, our 12-month rolling adjusted EBITDA is expected to be between $559 million and $569 million. As a result, our net leverage will be approximately 4.4x to 4.5x at the end of Q2. We expect this higher leverage to be temporary as we expect to end the year in the 3.9 to 4.2x range we guided to in February. Our team continues to focus on supplemental payment programs that we are confident will be approved in 2026, but we have not included any unapproved programs in our guidance. We continue to estimate that certain programs currently under regulatory review could add at least $22 million in incremental EBITDA to our guidance if they receive approval this year. Based on the latest insights regarding Ford's plan, the $22 million may be conservative. I will now turn the call back over to Debbie for closing remarks. Debra Osteen: I want to end our prepared remarks by thanking Todd for his contributions to Acadia, and I wish him well in his next chapter. I'm proud of the important work we are doing across Acadia to address a critical need in our nation. For 2026, our strategic priorities are aligned to improve our financial and operating performance through consistent execution. We are well positioned to apply our scale and expertise to help set the standards for care that address the escalating demand for behavioral health and substance use treatment. We will continue to strengthen our capabilities with discipline, deliver the highest quality patient care and create value for our shareholders. With that, we are ready to answer your questions. Operator: [Operator Instructions] . Our first question comes from Whit Mayo with Leerink Partners. Benjamin Mayo: Debbie, I was hoping that you could elaborate more on the correction plans that you have in place for the underperforming de novos. I hear the organizational changes, the standardization efforts. Just might be helpful to hear more about the specifics on what the action plan is. Debra Osteen: We have specific plans, as I mentioned, and they really focus on continued ramping of occupancy into the facility. They focus on access with our partner to make sure that we have communication in place. They also focus on service lines that we might do in each facility. So in other words, what services, what are the time lines? Do we need CON approval? Do we need other licensure for them? And what we've tried to do is we've been working with our partners to make sure we're aligned with them on these plans. We entered this with them to meet a need they had, and each plan is really tailored to the partner, but also to the market and to the facility and perhaps in some cases, the unique features that we see in some of the states. Benjamin Mayo: Okay. That's helpful. And then maybe just on the payer denials, just maybe a little bit more color on that. What's new in terms of payer behavior? It sounds like that's factored in the full year guide. And maybe just how much of the increase in AR days is influenced by that or is something else going on? Todd Young: Thanks for that question, Whit. Yes, we thought bad debts and denials have started to stabilize in Q4, but then they continue to get a little bit worse in Q1 than what we had previously expected. We do have good game plans in place to make sure we're doing everything to advocate for our patients and to improve on overall collections. We're having good responses, but they are running a little hotter than what we had expected them to. And so we've reflected that in the full year expectations. That being said, there is a lot of focus at our facility level with the finance ops teams on revenue cycle management and doing our best to make that less than what we've currently forecasted. Debra Osteen: And I'll just add to that with -- we are looking at our process and where the improvements can be. We're using tools to enhance what we're doing with respect to documentation, making sure we're in compliance with that. We are appealing denials, as Todd was mentioning. And we've also brought back Larry Hard on a temporary consulting basis. He, as some of you may know, worked with Acadia and retired, but he did an excellent job during my last tenure with just this area. And so he's come in and he's evaluating where and what we need to improve. And I think it's fair to say we have a lot of opportunity. Benjamin Mayo: Maybe just one clarification. Is there any -- was this one specific type of payer? Was it managed Medicaid, something else broad-based? Just maybe a little bit more detail. Todd Young: It's more broad-based, Whit. I wouldn't say there's any one specific area. So -- but that's why we're taking advantage of it across the entire enterprise. Operator: Our next question comes from Matthew Gilmor with KeyBanc. Matthew Gillmor: I wanted to ask about the seasonality with EBITDA implied in the guidance. It seemed pretty typical versus historicals, at least the way we were looking at it. I appreciate in the deck, you called out the Medicaid supplementals being higher in the back half and then you've also got the impact from the ramping facilities. How are you thinking about the seasonality? Are we correct that it's pretty normal? And then can you help size the EBITDA contribution from the Medicaid supplementals and the ramping facilities as we think about the back half EBITDA? Todd Young: Yes, Matthew, thanks for the question. I mean, overall, we feel great on how we've started the year and the performance on the EBITDA and our ability based off a good Q1 to increase our full year expectations. We've tried to be very clear on the cadence with the guidance, just given how volatile the quarterly results were in 2025 that creates some noise into that seasonality. But fundamentally, what we said at the start of the year and what's driving the back half now is the same thing. It's what you just called out. It's slightly higher supplementals in the back half on a run rate basis, just sort of the core embedded supplementals we have in our business. It's been the ramping facilities. As we noted, Q1 was better than we expected on the 23 to 25 cohorts. And so that continues to have a bigger incremental year-over-year contribution in the back half. So those are the big drivers. Plus, as Debbie mentioned in the prepared remarks, we have done a number of different cost programs and cost efficiencies at the end of Q1 that we think also provides benefits over the course of the year. Matthew Gillmor: And then as a follow-up on the New York Medicaid issue, it seems like you're obviously doing better there than you thought. I want to see if you could provide some details in terms of how you're backfilling the capacity with those Pennsylvania facilities. Debra Osteen: Yes, I'll take that. We have a very active business development team that is working with referral sources in surrounding states. And one of the states is New Jersey. Certainly, we also have been working with referral sources in Maryland, but we've also seen an increase in Pennsylvania referral sources. So it's a very concentrated effort to try and refill these beds. And I will say we're also still focused on working with New York to see if we can reopen those referrals. We're not at any place right now to talk any more about it because it's a process, but we are in conversation with them. And our referral sources there, I think, have really benefited from having these facilities. So we're focusing and working with those referral sources in New York as well. Operator: Our next question will be from Pito Chickering with Deutsche Bank. Pito Chickering: I guess 2 questions here. I guess, one more on bad debt denials. Are the payers pushing back on things like length of stay or the actual coverage once they've been admitted? And is that why the admission guidance was increased, but the patient days were left unchanged? Todd Young: So overall, the length of stay change we're seeing across the enterprise is more a math exercise, Pito, than it is anything changing in the business. We closed 4 specialty facilities last year, plus we now have the challenges on specialty in Pennsylvania. Those are all just longer average length of stays on average than acute. At the same time, we've been bringing a lot of new acute beds into our business over the last year, and that's continuing here in Q1 with the opening of Tufts and will continue in Q2 with the opening of Orlando Health and Methodist Jenny Edmundson. And so it's really just a math exercise of specialty beds being down, acute beds being up and those length of stays then working through as we presented. And as you'd guess, right, shorter length of stay in acute with more beds there, admissions are going to be higher while the length of stay of those patients is lower. Pito Chickering: Okay. Perfect. And then one more follow back on that's question. Can you actually quantify how much more supplemental payments we get in the back half of the year versus the first half of the year. Can you sort of quantify actually how the ramping facilities should be growing in the back half of the year versus first half of the year? And are there other things you put in our bridge like the benefit costs were reversing. So any way of quantifying the first half of the year bridge to the back half of the year? Todd Young: Overall, Pito, I mean, it isn't a massive acceleration in the back half given what we've guided to here for the first half on EBITDA. And so there's a lot of moving parts in our business, as you know. But right now, we're calling out a slight increase in supplementals, high single digits, low double digits, not $30 million sort of thing. And then as you can imagine, we're really excited about what we're seeing and the progress on the ramping facilities. those open from '23 to '25. They overachieved our expectations in Q1. And so that will be the other contributors. There's also our start-up facility losses, they sort of peak here in Q2, and those get better in the back half as well. So there's a lot of good things happening in the business that will help drive that small increase in second half EBITDA versus first half. Operator: Our next question comes from Ben Hendrix with RBC Capital Markets. Benjamin Hendrix: I just wanted to dig into the acute operational restructure a little bit more, specifically around the referral efforts across the acute platform. I just wanted to get an idea of what inning we're in, in terms of the referral network enhancements that you're trying to put through there? And how should we think about the magnitude and timing of what you're trying to achieve in acute? Debra Osteen: Ben, the referral sources are really critical, as you know, to our business. And we've always had good, strong relationships with them, really, and I mentioned this in the prepared remarks through all of our service lines. What we're really focused on, though, is making sure that they're seeing our outcomes, making sure that we make it our access, we're not putting up barriers for them to refer. We are in communication with them about what services they believe their patients may need. And so there's a very strong team that works with our referral sources. In specialty, they are called treatment placement specialists, and they work with referral sources. We have a team in acute that service line as well as our RTC. So each service line has a group that's really in communication, but then we're also making sure they see what we're accomplishing with the patient. And as we have more outcome data, which we started to put on our website, we believe that we will be confirming really what is of most interest to them, and that is their patient gets better in our care. Operator: Our next question comes from Brian Tanquilut with Jefferies. Brian Tanquilut: Congrats on a good quarter. Maybe, Debbie, as I think about -- you've called out some of the changes you've made to leadership. Just curious how you're thinking about the operational or organizational structure where you've had a few months here now in terms of where there are opportunities to either reduce some of the infrastructure or some of the positions there that have been added over time. Just thinking through the G&A opportunity here and where else we can see some areas of improvement as you bring the band back, so to speak. Debra Osteen: Well, Brian, we have taken a very hard look at our corporate overhead who is in place, what's needed now by the facilities. And as you alluded to, there is a middle layer of management that I was able to see that had been added. And as we dialogued with the field and those that are using the support, there were decisions made to eliminate some of that middle layer. We think it's going to speed up decision-making. We think it's going to align better with where we see us going, and that is to provide this excellent patient care, but also improve our performance. So we've made changes there. As far as the structure around operations, as I mentioned in the prepared remarks, we reduced the number of facilities and also the geography that our division leaders were traveling to. And we have tried to make it more manageable, so that they can focus more intently on what are the issues, what do we need to do to problem solve and also to build and to grow, especially with the new facilities. And as I thought about it, and I think I had a lot of support here at the corporate office, there are a lot of common themes with our JVs. They're all different, and they're in different markets. But there are things that are common. So as I looked at it, I made the decision that we should align them under a person who can learn and to take those best practices from one JV to another and also to improve the ramping of those because we've added those beds primarily around the JVs. And I think that it's been embraced by the team. Everyone has been very positive about the changes. And I think they feel like their oversight is more manageable. And I think we're going to see the fruits of that as the year goes by. Operator: Our next question comes from Andrew Mok with Barclays. Todd Young: To the next caller, and we'll see if we get an later in the queue. Operator: The next question comes from Ryan Langston with TD Cowen. Ryan Langston: Todd, thanks for all the help. Best of luck at NVA. Maybe just one more on the bad debt. I heard you talk about improving documentation processes internally. I guess are those issues that you've identified, can you fix those in the short term? Or is that more of sort of a longer-term process to improve? Debra Osteen: Ryan, I'll start and then Todd can add. I think that documentation is the key to what we do, making sure that what we are offering and doing for the patient is in the medical record. And I think there's always room for improvement. But in this case, we have seen in our processes that have been evaluated that there are areas where we think we could better reflect the acuity. And we want to make sure that we are covering everything that our payer needs to see. We're very firmly in belief that the patient that is in our facility needs that level of care, and we want to make sure that, that's reflected in the record. And so I think the effort has been going -- ongoing for some time, but we really escalated that. And we're also using tools in some of our facilities to really create more visibility around that. And we're using -- very early stages of incorporating AI into our revenue cycle management. And we are using that to analyze our data. And also, we're looking at other products for that. But we think we can streamline some. But again, back to the key is the documentation that needs to be present. We also -- as the patient comes into our hospitals, we want to make sure that we are first providing active treatment, but then documenting that. And so that's been the view that we've been taking is just are we reflecting that? And is there a way to improve it. Operator: Our next question comes from John Ransom with RJS. John Ransom: The legacy management team talked about the fallout from the negative press on the specialty referrals just given people do Google searches and that stuff pops up essentially. Has -- I mean just given the results, are we finally kind of beyond that effect? Debra Osteen: Yes, we are, John. And we actually saw some very strong performance at some of our specialty programs that pull patients from around the country. Our commercial payer mix is up, and I think that team is doing very well. We have some very -- we have outstanding facilities, and I was very pleased to see the results and some of the facilities -- specialty facilities that pull from around the country. John Ransom: Yes. And look, just -- was there also -- I think you mentioned and not maybe hallucinating, but didn't you also mention that maybe the emphasis historically got a little to B2C and you had some commercial relationships that needed to be reestablished. Am I remembering that right? Or am I just making this up, which I do frequently, Debbie? Debra Osteen: I don't think you're making it up, John. I think that we had shifted our focus away from commercial. I'm not saying that we weren't still looking at it, but we've really strengthened that. And we've added to our GPS team. And again, those relationships have in my mind and what I've seen here are very strong, but we tried to do even more with really communicating why we're different because there is competition for those patients that travel. And I think the team is doing a very good job in making sure they understand what we're offering at our facilities. John Ransom: Great. And just lastly, I think quality sometimes is a bit nebulous in behavioral health. But what -- if you were to grab somebody for an elevator pitch and say these are the 3 or 4 metrics that we really focus on, and we think -- and of course, there's the absence of industry benchmarking, but what are you doing? And what sort of metrics on the acute side are you driving home to payers to say, here's why we're different and better in the absence of a robust industry data set? Debra Osteen: Well, the first area is patient satisfaction. What is their experience in our facilities. The second would be, are they coming in with -- as they come into our hospitals, are they leaving with an improved condition. And so we have measurement tools around that, and we're making sure that we use those tools to measure improvement. And I'm pleased to say that as I look at those measures that they are very, very positive. What we are doing now is really making sure we can do that across all our service lines, not just acute, but with specialty as well. But I think the improvement -- and then obviously, our payers use a readmission metric. And I think we measure that, too. Have they had to come back for care, what period of time. So all of that goes into looking at what are we doing for the patient and what are the outcomes that we're achieving. Operator: Our next question comes from Joanna Gajuk with Bank of America. Unknown Analyst: This is [ Joaquin Agada ] on for Joanna Gajuk. I just wanted to ask, could you give us an update on labor? How does wage growth, hiring trends? And how has retention been? Todd Young: Sure, Joaquin. Things are good. Overall, for the eighth consecutive quarter, our retention of our team improved. So that's just a huge value prop from just a training, from a disruption basis, all of that. So really pleased with what our teams are doing at the local facility levels to improve on retention overall. So -- on a same-facility basis, we were up 3.7%, but even better on a patient per day basis, it was 2% again, which was the same as it was in Q4. So overall, I think the team is doing a really good job of managing that. I think you heard some of that in Debbie's prepared remarks with regard to less premium pay, less inefficiencies in when staffing is happening. And the team and our nursing team overall has done some really good training to just improve that to help facilities understand how to manage the labor better while not sacrificing anything on quality compliance or patient care. So feeling very good about how that's trended. Obviously, overall numbers are up as we open new facilities, and that just improves over time as we fill the beds and occupy more. Unknown Analyst: Great. And I just wanted to touch up on your AI comment earlier. So what are your guys' future plans? And how are you looking about that to implement it further in the future? Todd Young: We're looking at different tools. We're doing some prediction of care just to have better understanding of different risks. We're looking at it with inside our electronic medical record systems to use those and doing pilots before we roll it out in total. But overall, we're very attuned to the changing environment that we're all living in and making sure we're not caught off guard by something that we're missing. Really strong IT team that's digging in here and providing us tools to get better. Operator: Our next question comes from Andrew Mok with Barclays. Andrew Mok: I wanted to follow up on the strong same-store admissions. I think they were up 6.5% in the quarter. One, can you elaborate on the drivers of the acceleration there? And do you think that's a leading indicator for patient day growth? And then secondly, start-up losses are still tracking around $15 million per quarter. When should we see that number start to diminish? Todd Young: Let me take the second question first. So it was $12 million in Q1, $2 million better than we expected. We pulled out our full year guidance to reflect that $2 million at the top. So now we expect $47 million to $51 million. We've said we expect $15 million in Q2. That's likely the high end of the number, Andrew, for the year from a quarterly standpoint. So again, progress on those fronts on that. From an admission standpoint, again, a lot of this is new acute beds coming on and those ramping of those new facilities. Because the length of stay in acute is shorter, admissions are higher on that. And then again, as we mentioned on an earlier answer, a lot of the average length of stay change we're seeing is really a mix as we closed specialty facilities last year, -- we've got the challenges in Pennsylvania. Those were longer lengths of stay that are coming out of the number while we're adding in acute beds with shorter length of stays into the numbers. So overall, we feel good about the referral network, as Debbie talked about, driving those admissions into acute. And so again, a lot of good forward momentum here that the business has and progress on filling up our beds and our new acute facilities. Debra Osteen: And I'll just add to that. Our inquiries for acute were up over 20% in the first quarter. Our RTC census was very, very strong. And we also, as I mentioned earlier, had very strong performance in some of our specialty facilities that attract from all over the country. We've made some changes in our marketing approach, and we're looking at our spend on Google, which is a generator of patients in some of our service lines. And I think that the team is just very, very focused on making sure they understand the referral sources. We're using some tools to bring in new referral sources. So not just taking what we have now, but targeting individual practices and others that we think could be a referral source for patients. And all of those things are working together to, I think, create the strong volume. Demand is continuing to be strong, and there are individuals that are seeking care, and we have not seen that reduce. We've actually seen it strengthen, and that's contributed to some of our results in the admission area. Todd Young: Bailey, any more questions in the queue? Operator: There are no more questions. This concludes our question-and-answer session. I would like to turn the conference back over to Debbie Osteen for any closing remarks. Debra Osteen: I just want to end by thanking all of our employees and the corporate staff for their dedication and their hard work to ensure that our patients receive excellent care. I thank you all for being with us this morning and for your interest in Acadia Healthcare, and have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, and welcome to the Phathom Pharmaceuticals First Quarter 2026 Earnings Results Call. [Operator Instructions] Please be advised that today's call is being recorded. With that, I would like to turn the call over to Eric Sciorilli, Phathom's Head of Investor Relations. Please go ahead. Eric Sciorilli: Thank you, operator. Hello, everyone, and thank you for joining us this morning to discuss Phathom's first quarter 2026 results. This morning's presentation will include remarks from Steve Basta, our President and CEO; and Sanjeev Narula, our Chief Financial and Business Officer. A couple of notes before we get started. Earlier this morning, we issued a press release detailing the results we will be discussing during the call. A copy of that press release can be found under the News Releases section of our corporate website. Further, the recording of today's webcast and the slides we'll be reviewing can also be found on our corporate website under the Events and Presentations section. Before we begin, let me remind you that we will be making a number of forward-looking statements throughout today's presentation. These forward-looking statements involve risks and uncertainties, many of which are beyond Phathom's control. Actual results may materially differ from the forward-looking statements, and any such risks may materially adversely affect our business and results of operations and the trading prices for Phathom's common stock. A discussion of these statements and risk factors is available on the current safe harbor slide as well as in the Risk Factors section of our most recent Form 10-K and subsequent SEC filings. All forward-looking statements made on this call are based on the beliefs of Phathom as of this date, and Phathom disclaims any obligation to update these statements. Later in the call, we will be commenting on both GAAP and non-GAAP financial measures. Specifically in the scope of this discussion, when we refer to cash operating expenses, please note we are referring to the non-GAAP form of this measure, which excludes noncash stock-based compensation. As always, detailed reconciliations between our non-GAAP results and the most directly comparable GAAP measures are included in this morning's press release. With that, I will now turn the call over to Steve Basta, Phathom's President and CEO, to kick us off. Steve? Steven Basta: Thank you, Eric, and thank you, everyone, for joining our call this morning. Let me start with a few highlights and a bit of perspective on the quarter. We more than doubled revenue from Q1 2025 to Q1 2026. We believe we're on track to potentially achieving $1 billion in annual revenue from gastroenterology prescriptions with the potential for a second $1 billion from primary care prescriptions as patients cycle back to share their VOQUEZNA experience with their PCP and we evolve our sales and marketing focus to include this segment in the future. In 2025, we set our strategy to focus on building toward that first $1 billion target in GI. We're executing that strategy. In Q1 of this year, we expanded our sales team with nearly 50 new sales representatives trained and deployed into the field in recent months. Our sales force alignment to enable high-frequency calls on gastroenterologists is complete. We have more than 290 reps in place to start Q2. In parallel, we're rolling out enhanced HCP marketing programs with several initiatives in the works to support the sales team. Our primary sales and marketing focus is on increasing depth of writing among gastroenterologists and associated providers. We're encouraged by the impact we're already having. There are approximately 20 million PPI prescriptions written annually from gastroenterology HCPs. And we believe that 20% to 30% market share among this group should get us to the first $1 billion in annual revenue. We previously discussed that as we look at our top 300 gastroenterology writers, they are already averaging about 20% TRx share compared to PPIs. Importantly, when we look at new-to-brand or NBRx writing among these early adopters, our market share is even stronger. In Q1, VOQUEZNA achieved approximately 45% NBRx market share compared to PPIs among this group of 300 writers. This means that our top 300 gastroenterology writers were selecting VOQUEZNA for their patients nearly 1 out of every 2 times as they switch their patient therapy to a new product. In fact, even as you look as deep as our top 3,000 gastroenterology writers in Q1, cumulative NBRx or new-to-brand prescription market share remains north of 30% in that population of physician writers compared to PPIs. We believe new-to-brand conversions drive future TRx growth as we expect that many of these patients who are converted to VOQUEZNA will elect to remain on VOQUEZNA. While Q1 TRx numbers showed expected seasonality, the underlying trends in prescribing behaviors and particularly new-to-brand switching to VOQUEZNA reinforce our view that our strategy of going deeper in gastroenterology is starting to show early positive indicators. We've transitioned the strategy and profile of this business and we believe the effects of those changes are still getting underway. I'd like to briefly discuss key financial highlights for the quarter and then Sanjeev will provide further commentary during his portion of the call with more detail. Net revenues were $58.3 million for Q1 compared to $28.5 million for the same quarter last year. We believe we're seeing similar early year revenue patterns compared to last year with late March and early April prescription trends indicating the growth going into Q2. We are thus maintaining our revenue guidance for the year. Cash operating expenses, excluding stock-based compensation, were $56.2 million for Q1. Our team continues to exercise fiscal discipline in our operations. And lastly, our net cash usage for Q1 operations was approximately $15 million. A few quick notes on commercial metrics for Q1. Through April 17, about 1.35 million VOQUEZNA prescriptions have been filled. Covered prescriptions increased about 5% during the most recent 4-week period compared to the prior 4-week period, signaling that growth that I previously described in recent weeks going into Q2. Of the approximately 268,000 prescriptions that were filled in Q1, about 168,000 were covered prescriptions, representing approximately 63% of the total, while about 100,000 were filled with cash pay. The incremental IQVIA reporting gap mentioned on our previous call was resolved by mid-March and the TRx numbers we are reporting today include the prescriptions that IQVIA has not captured. On a year-over-year basis, covered prescriptions grew about 91% and total prescriptions filled grew about 115%. The higher growth in total prescriptions reflects the impact of introducing the cash pay option for Medicare patients as of April 2025. Weekly TRx in March approached the previous December highs. And now as we begin Q2, we've seen 2 of the first 3 weeks in April reach new all-time prescription highs for covered prescriptions. I mentioned earlier that we view NBRx prescription growth as an early indicator of how our strategy is playing out. We believe NBRx writing is the leading signal for our growing patient base as it represents a patient being switched to VOQUEZNA prescriptions for the first time. Ultimately, many of these new-to-brand prescriptions progress to consistent refill prescriptions in future quarters, thus driving growth. In Q1, we saw covered NBRx grow approximately 11% over Q4 of 2025, signaling that we are continuing to see a solid rate of new patient starts on VOQUEZNA. The proportion of NBRx being written by gastroenterologists versus other specialties has increased over the last few quarters, indicating the early effect of our strategy focus on gastroenterology. Introducing more new patients with GERD VOQUEZNA is the first step to drive durable growth. Persistent refills for these patients then contribute to growth in future quarters. Among the cohort of patients that started VOQUEZNA in 2024, we saw an average of approximately 6 bottles worth of VOQUEZNA dispensed over a subsequent 12-month period. One note on this analysis is that the analysis may actually understate persistence to some degree as an additional 18% of the patients who had stopped VOQUEZNA through that analysis actually restarted therapy within 12 months of their original prescription. Lastly, we've recently been hearing questions from investors about a possible new P-CAB entrant into the U.S. market. Internally, we're preparing for a potential second P-CAB approval in the U.S. in 2027. Last week, 2 Tegoprazan abstracts related to the erosive esophagitis Phase III trial for this product were released ahead of this year's DDW conference, where the data will be presented next week. The abstracts provide a preliminary summary of the data. As anticipated, the Tegoprazan results support the effectiveness of P-CABS as a class. While cross-trial comparisons have inherent limitations and the studies were not a head-to-head evaluation, it may be helpful to our investors to note that in our VOQUEZNA Phase III erosive esophagitis trial, approximately 93% of patients in all categories of erosive esophagitis achieved healing of their erosions by 8 weeks. In the separate recently reported Tegoprazan study, approximately 85% of patients in all categories of erosive esophagitis achieved healing of their erosions by 8 weeks. We continue to feel confident in VOQUEZNA's robust clinical data profile and are executing our commercial strategy in the current market. Overall, we remain confident in our outlook for 2026. Our foundation is strong. The sales force is implementing our gastroenterology-focused strategy and new patients continue to start therapy. We are fully in execution mode as we continue to work to drive TRx and sales growth. I'll now turn the call over to Sanjeev to take you through our financial updates. Sanjeev Narula: Thank you, Steve, and hello, everyone. We have a lot to cover, so let's jump right into our Q1 results. Revenues for quarter 1 were $58.3 million, reflecting year-on-year growth of 104% and a sequential growth of 1% over Q4 2025. Our Q1 2026 revenue was somewhat light compared to our internal expectation due to market access seasonality and other factors like winter storm and deployment timing of new sales force team members. However, with recent weekly prescriptions demonstrating growth relative to early Q1 and our expanded sales force in place, we remain confident in our outlook for VOQUEZNA in 2026. Our gross to net discount for Q1 came in at the lower end of our 55% to 59% guidance range because of channel mix for [ Cordis ] prescription. Our gross margin was in line with our guidance at approximately 80% for quarter 1. As described during last quarter's call, this now reflects certain third-party fulfillment costs being accounted for as cost of goods sold instead of gross to net adjustments. Q1 cash operating expenses were about $56.2 million, reflecting continued disciplined expense management. The sequential step-up was anticipated and tied to 3 main drivers: expansion of our sales force, our annual national sales meeting in February and the ramp-up of our Phase II EoE trial. In fact, I'm pleased to report that the EoE trial is enrolling ahead of schedule. And as a result, we are anticipating top line data by late Q4 2026 or early Q1 2027. Importantly, we continue to demonstrate expense discipline across the organization with year-on-year cash operating expenses down about 43% compared to Q1 2025. We reported a loss from operations, excluding stock-based compensation of approximately $9.9 million. We ended the quarter with about $181 million in cash and cash equivalent, which reflects roughly $15 million used in Q1 after netting out the flows from our equity raise and debt amendment. The increase in cash usage compared to Q4 2025 was driven by the timing of our annual corporate bonus payout and changes in the working capital due to timing of certain payments. We anticipated these dynamics and remain confident in our path to operating profitability and cash flow positivity. Overall, our balance sheet remains strong and as a result of our operations and the deliberate capital structure enhancement we did at the start of the year. Based on our current operating plan, we believe our cash on hand, along with the anticipated future cash generated from operations will be sufficient to invest in our business, satisfy all outstanding debt obligations at all time without the need for another debt or equity raise. Now let me speak about our financial guidance for 2026. We're maintaining all guidance ranges and estimates provided during last quarterly call. We continue to anticipate 2026 net revenue between $320 million to $345 million. We continue to believe our gross to net discount will be within the 55% to 59% range and gross margin will be approximately 80%. As for spend, we anticipate that cash operating expenses, excluding stock-based compensation, will be between $235 million to $255 million. As we think about cadence, we continue to believe revenues will be more heavily weighted towards the back half of the year. We expect expenses to modestly step up in Q2, reflecting full quarter's worth of cost of the expanded sales force. Lastly, we continue to anticipate achieving operating profitability, excluding stock-based compensation by Q3 and for full year 2026 with positive cash flow in 2027. We remain focused on executing with discipline and we feel confident in our ability to deliver on our GI focused strategy. We ended the quarter with a strong balance sheet and believe we will strengthen our financial position as revenues grow. In summary, our priorities remain clear. First, drive efficient growth towards achieving $1 billion from GI prescriptions. Second, support strategic investments where needed while continuing to be disciplined on spend. As we look ahead, I am encouraged by the efforts and dedication of our commercial and R&D teams. We're energized by the opportunity in front of us and we believe our internal metrics show the momentum is building. With that, I will now turn the call back to Steve for his closing remarks. Steve? Steven Basta: Thank you, Sanjeev, for the detailed financial review. With an expanded and trained sales force executing our gastroenterology-focused strategy and continued expense discipline, we believe we have a clear path to strengthening the revenue trajectory and achieving operating profitability in the months ahead. Thank you to our team and our investors for your continued dedication and support. We look forward to continuing to serve the patients in need of VOQUEZNA. Operator, please open the line for Q&A. Operator: [Operator Instructions] Our first question or comment comes from the line of Yatin Suneja from Guggenheim. Yatin Suneja: Congrats on good performance. So 2 questions for me. First one is on the competition. Steve, I think you just mentioned a little bit about how you see their product. I'd love to understand from a market dynamic perspective, what do you expect? Like, so you are right now the only branded that is doing the heavy lifting. Should we -- do you expect the market to expand or them to take some share? Just love your articulation there. And then maybe second for Sanjeev. I think you touched a little bit on the gross to net dynamic. So I understand, I think there was a better gross to net yield. But your guidance for 55% to 59% still stays. So is there some room there for an upside as we go into second quarter or third quarter because generally they tend to be a little bit better? Steven Basta: Yes. Thanks so much for both of the questions and the kind sentiments. The -- yes, as you sort of described, we are, in fact, tracking the evolution of Tegoprazan sort of as they start to build awareness. It's awareness is at a pretty low level in the market right now because they don't have a current commercial organization. So they're in the NDA review process. Certainly, we expect that as a second P-CAB entrant comes to market, there's a shift in sentiment from Vonoprazan or VOQUEZNA is a new product and I have to learn about a new product to now there's a new category and I have to learn about the new category and think about how to integrate this new category into my treatment. That helps to build awareness within the gastroenterology community and generally what prior market experience for a number of products have shown is that the first mover in that space gets the lion's share of the market, but there's a growth in awareness of a category as a second entrant comes in and we're certainly optimistic in that regard. The other thing is that as we look at the data, there's just no compelling reason for anyone to switch a patient from VOQUEZNA to -- from Vonoprazan to Tegoprazan. The data doesn't suggest that the patient is going to do better. And so we think that the market share that we've won and the presence in the market that we've won is really quite solid. We are going to be continuing to grow our presence in the market. We've got very strong market share among several thousand gastroenterologists and that expands every month as the sales force spends more time. So we've got at least another year to be building that depth of awareness and building the habit among gastroenterologists around prescribing VOQUEZNA. I think that all positions us very nicely. And we think growing awareness of this category will just help build it. Sanjeev Narula: Yes. And Yatin, on your question about gross to net. As we said in our prepared remarks, it came in at the lower end of our guidance and the guidance at 55% to 59%. I think what happens in our business or any business, there is a channel mix that go on quarter-to-quarter and that could change the gross to net percentage. And in first quarter, we see a higher proportion of cash scripts. And what that does is that drives gross to net to be a little lower because cash scripts don't have any gross to net item. So I don't expect us to deviate from our range, but it's going to be within the range. And every quarter could be different because of different dynamics that are going on. But for the full year, that's how we're maintaining our gross to net range at 55% to 59%. Operator: Our next question or comment comes from the line of Umer Raffat from Evercore ISI. Umer Raffat: I wanted to touch up just broadly on your observations commercially with the readjusted commercial focus and what the feedback is and how much of a follow-through you guys are continuing to expect with the turnaround we're seeing on IMS already? And secondly, as we think about sort of the path for the company forward in terms of heading towards sort of better than breakeven, et cetera, would it -- what are the priorities from a potential M&A perspective? And I'm not talking large deals. I'm just saying to enable the OpEx to be levered across a larger sales base in the areas you're already operating in? Steven Basta: Thanks so much for both of the questions. So thinking about first, the commercial focus and what we're seeing, we are feeling and hearing from the field the same kinds of things that you can see in the IQVIA or the IMS numbers in recent weeks and that is there is growing activity, growing momentum in the adoption pattern. We've got territories regularly seeing all-time highs in terms of the new prescription volume that is happening. And one of the reasons that we spent a little bit of time today talking about NBRx trends rather than just TRx trends because the easy thing to look at from IQVIA numbers is sort of look at the TRx trend. But what we think about as a forward indicator of that commercial momentum is how effectively are we converting new patients because those new patient starts are really where we can have an impact. When a sales rep is in an office working with the gastroenterologists about thinking about what kinds of patients are appropriate for VOQUEZNA, they're not changing the established base of patients that are already getting PPIs under the office. The only patients they can switch are the patients that they're seeing in the office at that time. So that's really the new-to-brand volume and that's where we move the needle first and then that foretells the future momentum. So we expect that the momentum on new-to-brand conversions predicts that we're going to have continued momentum on TRx growth and that should show up in the future quarters. And we're quite enthusiastic about that feedback and that dynamic in all of our conversations with physicians and with our field personnel. And our field team is feeling pretty solid about that. And then sort of path forward in terms of M&A priorities and the kinds of things. There's not urgency for us to bring a second thing in. We are starting outreach to identify other GI assets that would be complementary to bring into our sales force. And those could be commercial products or they could be Phase II or Phase III products that we could launch before our LOE date, 2033 or 2034. So we've got a few years to identify those assets and bring them in. There's not a great urgency to do so right now because, quite honestly, I don't want to distract the field. Our team is focused on conversations around VOQUEZNA with accounts and there is still a lot of education and market depth to build in terms of all of those conversations. So we're starting to evaluate those programs. There's nothing imminent, but we are looking at really interesting things and also looking at new applications for VOQUEZNA. We're doing the EoE Phase II trial. We've been evaluating the potential to look at as-needed dosing of VOQUEZNA. There's lots of interesting talk around potential synergy of using VOQUEZNA when patients are on GLP-1s associated with the GERD that arises in the context of GLP-1 use. There are a number of really interesting opportunities that could be expansion opportunities for us just within the VOQUEZNA opportunity set. Sanjeev Narula: And Umer, just to look at the cash flow opportunity in the company, as you pointed out, with the strategy in place and the -- us generating the positive cash flow next year and the cap structure we enhanced at the beginning of the year, I think that gives us the flexibility to meet, obviously, our obligation, but we'll have the flexibility of additional cash to invest as we expand VOQUEZNA potentially in a couple of years, maybe to primary care and maybe combine that with the DTC. So we'll have the resources and the cash flow to be able to do that. So we feel pretty good about what the trajectory is and we're going to take best use of the opportunity. Operator: Our next question or comment comes from the line of Kristen Kluska from Cantor Fitzgerald. Kristen Kluska: Congrats, everybody, on all the great growth you've seen, especially when looking at the trends from last year. So as the breadth and depth of your GI interactions are increasing, how are physicians understanding in a real-world scenario, the additive benefits of VOQUEZNA? And how do these measures and the patient feedback they get then translate to them potentially recommending the product to other patients they have? Steven Basta: So Kristen, thank you. And thanks for the context on both physician understanding and the importance of patient awareness and patient advocacy because both become really important components in how this product grows. What we're seeing is as we have time in the market, I mean, we're now a couple of years into the launch and so the physicians who have adopted VOQUEZNA as a meaningful part of their practice are having the opportunity to get feedback from patients about the significant improvement that VOQUEZNA provides. And it's interesting, we just did a round of market research where we were doing interviews with a significant number of physicians and a significant number of patients. And one of the interesting findings from that research was -- and often there are clinical trials and you see a clinical outcome and then the physician doesn't really know whether or not they can measure that clinical outcome. That's not the case here. The case here is what we see in our clinical trials, which is better outcomes with VOQUEZNA, certainly in erosive esophagitis patients, but also significant alleviation of pain and sort of an increase in the heartburn-free experience for patients with non-erosive reflux, physicians are seeing that from their patients. They are hearing from their patients how much better they feel. And every one of those feedback points, every time a physician talks to a patient who then comes back and says, "Doc, I've not felt this good in years," that conversation is a reinforcing conversation that cements in the mind of the physician, this really is a transformative experience for my patients. And that's part of what drives growth. So part of what drives growth is our sales and marketing activities and the time spent in the office educating the physicians, but a large part of what drives growth is physician experience and feedback from their patients that then causes them to want to prescribe it in more patients. The other thing that happens is not only do patients understand the benefit and have that conversation with their physician, but this becomes the passage to our future expansion back into primary care. Those same patients who are telling their gastroenterologists how much better they feel are going to go back to their primary care physician for their annual physical next year. They're going to be having exactly that conversation with their primary care physician who referred them to the GI. And it's going to naturally ask how did that go? How are you feeling? Are you still having the pain that you're experiencing? That conversation leads to an education of the primary care community and positions us in future years to expand meaningfully in primary care and positions us for possible future initiatives to broaden the outreach. Kristen Kluska: Okay. And as the database for patients that have been treated with VOQUEZNA continues to increase, particularly maybe some more severe patients as you do more work with GIs, are you collecting any -- again, not -- understanding this is in a clinical trial setting, but are you collecting any anecdotes to give you any clues as to where this therapy could potentially be studied for in the future? And then if you were to expand into other indications in the future, are there ways to also strengthen the IP around those opportunities as well? Steven Basta: So absolutely, we are learning from physicians about the breadth of use. And again, in the context of some of the recent market research, we're starting to evaluate this. So we're starting to look at a number of different indications. How would physicians think about using a product on an as-needed basis on a long-term basis for patients who may not require daily therapy, but PPIs can't really be used that way. So that becomes an opportunity to switch a different population of patients and grow utilization. I mentioned earlier to one of the questions that there is an increasing prevalence of gastroesophageal reflux symptom severity in patients who are on GLP-1s. That becomes an increasing prevalence conversation. I've been having a series of dinner conversations with gastroenterologists in recent weeks and it's come up several times that they are now starting to see patients who they're having to have conversations with them about whether or not to titrate their GLP-1s because of the side effect profile of the reflux and the heartburn that they're experiencing and patients really don't want to reduce their GLP-1s if they're losing weight, but they're having significant GERD. So that becomes a significant opportunity. Certainly, in patients who are having severe consequences and a lot of patients with erosive esophagitis, they may progress to Barrett's and progress to having the risk of esophageal cancer and there are a number of potential sort of broadening thoughts that physicians have around how do I consider what patients I'm using this product for those conversations are evolving as we are learning about the breadth of use that physicians want to have. Oh, and then your other question was on potential IP. I apologize, I didn't touch that. I'm going to probably just pass on answering questions about what potential IP we might have around what future products or indications. We'll evaluate that as we get there. Operator: Our next question or comment comes from the line of Paul Choi from Goldman Sachs. Kyuwon Choi: Congrats on the good quarter. To the degree you guys have insight from either the prescription data or physician feedback, can you maybe help us understand or break down how much of the incremental prescription growth is driven by NERD versus GERD? That would be very helpful for clarification. And my second question is, as you think about the potential entrance of a second P-CAB into the category, over the intermediate term, do you envision the category becoming more managed? And if that is the case, do you think PPIs would be an appropriate analog here given that the category eventually had multiple entrants? Steven Basta: So, Paul, thanks for the questions. And in terms of the relative use, so we don't always have visibility on the underlying diagnosis that drove the specific prescription for every one of our TRxs, whether it's a NERD patient or an EE patient or a half EE patient because you may have a patient that had erosive esophagitis and now is having symptoms again, may not have erosions, but the physician is concerned that they might get erosions. So there are patients that sort of cross over between the 2 categories. What we see is generally, a gastroenterologist will start by putting their most severe patients on VOQUEZNA and then they will grow their utilization over time. So often, the starting point is the erosive esophagitis patient who has severe erosions who's failed multiple rounds of PPIs, has failed BID PPIs and there's just no other alternative, they don't have any other way to help this patient, they need to help them heal, that's the patient with which a gastroenterologist may start. When they see success with that patient, they see that VOQUEZNA has actually enabled that patient's erosions to heal, then the conversation that our representative is having in the office is about how the physician can start using it more broadly, maybe it's to all of their Grade C and D erosive esophagitis patients. And then as they see success in those patients, broaden it to all of your erosive esophagitis patients. And then as they're seeing success in those patients, why not broaden it to your patients that have non-erosive reflux but are still having significant pain and are still having nighttime heart burn, not able to sleep or not able to tolerate certain foods. And so there is a natural evolution in a physician's adoption that starts from the more severe patients to the less severe patients, starts with erosive esophagitis and then moves to non-erosive reflux. That's just the natural cadence with which a gastroenterologist tends to adopt this product. And so we see that evolution. There's some skew probably toward more erosive esophagitis patients in the early adoption years and we continue to see those patients being converted, but then expand into non-erosive reflux patients. And then in terms of how the market evolves with a second P-CAB entrant, I mean, there are so many examples where there has been a category where multiple entrants came in over the course of time and the category continued to grow substantially, we would -- as I commented earlier, I think we just expect to see the category of P-CAB adoption grow as physicians become ever more familiar with this mechanism, ever more familiar with the efficacy of these products. And we have a product with really terrific outcomes in which physicians have really significant confidence. Operator: Our next question or comment comes from the line of Joseph Stringer from Needham & Company. Joseph Stringer: Just a follow-up on a previous answer you gave on the primary care setting. I know this is part of your future expansion plans. But just curious if you have any early quantitative metrics on the patients that cycle from primary care through a specialist back to primary care, for example, what's the recapture rate from the initial patient referral, those patients coming back to the PCP? And how is that evolving over time? Presumably, that's already occurring to some extent, but just curious if you had any early color here or commentary, that would be helpful. Steven Basta: Joseph, thanks for the question. I think that's going to be a really important element for us to track and evolve in our understanding over the next couple of years. It's not one where we have significant metrics yet because we're still in early days. We've made the GI pivot just about 12 months ago. And so with that GI pivot a year ago, we haven't had enough time for a significant number of those patients to make it back to their primary care physician to then start getting scripts in their primary care physician. Anecdotally, I would tell you, it was interesting one of the observations from our analytics team is that we are starting to see primary care physicians writing scripts for VOQUEZNA whom we've never called on. That's an indication of exactly that pattern. What we're seeing -- the only way that a physician we've never called on is writing a script for VOQUEZNA is a patient came back to them and asked for it. And that's exactly the pattern that we want to see. But as to the breadth of those metrics and exactly how we track that, it's still early days and we don't have all of those worked out. Operator: Our next question or comment comes from the line of Annabel Samimy from Stifel. Annabel Samimy: So wondering if there's anything that you can share about the dynamics between the cash pay and the covered patients. Do you see any increasing usage of the cash pay market as you're moving into more Medicare populations? And then separately, I guess it's great to see the EoE trial enrolling so quickly. Is that an indication that there could be bigger demand than off-label PPIs would suggest? Can you just give us a little color around what's driving that? Steven Basta: So on the dynamics for cash pay versus covered, I'll start and then, Sanjeev, if you have additional insights, feel free to jump in on this. But we saw a little bit of a bump up in the percentage of patients who received a script on a cash basis rather than a covered basis in Q1. We fully expect that every Q1 because there will be patients who with their health plan resets are going to have a high deductible plan and where they had coverage with a low co-pay. Our co-pay buy-down programs don't bring them down to a low enough price, so they would end up opting for the cash pay price. We think that's a Q1 phenomenon. And then going forward, I would expect it to normalize more consistently with historic levels in terms of the ratio of cash pay to covered. But we don't try to manage that number precisely. What we try to do is really maximize prescriptions and then maximize how many of those prescriptions can get coverage and that number will evolve over time. But I think there's a little bit of a Q1 bump that we experienced. Sanjeev Narula: And we already -- Annabel, we're already seeing that number starting to moderate in the script data after Q1 to Steve's point. So I think that's a natural phenomenon of what happens in quarter 1. Steven Basta: Yes. And then for EoE, what I can describe is what we've heard from the clinical sites, but I can't really extrapolate it out to the entire market yet, but we're certainly seeing the fast enrollment of this trial reflects significant interest in a first-line therapy that doesn't have the significant burden of some of the immunologic changes that more aggressive therapies would have. I mean, if a patient progresses to Dupilumab, for example, that's a more advanced patient and first-line treatment standard of care for many EoE patients is, in fact, today, PPI therapy. But this is the first big study of acid suppression therapy as a treatment modality in a well-controlled clinical trial. There was a high level of interest among the physicians in the clinical trial to enroll patients, lots of enthusiasm for it. And obviously, we're enrolling ahead of schedule. So certainly pleased with that. We haven't done enough market research on it to predict exactly how broadly that's going to suggest the market opportunity is in EoE when we commercialize it. We'll do that after we see the data from this trial as we're planning on our Phase III trial. Operator: Our next question or comment comes from the line of Denise Ding from Jefferies. Yuchen Ding: Congrats on a great quarter. Can you talk a little bit more about the shape of gross to net throughout the year? Should we expect it to worsen towards the top end of 55% to 59% like it did last year as the percentage of cash pay comes down? And then secondly, Steve, you've talked on a broadening category on a new P-CAB entrant, but curious on your thoughts more specifically for VOQUEZNA. How do you see a new competitor impacting the sales trajectory in 2027 and beyond? Do you expect any sort of pressure from payers that would erode price? Sanjeev Narula: So on the first one, the shape of gross to net, I would stay short of making a prediction about the quarter-to-quarter number. That's the reason we give a range because as you know very well, this is entirely based on the mix of business in each quarter. Clearly, quarter 1 gets impacted by -- a little bit by the cash scripts. But in the subsequent quarter, there are so many other dynamics that go on. So it's kind of hard to say one quarter what percentage is going to be. That's why we want to stay within the range as we did last year. Steven Basta: Yes. And then your second question around sort of the shape of the market in the context of a new competitor entry, I don't think we've got enough specifics yet on how the second product may come to market, what their positioning is going to be. And so it's really hard for us to predict what their market strategy is going to be and therefore, what our response will be. What we are very confident about is the momentum that we're building within the gastroenterology community, the conviction that physicians have around this product. I mean, again, our top 3,000 writers -- now 1 out of every 3 new patients that they are switching acid suppression therapies, they're switching them to VOQUEZNA. That's an enormous share of mind that we have with a broad population of the gastroenterology community. And in fact, that is broadening. And we've got another year at least before second entrant comes in to be building that market share and to be building that mind share that I think will position us really well in the context of the competitive dynamic in the future. Operator: Our next question or comment comes from the line of Mr. Matthew Caufield from H.C. Wainwright. Matthew Caufield: Are there any further insights into the weighting for revenue growth expected between first half and second half? And then additionally, are there thoughts on how we can best expect OpEx trends to continue for the year? I believe there was mention of the OpEx being up in 2Q. Sanjeev Narula: Yes. So Matt, thank you for your question. So I think it's safe to say the revenue trajectory will follow similar trends as last year. I don't want to get into the percentage because if I do that, then I'm actually giving you guidance for a quarter, next quarter, which I don't want to do that. So I think it's fair to say -- I said in my prepared remarks, it's going to be second half-weighted business, which is what happened last year and I don't see that changing this year as well. So that's number one. Number two, on the OpEx. I think a couple of things will happen. Quarter 2, we'll see a slight bump in the expenses from quarter 1 and that's precisely for 2 reasons. One is the EoE trial is ahead of schedule and that's a good news. So there may be a little bit more expense timing-wise in quarter 2 than we had earlier thought about. And number two is the sales force is fully in place. In quarter 1, we were still hiring and that hiring is now complete and the sales force is fully on board. That impact will also reflect in quarter 2. But that's going to be marginal. And after that, I expect our operating expenses to be more or less stable. Operator: Our next question or comment comes from the line of Martin Auster from Raymond James. Martin Auster: There was some pretty interesting data about new-to-brand prescription share amongst the top 300, top 3,000 GIs. Curious if you could give us a little bit more context around that snapshot in terms of sort of how much progress has been made since the new GI-focused strategy has come in? And then if you have a sense of sort of what's a realistic ceiling for higher prescribers in terms of new-to-brand Rx? Steven Basta: So Martin, I mean, the growth to -- thank you for the commentary. I share your enthusiasm that the new-to-brand data actually is a really strong clarifying indicator for where we expect the business is evolving. And it's a metric that we use internally in our forecasting and in a lot of our planning activities is how those trends are going. What we have seen in every category of physician that we call on, whether it's a gastroenterologist or a gastroenterology APP or primary care physician or primary care physician APP as well, as we look at the new-to-brand prescription trends and one of the metrics we use is new-to-brand prescriptions per sales call, those numbers continue to go up. They've been going up for the last 2 years. They continue to go up. On a quarter-over-quarter basis, we are driving increasing effectiveness in those categories. And obviously, now we're focusing on GI and GI APPs as the core call point. But those haven't capped out. Those are continuing to improve and we would expect to continue to improve those over time. And so that I don't have a clear sense for where a cap is in that process. It is encouraging that we are already at the 45% level. I don't know if it caps out at 50%, 70%, 90% of their new-to-brand prescriptions get converted. But one of the other things that happens is as we convert more new-to-brand prescriptions and those patients stay on, the underlying TRx percentage in those offices continues to grow because more -- higher and higher percentage of their patients are already on VOQUEZNA and we're continuing to convert to new patients. So you'll see the TRx percentage grow toward the NBRx percentage. So where right now, we've got 20% penetration in TRx volume in the top 300 accounts, we've got 45% penetration in NBRx, which suggests that we're going to be growing that 20% number toward the 45%. The 2 may never completely match up, but one drives the other. And that's part of why we're focusing on that as a core growth metric and one of our core effectiveness and efficiency metrics in our call strategies and the call allocations. Martin Auster: It was really helpful incremental context and hope it's a metric you'll periodically revisit in the future with us. Steven Basta: Yes. I don't know that we'll do it every quarter, but we will certainly provide periodic updates. Operator: [Operator Instructions] Our next question or comment comes from the line of Chase Knickerbocker from Craig-Hallum. Chase Knickerbocker: Maybe just one quick one for me. And sorry for it to be on competition again here. But Steve, I just wanted your thoughts on one thing specifically. So the way that the potential competitor, the next P-CAB potentially or the way that study was constructed, there's a chance that there might be a couple more superiority claims at launch. So to what extent do you think that matters? And then kind of compare and contrast to how you think the first-mover advantage that you've built up with the 1 million-plus prescriptions since launch and the clinical experience here kind of pairs that? Steven Basta: So I don't have complete visibility on exactly how this competitor is going to launch or what kind of sales force they're going to build. And so it's hard to predict exactly what happens in that marketplace. But as for the data, when we look at the core data from the abstract that's available from -- or the abstracts that are available from DDW and we think about what's important to a physician, again, we were talking earlier about the natural pattern of adoption, the natural pattern of adoption for a physician considering switching patients to a better acid suppression strategy if their prior PPI strategy wasn't working, is that they start their adoption curve with their most severe patients. And then as they see a product work, they move into a broader population of patients. What we see with our data is when you put erosive esophagitis patients on VOQUEZNA, 93% of them heal their erosions within 8 weeks. That's exactly what a physician wants to see. Every physician who is seeing that today and every physician who sees that over the next year as they put erosive esophagitis patients on VOQUEZNA is going to see that their erosions are healing and this product clearly works and it clearly produces really good outcomes. And they're having clear conversations with their patients about how much better they feel because their pain is substantially relieved almost immediately, literally within hours and on the first day and I'll tell you the patient, the first day that I took VOQUEZNA, I felt a whole lot better. It's just really quick how this product works. And so what the physician experience is with VOQUEZNA is enormously satisfying and enormously positive. They see their patients heal. They see -- they hear feedback from their patients that they feel better and they grow their utilization over time. That doesn't get disrupted at all because someone has some statistics measure in some other clinical trial when you know you've got a product that's going to produce 93% healing rates and really good outcomes for your patients. So I just don't see that having any impact in the market in any meaningful context. Operator: I'm showing no additional questions in the queue at this time. At this time, I would like to thank everyone for participating. Thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Speakers, stand by.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Q2 2026 Plexus Earnings Conference Call. I will now hand the conference over to Shawn Harrison, IRO. Shawn, please go ahead. Shawn Harrison: Good morning, and thank you for joining us today. Some of the statements made and information provided during our call today will be forward-looking statements, including, without limitation, those regarding revenue, gross margin, selling and administrative expense, operating margin, other income and expense, taxes, cash cycle, capital allocation and future business outlook. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied in the forward-looking statements. For a list of factors that could cause actual results to differ materially from those discussed, please refer to the company's periodic SEC filings, particularly the risk factors in our Form 10-K filing for the fiscal year ended September 27, 2025, and the safe harbor and fair disclosure statement in our press release. We encourage participants on the call this morning to access the live webcast and supporting materials at Plexus' website at www.plexus.com, clicking on Investors at the top of that page. Joining me today are Todd Kelsey, President and Chief Executive Officer; Oliver Mihm, Executive Vice President and Chief Operating Officer; Pat Jermain, Executive Vice President and Chief Financial Officer; and David Abuhl, Senior Vice President, Finance. With today's earnings call, Todd will provide summary comments before turning the call over to Oliver, Pat and David for further details. Before I turn the call over to Todd, I would first like to express my gratitude to Pat for his partnership, mentorship and friendship and offer my best wishes for an amazing retirement. Second, I'm excited to announce that Todd will be appearing on CIBC's Fast Money this evening to discuss Plexus and our fantastic results and outlook. With that, let me now turn the call over to Todd Kelsey. Todd? Todd Kelsey: Thank you, Shawn. Good morning, everyone. Please advance to Slide 3. Before I begin my prepared remarks regarding the business, I want to celebrate Pat's incredible 12-year tenure as Plexus' CFO and wish him all the best during retirement. He's been an extraordinary business partner to me over the years. I also want to express my deep gratitude for Pat's leadership and integrity, establishing a strong tone from the top. Pat has been instrumental in our growth journey, fostering and cultivating a high-performing finance team that has played a significant role in Plexus' tremendous financial results over the years. I'm also excited to welcome David Abuhl as our next CFO. Since joining Plexus last fall, David's impact on the organization has already been meaningful. I'm confident that as we continue our growth journey, David's extensive financial expertise, global perspective and strategic mindset will position him to be an exceptional CFO. Please advance to Slide 4. Plexus' momentum is accelerating broadly. We now expect to deliver mid-teens or greater fiscal 2026 revenue growth from the contribution of numerous program ramps, ongoing market share gains and improving end market demand. Our team generated a record $355 million in new manufacturing program wins with broad-based contributions across our market sectors. Against this tremendous result, we also expanded our funnel of qualified manufacturing opportunities. We're delivering non-GAAP operating margin expansion, while increasing our already significant investments focused on expanding operational efficiency and capitalizing on continuing revenue growth momentum. Finally, we are sustaining strong financial discipline, delivering better-than-expected working capital performance amid substantial acceleration in revenue growth and tightening supply chain conditions. Please advance to Slide 5. Fiscal second quarter revenue of $1.164 billion exceeded our guidance range, representing our fifth consecutive quarter of sequential revenue growth and a robust 19% year-over-year increase. While growth was strong throughout all of our market sectors, we experienced specific strength in aerospace and defense as a result of increasing demand for our industry-leading solutions and support of disruptive technologies and in semi-cap, where our ongoing share gains are amplifying surging market demand. Non-GAAP EPS of $2.05 exceeded guidance. We delivered a robust 6% non-GAAP operating margin, while continuing to heavily invest in program ramps, operational efficiency initiatives and technologies. Please advance to Slide 6. For the fiscal second quarter, we secured 30 new manufacturing programs with a record $355 million in annualized revenue when fully ramped into production. All market sectors contributed to this tremendous performance, which included broad-based opportunities in aerospace and defense, expanded relationships and share gains in surgical and imaging platforms and new engagement in data center power solutions and continued share gains in semiconductor capital equipment. Through expanded business development efforts, synergies with our engineering solutions and sustaining services and our focus on providing unmatched quality and delivery, we are also seeing an increasing breadth of customer interest for our industry-leading solutions. As a result, for the second fiscal quarter, our funnel of qualified manufacturing opportunities expanded sequentially and year-over-year. We produced particularly notable growth in our industrial market sector, where we are generating significant interest in automation and robotics, data center and energy solutions and our aerospace and defense market sector. Please advance to Slide 7. At Plexus, we are committed to advancing sustainability through our value of innovating responsibly as we boldly drive positive change and promote a sustainable future for and through our people, our solutions and our operations, all of which is built on a foundation of trust and transparency. Critical to our success is our people who are at the heart of who we are and what we do. Our second fiscal quarter was particularly memorable as we celebrated 2 major organizational milestones. First, I was honored to join members of our Plexus leadership team at NASDAQ's market site in Times Square to ring the closing bell in celebration of our 40th anniversary as a publicly listed NASDAQ company. This significant accomplishment was a celebration of the trust we've created with our customers and the unwavering dedication of our people. Additionally, our Kelso, Scotland site celebrated its 25th anniversary. Since opening in 2001, the Kelso team has evolved from printed circuit board assembly to manufacturing complex life-impacting products, an evolution made possible by our team members, many of whom have been with us since day 1. Our commitment to delivering excellence and innovating responsibly also continues to earn external recognition. We are proud to be named a finalist for the 2026 Manufacturing Leadership Awards in 2 categories: AI vision and strategy and sustainability in the circular economy. The awards will be presented in June by the Manufacturing Leadership Council, which is part of the National Association of Manufacturers. These awards highlight our emphasis on innovation and delivering a positive environmental impact as we help create the products that build a better world. Finally, we are excited to announce the upcoming release of our annual sustainability report during our fiscal third quarter. The fiscal 2025 report highlights our continued commitment to innovating responsibly as we've always been driven to do something more for our customers, our team members and the world. Please advance to Slide 8. For our fiscal third quarter, we are guiding revenue of $1.2 billion to $1.25 billion, representing 5% sequential and 20% year-over-year growth at the midpoint. We are guiding non-GAAP operating margin of 5.9% to 6.3% and non-GAAP EPS of $2.02 to $2.18. We believe we are outgrowing our end markets, many of which are seeing improving demand by leveraging new program ramps, market share gains and our support of disruptive technologies. As a result, we anticipate double-digit revenue growth in each of our market sectors in fiscal 2026 with particularly strong performance in aerospace and defense and industrial, led by significant growth in our semicap subsector. Accordingly, for fiscal 2026, we now expect to deliver mid-teens or greater revenue growth overall, a substantially increased forecast from our initial expectations last October. We anticipate delivering this revenue growth performance with robust profitability, anticipating a 6% or greater non-GAAP operating margin for fiscal 2026 and continued strong working capital efficiency. In closing, our consistent focus on redefining excellence through our unmatched quality and delivery is shaping our decision-making and sustaining our tremendous momentum. We are expanding and accelerating investments in technology, capabilities and our people to enable customer success, drive greater long-term operational efficiency and increase our revenue growth potential. These efforts will position us to sustain our momentum well beyond fiscal 2026. I'll now turn the call over to Oliver for additional analysis of the performance of our market sectors. Oliver? Oliver Mihm: Thank you, Todd. Good morning. I will begin with a review of the fiscal second quarter performance of each of our market sectors, our expectations for each sector for the fiscal third quarter and directional sector commentary for fiscal 2026. I will also review the annualized revenue contribution of our wins performance for each market sector and then provide an overview of our funnel of qualified manufacturing opportunities. Starting with our Aerospace and Defense sector on Slide 9. Revenue increased 19% sequentially in the fiscal second quarter, significantly outperforming our expectation of a mid-single-digit increase. Improved end market demand across all subsectors and our team's efforts to expand component availability drove the result. For the fiscal third quarter, we expect revenue for the aerospace and defense sector to be up mid-single digits as we see programs scaling up in our space and defense subsectors. Our fiscal second quarter wins for the aerospace and defense sector were $44 million. Our Kelso, Scotland site won a follow-on share gain award from an existing customer in the defense subsector. The customer noted the strength of our partnership and the operational excellence as factors in their decision. Relationship strength and operational excellence were also factors in a significant follow-on award from an existing unmanned defense customer. This product is built in our Boise, Idaho facility. We anticipate fiscal 2026 revenue growth for the aerospace and defense sector to exceed our 9% to 12% goal with growth expected to be well into the double digits. The sector's growth continues to gain momentum, supported by new and existing customers with strong demand growth in the commercial aerospace and space subsectors and exceptional growth in the defense subsector. Please advance to Slide 10. Fiscal second quarter revenue in our Healthcare/Life Sciences market sector was up 1% sequentially, aligned to our expectation of flat to up low single-digit performance. For the fiscal third quarter, we expect the Healthcare/Life Sciences market sector to be flat ahead of an anticipated return to sequential revenue growth in our fiscal fourth quarter. Our fiscal second quarter wins were strong at $116 million. Our team in Xiamen, China won a next-generation point-of-care ultrasound system due to the strength of our new product launch capabilities. Our seamless engineering to production transition capabilities also contributed to a significant award for our Neenah, Wisconsin facility. The products support a robotic surgical platform. We continue to have a robust fiscal 2026 outlook for the Healthcare/Life Sciences sector, anticipating revenue growth to exceed our 9% to 12% goal, supported by contributions from ongoing and new program ramps, share gains and strong end market demand across our therapeutics and monitoring subsectors. Advancing to the industrial sector on Slide 11, fiscal second quarter revenue was up 12% sequentially, in line with our forecast. Our industrial sector fiscal third quarter outlook of a low double-digit increase is supported by substantial growth within the semicap subsector and strength in the industrial equipment subsector from new program ramps and strengthening demand. The industrial market sector had record high wins of $195 million for the fiscal second quarter. Wins included a substantial award from an existing customer that is launching a new product line for data center power solutions. Our long-term strategic partnership and strength of value proposition contributed to the win. The product will be built in our Bangkok, Thailand facility. We also won a substantial follow-on award from an existing robotics customer. A strength of execution and ability to quickly ramp to fulfill their demand supported the win. This product is assembled in our Guadalajara, Mexico campus. Our Guadalajara, Mexico campus is also welcoming a new customer to Plexus as we are selected to support production of an energy storage system for electric commercial vehicles. Our outlook for the industrial sector for fiscal 2026 continues to gain momentum. We are now anticipating growth well in excess of our 9% to 12% growth goal. Our growth outlook is supported by new program ramps and robust growth that's in excess of market for our semicap subsector and demand improvement and program ramps offsetting pockets of demand softness within other subsectors. Please advance to Slide 12 for a review of our funnel of qualified manufacturing opportunities. In recognition of Plexus' industry-leading capabilities and focus on building partnerships, our customers are providing increasing opportunities to capture share and new program wins. As evidence, our funnel of qualified manufacturing opportunities expanded 11% sequentially in the fiscal second quarter and is now $4 billion. This expansion is due in part to record high funnels in our aerospace and defense sector and our industrial sector. The funnel in those 2 sectors has expanded in excess of 45% as compared to the fiscal second quarter of 2025. In summary, the revenue growth we are experiencing from ongoing and new program ramps, inclusive of share gains and improving end market demand support our revised outlook for Plexus to now deliver mid-teens or greater fiscal 2026 revenue growth. Before I turn the call over to Pat, I'd also like to wish Pat well in his retirement. You've been an incredible partner and done a lot in support of the success of Plexus and the incredible journey that we are on. Congratulations. Now over to you. Pat? Patrick Jermain: Thank you, Oliver, and good morning, everyone. Our fiscal second quarter results are summarized on Slide 13. Gross margin at 10.2% was at the top end of our guidance due to a favorable mix of service offerings and fixed cost leverage. In addition, productivity improvements associated with ongoing operational efficiency initiatives helped to offset the impact from our typical seasonal compensation cost increases. Selling and administrative expense of $57.3 million was slightly above our guidance due to additional incentive compensation expense driven by our robust revenue growth and strong ROIC performance. In addition, we expanded our technology and automation investments in support of future efficiencies and sustaining revenue growth momentum. The result was a non-GAAP operating margin of 6%, which was at the top end of our guidance. Non-operating expense of $4 million was favorable to expectations due to foreign exchange gains and lower-than-anticipated interest expense. Non-GAAP diluted EPS of $2.05 exceeded the top end of our guidance due to the items mentioned and a favorable tax rate. Turning to our cash flow and balance sheet on Slide 14. For the fiscal second quarter, we delivered $28.5 million in cash from operations and spent $12.5 million on capital expenditures, generating $16 million of free cash flow, which exceeded our forecast of breakeven to a slight usage of cash. For the fiscal second quarter, we acquired approximately 109,000 shares of our stock for $20.6 million. At the end of the quarter, we had approximately $42 million remaining on the current repurchase authorization. Similar to last quarter, we ended the fiscal second quarter in a net cash position. We had $137 million outstanding under our revolving credit facility with over $350 million available to borrow. For the fiscal second quarter, we delivered a return on invested capital of 13.8%, which was 480 basis points above our weighted average cost of capital. Despite an increase in invested capital to support robust revenue growth, we continue to generate healthy ROIC given strong operational performance. Cash cycle at the end of the fiscal second quarter was 64 days, which was favorable to expectations and 5 days lower than last quarter. Please turn to Slide 15 for additional details regarding this positive result. Sequentially, days in receivables improved 3 days due to exceptional collection efforts by our team. Days in inventory sequentially improved 4 days from continued progress on working capital initiatives and increased revenue. Accounts payable days increased 3 days due to the timing of supplier payments and procuring inventory in anticipation of a significant revenue growth. Last, our days in advanced payments experienced a 6-day reduction with a net $15 million being returned to customers during the quarter. Before I hand the call to David, I'd like to make a few closing comments. It has been an absolute pleasure and honor to serve as CFO for Plexus under Todd's leadership and guided by our outstanding Board of Directors. I want to thank Todd, our Board and everyone at Plexus for your support and trust over the last 12 years. I especially want to thank our finance organization for maintaining the highest standards and integrity, something I'm confident will endure. The company is in great hands with David moving into the CFO role, and I know the transition will be seamless over the coming months. It has been a true privilege to be part of this fantastic organization. I will now turn the call over to David to discuss additional details regarding our fiscal third quarter expectations as well as some commentary regarding fiscal 2026. David? David Abuhl: Thank you, Pat, and good morning, everyone. Let me begin by offering my congratulations to Pat and wishing him all the best in this next chapter. I'm excited to step in and lead a tremendous team and carry on the legacy of a really strong finance organization. I'm also optimistic about Plexus's growth journey and confident that our consistent strategy will sustain our momentum as we help create the products that build a better world. Now let me turn to our guidance for the fiscal third quarter, summarized on Slide 16. As Todd has already provided the revenue and EPS guidance, I will review some additional details. Fiscal third quarter gross margin is expected to be in the range of 9.9% to 10.2%. At the midpoint, gross margin would be slightly below last quarter, impacted by the timing of program ramps, capability investments and ongoing higher incentive compensation given our robust revenue growth and strong financial returns. We anticipate ongoing productivity improvements and additional fixed cost leverage will serve as offsets. Our outlook for selling and administrative expense for the fiscal third quarter is in the range of $69 million to $70 million, including our typical stock-based compensation expense and additional stock-based compensation expense as a result of executive retirement. Excluding these expenses, we expect to gain leverage sequentially on higher revenue. Fiscal third quarter non-GAAP operating margin is expected to be in the range of 5.9% to 6.3%, exclusive of stock-based compensation expense. At the midpoint, this would demonstrate sequential improvement and good progress toward our goal of consistently delivering at or above a 6% non-GAAP operating margin. Non-operating expense is anticipated to be approximately $5.4 million in the fiscal third quarter, up sequentially primarily due to higher interest expense and foreign exchange comparisons. We are estimating a non-GAAP effective tax rate of between 16% and 18% for the fiscal third quarter and the same range for fiscal 2026, unchanged from our previous outlook for the year. Now turning to the balance sheet. For the fiscal third quarter, we are expecting higher investments in working capital to support the accelerating revenue growth outlook. We anticipate cash cycle days will be in the range of 67 to 71 days. As a result, we expect a usage of cash of free cash flow for the fiscal third quarter. In support of our accelerating revenue momentum, we are strategically increasing our working capital investments in fiscal 2026. Yet through our focus on working capital efficiency, we continue to expect to end the fiscal year with cash cycle days in the low 60s. We also continue to expect fiscal 2026 capital expenditures in the range of $100 million to $120 million. Our focus on operational efficiency is creating tangible benefits by generating higher throughput on existing production lines, which is deferring new equipment purchases while also increasing site revenue capacity. We are now forecasting fiscal 2026 free cash flow of $50 million to $75 million. Over the longer term, we remain confident that by leveraging our focus on working capital efficiency and our significant investments in operational efficiency, we will capitalize upon our substantial revenue growth opportunities and generate robust free cash flow. With that, Ben, let's now open the call for questions. Operator: [Operator Instructions]. Your first question comes from the line of Melissa Fairbanks with Raymond James. Melissa Dailey Fairbanks: Congratulations on the quarter. Of course, congratulations to Pat. We're going to miss you, but Dave, I look forward to working with you more in the future. I would be remiss if I didn't ask Pat about cash cycle days one more time. I know I'm a little bit focused on it. Dave, thanks for additional color looking into cash cycle days exiting the year. We're obviously seeing a really strong acceleration in growth in the near term. I know they're going to trend higher next quarter. It sounds like they're going to trend slightly lower exiting the year. Just wondering how to think about working capital investment longer term to support this level of growth, whether it's through CapEx, through new site investments or just working capital investments. Patrick Jermain: Yes, I can start and then maybe David can add on to it. I'd say 2 things, Melissa. I think from a days perspective, I think we're in a really good spot in this low to mid-60s going forward. I think that would carry into fiscal '27. I think the other thing to look at is with revenue growth, we're probably around 10% to 15% additional working capital dollars associated with any growth in revenue. I think that's a good barometer if you're looking at from a dollars perspective. From a days perspective, I think low to mid-60s is a good range for us. David Abuhl: Melissa, maybe I'd build the other part of your question was about investing in even capital in the long term. We just reconfirmed our $100 million to $120 million of capital investment Recently, in the last 6 months, our teams have actually improved the throughput of some of our assets by 10%, which has avoided in the neighborhood of $20 million of capital investments. We're able to grow revenue on a very similar capital base. Those types of efficiencies are not only happening in CapEx, but also there's the same type of efficiencies in our working capital environment as well. Hence, that gives us confidence in the long term. Melissa Dailey Fairbanks: Just one more question that's maybe for Oliver because he kind of touched on some of this in his commentary. I wanted to ask about some trends in industrial. We focus on semi cap and test equipment so much, but it sounds as though one of your customers, I think you do some energy storage solutions for them. They raised their full year outlook for this year, almost doubling the growth rate. In part, because of strength in power supply. I know you kind of touched on you've got some new wins in industrial for these types of applications. You've been winning in there for a long time. Just wondering how you're looking at some more near-term demand, assuming that some of these new wins are going to be longer term in scope. Oliver Mihm: Thanks, Melissa. Happy to talk about that. Yes. We are excited about our customers in the energy infrastructure space. We've talked about some wins there over the past few quarters. We also referencing back a few quarters ago, we talked about a specific regulatory compliance standard that we have for our Boise facility that enables us to do control systems for nuclear power. We think that gives us a bit of competitive differentiation, which enables some of this growth that we're seeing in this subsector. Yes. I would lead that through to saying our excitement there also extends into the adjacencies that we're seeing here relative to data centers. We talked about a win here this quarter specific to a power platform solution, but just the funnel that we have related to items in the data center, whether that's power management and storage, thermal cooling, thermal density, fluidics, really well aligned to our value proposition and capabilities. Then again, the energy distribution and infrastructure, we just talked about storage control systems, we're also seeing companies push AI out to what has been referred to as at the edge. On equipment, on devices, these are often ruggedized applications, and so the redesign to put that -- those solutions in place, the manufacturing and then the need to sustain those and service those, we view as being really well aligned to our capabilities and strength, and we have a very strong and active funnel in that space.. Operator: Your next question comes from the line of Ruben Roy with Stifel. Ruben Roy: Congratulations to all, but especially Pat, thanks for all the help, Pat. David, obviously, congratulations, too. Pat, before you go, maybe we'll start with you. Todd, in his prepared remarks, mentioned sustained momentum well beyond fiscal '26. I'm wondering if we can just maybe think a little bit about the operating margin structure of the company as you sort of line up a funnel of new wins, etc. It's probably premature and you're probably not going to give us a longer-term target above what above 6 means. Just in terms of some of the wins that are coming into the funnel, etc., maybe you could walk us through the puts and takes across the different segments on how we should think about that operating margin? I have a follow-up, which is sort of similar for Oliver after we talk about this a bit. Patrick Jermain: Sure. Yes, and I'll start if others want to join in. Ruben, the margin differential between market sectors is not that different nowadays with the markets we're serving. With the additional wins, there is some ramping costs that's involved. That's a little bit of a drag on our margins, but the fixed cost leverage we're gaining both on our fixed costs and SG&A definitely overrides that and provides that target of 6% or above. As we look to F '27, yes, we're not going to make any new commitments at this point, but seeing a consistency in that margin performance. Going back a few years ago, when we saw that consistency is when we started to think about what is that next target. I think we'll be in that position, but obviously not wanting to commit to anything at this point. I think there's definite opportunity with the fixed cost leverage, some of the services we're providing around sustaining services and engineering that carry higher margins. Then probably around the automation efforts, David talked about some of that with capital spending, the impact that has on margin is pretty pronounced. I think you'll see benefits there as well. Todd Kelsey: Yes. One of the things that I would add is with the -- what we would expect is improving or increasing margins as we continue to move out, and that's because of the leverage that we'll be gaining as well as the operational efficiency initiatives. We're probably not too far from establishing a new target. Pat's been working on it with David and the finance team, and we'll let David get comfortable in the chair for a couple of quarters perhaps before coming out with a new target here. Ruben Roy: If I pull that sort of discussion and maybe pull in working capital near term, Oliver, you called out some tightening supply chain conditions, and that's been a consistent sort of theme across a lot of calls so far in earnings season. Wondering if you could maybe give us a little more detail on what you're seeing around supply and whether or not that's acting as a little bit of a gating factor as you think about some of the program ramps embedded in your Q3 or fiscal year guidance here. Obviously, the raise is great to see, but what are the puts and takes against supply and sort of the demand improvement you're seeing across the end markets? Todd Kelsey: Yes. Maybe I'll start with this, Ruben, and Oliver can jump in and provide additional color. I think as we set our forecast, we certainly have taken into account the realities of the supply chain. I think I don't feel like we have undue risk as a result of supply chain within our forecast right now. Now there's certainly more upside that exists should things go in the right direction for us. The other thing that we're doing is we're working very proactively with our customers around, call it, the golden screws to make sure that we get supply for those tough to obtain parts. Oliver Mihm: Yes. More specifically there, the specific commodities that we are seeing allocation or tightening, Ruben, portions of semiconductor, portions of passives, memory, no surprise for anybody, raw PCB fabs, Behind that, lead times extending, but not allocation yet around extended lead times around high-performance passes, magnetics and some portions of microcontrollers. As Todd noted, a lot of proactive work here, asking our sourcing teams to identify risk early that enables a consultative engagement with our customers, asking them to extend forecast visibility, expand alternates, enable some advanced materials planning from our side, for instance, early PO placement, extended PO horizon. Then I would just generally say that the interconnection between those teams and the processes around that were well honed during the constrained market post-COVID, and so we're seeing that bring to bear today, including some AI tools that we had developed to help interrogate the open market and find supply for us. Operator: Your next question comes from the line of David Williams with Needham. David Williams: Pat, let me say congratulations, and we will certainly miss you very much. I hate to see you go. David, welcome, and I look forward to working with you. Maybe first on the capacity side, you've talked about that $100 million to $120 million this year. Just kind of curious, do you think that you can keep up some of the automation efforts and some of these efficiencies? Can you keep up with the type of demand that you're seeing in front of you? Or should we think maybe next year, you'll need some additional greenfield capacity expansion that you haven't considered or haven't thought in the past that you would need just given the strength of the demand? David Abuhl: Yes. Thanks, Dave. That's a good question. We're really pleased with the results our teams are delivering with those efficiencies and throughput we talked about. At this point, if we think about our capacity around the world, it's really well balanced. We think we can service well in excess of $5 billion in annualized revenue, but then as the growth continues, we're going to just going to continue to reassess how our sites are doing, where we might need to invest in capacity. At the moment, we're feeling pretty good about what we have. With the growth, it depends on the type of product and the location, but at the moment, we're sticking to that guidance, and we're going to continue to drive efficiency with our footprint. We have a lot of initiatives that are increasing the utilization within our current sites. That progress is going to continue. So far, so good, David, but we're constantly assessing the situation for sure. Oliver Mihm: One of the things I'd also note is with -- David, with our newer building deployments that we do, the way we put those into play enable us to add incremental capacity without substantial CapEx. That enables us to add some additional bricks-and-mortar footprint when we need to. David Abuhl: Yes, I thought that was an important point to add. David Williams: Then maybe secondly, just you talked about the exceptional strength of defense and the semicap. I guess in this environment, as we think about this demand, how much of this do you think is demand driven from the efforts you put in previously versus just the backdrop is so heavy in terms of that demand that you're just seeing more shifting to you. I guess I'm trying to ask how much is share gains because of your operational excellence versus what do you think just the market overall is being pushed towards you? Todd Kelsey: Yes. There's large components from both, David. We've got significant share gain in semiconductor capital equipment that's going on right now and continues even through this quarter. We also are gaining share within aerospace and defense on several of the subsectors with defense being a significant one, but those markets are good, too. We're getting a double benefit, I would say, in that we're taking share in a really strong market. We expect some excellent growth within those markets that far exceeds market growth. Operator: [Operator Instructions]. Your next question comes from the line of Steven Fox with Fox Advisors LLC. Steven Fox: First of all, Pat, thanks very much for all your help over the years. Always a pleasure to work with you. I guess, first of all, just maybe following up on that operating margin question. Can you give us a sense for how operating leverage is developing numerically? Obviously, not an exact number, but qualitatively from the sense you have some puts and takes in there. You're seeing margin expansion. How do we think about sort of the drop-through in this type of environment? Is it similar to what you've seen in prior up cycles? Or is there more investment going on that we should maybe consider a little less margin expansion? I was curious if you can provide more perspective there. Then I have a follow-up. David Abuhl: Yes, Steven, this is David. As we think through the leverage and drop-through, typically, we can see maybe a 10% to 12% drop-through on revenue growth. Obviously, as we're driving our efficiency initiatives, we can see not only that leverage, but also some drop-through of other improvements, but we're also investing in capabilities. For example, we've got the next generation of cybersecurity maturity models we're investing in to help us win new revenue, and so we need to balance what we're doing with the efficiency, whether it's dropping to the bottom line, but or enabling the next level of revenue growth. We're confident that we're going to see that leverage come through and it's fairly typical to what we've seen before, and we're in a great period of driving efficiency and balancing that with investment. So yes, that 10% to 12% drop-through is probably what you should keep in mind. Steven Fox: Then in terms of the aerospace market, you guys threw a lot at us just now? I know last quarter, you also had a huge amount of wins in that space. Can you give us a little more sense on sort of ranking the drivers here? How much is just some of these new markets like space really accelerating? How much is your own market share gains or new wins or new capabilities? There's a lot to unpack there. I was wondering if you could just sort of give us a sense for what's most important. Oliver Mihm: Yes. Steven, this is Oliver. I'll take that. If I break that sector down within -- and this is going to build a little bit on what Todd just talked about a second ago or a minute ago. Within defense and space, we see both the benefit of new program wins as well as end market demand driving the growth there. Within commercial aerospace, that's largely just organic growth. Then within commercial aerospace, I'll also note that similar to prior quarters, our message that we really haven't seen a significant pull-through of additional end market demand due to recovery at the primes and how they're doing the production, right, or the OEMs and how they're doing their production. We still have upside to bring to bear there as their production rates increase. Does that give you the insight you're looking for? Steven Fox: Pretty much. I mean just to follow up real quick, like the new programs that you won last quarter, I guess, can you talk about how that influences maybe the growth in coming quarters? When would we start to see it and whether it fits within all those buckets like you described? Or is there's something different going on that we should think about as an inflection? Oliver Mihm: Yes. Certainly, it fits within those buckets. I recognize the answer it depends, isn't going to be super helpful, Steven, but let me add some more words there. As we look at new program ramps, based on sectors, based on customers, we can get quite a bit of variation in terms of how long that we can hit that revenue rate. If we're starting from scratch, say, it's a new customer win, and we've got to ramp up the supply chain, potentially the customer, they have some end market regulatory work that they got to do if it's in, say, healthcare, life sciences, that can be a 6- to 8-quarter ramp for us to get into production and start hitting some volumes. We try to note in our comments this morning, if it's an existing customer, an add-on product or even with an existing customer, if it's a new product, you've got some supply chain work already there and our ability to ramp into production is faster. Shawn Harrison: Steve, it's Shawn. Just to get a bit more acute for you, some of the wins we had in aerospace and defense in our first fiscal quarter will contribute to the latter part of this fiscal year. Capacity is already coming online, and so that is a little bit of a help this year, but it's actually a greater contributor to fiscal 2027 and beyond. A lot of the growth we're seeing right now is based either upon programs or market share gains that we had over the course of the past couple of years. This sustains the momentum as Todd talked about into '27 and beyond. Operator: Your next question comes from the line of Anja Soderstrom with Sidoti. Anja Soderstrom: Congratulations on the great quarter and guidance and on the retirement path and appointment, David. Looking forward to be working with you. A lot of my questions have been addressed already. In terms of -- I just want to check with the Malaysia facility. You mentioned last quarter that you expected that to break even in terms of margins in the second quarter. How is that tracking? Todd Kelsey: It was a little bit behind breakeven this past quarter and the reason being that the revenue is actually ramping faster there. We're making additional investments early on, but we're still on track to exit the fiscal year with having strong profitability. Anja Soderstrom: Then just with the targets that you set for the Healthcare and Life Sciences for the full-year and the third quarter, how should we think about the growth there going forward? It seems like that's going to be slowing down a bit or coming down. Oliver Mihm: Yes. I would say that we see -- I talked about the sequential growth we're looking at in Q4. We also talked about the wins here this quarter, historical wins from F '25, quite strong, which will help to create some sustained growth as we look to F '27. Anja Soderstrom: Just one last question on the competitive environment. Have you seen any sort of changes there at all in the... Oliver Mihm: Yes. I'm reflecting, Anja. I don't think we've seen any significant changes from the competitive environment. In fact, we have noted that in this past quarter, the number of large opportunities that we've won had a slight uptick, which we view as positive both for how we're conveying ourselves in the marketplace and our ability to differentiate. Operator: There are no further questions at this time. I will now turn the call back to Todd Kelsey for closing remarks. Todd, please go ahead. Todd Kelsey: Thank you, Ben. I'd like to thank our shareholders, investors, analysts and our Plexus team members who joined the call this morning. In closing, we're generating significant momentum, and I anticipate that fiscal 2026 will be a great year for Plexus and set us up for a strong fiscal 2027. Thank you again to our team members, our customers and our shareholders. Have a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Thryv First Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Cameron Lessard, Senior Vice President, Corporate Development and Strategy. Cameron, please go ahead. Cameron Lessard: Good morning, and thank you for joining us for Thryv Holdings First Quarter 2026 Earnings Conference Call. With me today are Joe Walsh, Chairman and Chief Executive Officer; and Paul Rouse, Chief Financial Officer. Before we begin, I'd like to remind you that today's call may contain forward-looking statements, including statements about our business outlook and strategy, future financial results, growth prospects and any other matters that are not historical facts. These statements are subject to risks and uncertainties, and our actual results may differ materially. Please refer to our most recent filings with the SEC for a discussion of factors that could cause our results to differ materially from these forward-looking statements. We do not undertake any obligation to update these statements. In addition, today's discussion will include references to non-GAAP financial measures. Please refer to the press release we issued this morning for a reconciliation of our non-GAAP measures to the most comparable GAAP measures. The press release and accompanying investor presentation are available in the Investor Relations section of our website at investor.thryv.com. With that, I'll turn the call over to Joe Walsh. Joe Walsh: Thank you, Cameron, and good morning, everyone. I will highlight our first quarter results and key trends and hand it over to Paul Rouse to walk you through the numbers, and then Cameron will take you through some of our forward guidance. We had a strong quarter. SaaS revenue of $117 million came in ahead of expectations, and Marketing Services outperformed as well, resulting in total company adjusted EBITDA that beat our guidance. Quality customers now represent 70% of revenue and annualized client spend has eclipsed $4,500. We are now a 70% SaaS revenue company. A few years ago, we were a marketing services business with software on the side. Today, that equation has fully flipped, and it happened because small businesses are telling us through their buying behavior that they need what we offer. The clearest signal of that is Marketing Center, which grew around 30% year-over-year in Q1. Small businesses want to get found online, drive high-quality leads and convert those leads into lasting customer relationships. That's exactly what Marketing Center does, and the growth reflects that fit. It is the centerpiece of our Market, Sell, Grow strategy, and its continued momentum validates that strategy is working. We're also seeing strong results in our upmarket motion, attracting and winning larger small businesses than we've historically served. These are clients with more complexity, more needs and more to spend, and that's showing up directly in our numbers. ARPU grew to $378 a month, up 13% year-over-year with annualized client spend eclipsing $4,500, a direct result of serving higher-caliber clients. And because larger businesses engage more deeply and expand their spend over time and stay longer, the lifetime value of these clients is fundamentally better. You'll remember, we've talked about moving from 4,000 to 8,000 over the next kind of 4 or 5 years. We feel strongly that, that upmarket move is gaining traction at this point. Quality customer count grew 6% year-over-year and now represents 70% of SaaS revenue, up from 62% a year ago. That trajectory tells you the mix shift is working, and it's a dynamic we're leaning into deliberately. I also want to touch on AI because the early results are genuinely encouraging. On prior earnings calls, we shared that we were rolling out a suite of AI-powered capabilities across the platform, and it's validating to come back this quarter and report that the engagement numbers are really strong. AI image generation, AI lead scoring and our AI guided dashboard are all seeing strong early adoption since rollout. AI review responses, our AI website builder and AI caption round out the suite and are performing well, too. These are not features that we are still testing. They're live now. They're being used by clients who are engaging with them. That matters because AI embedded in the daily workflow is what makes Thryv stickier and more valuable over time. We said we were building it, it's built and it's working. In sum, the business is on solid footing. Our core product is growing. Our client base is consistently upgrading toward higher-value relationships and our AI rollout is exceeding early expectations. That's the story of Q1. Now, I'd like to hand it over to Paul Rouse and Cameron to walk you through the numbers and update you on our guidance. Paul Rouse: Thanks, Joe. Let's dive into the numbers. SaaS reported revenue was $116.7 million in the first quarter, representing an increase of 5% year-over-year and exceeding guidance. SaaS adjusted gross margin was 67% and SaaS adjusted EBITDA was $10.8 million in the first quarter, resulting in an adjusted EBITDA margin of 9%. Adjusted gross margin in the first quarter was diluted by the strategic upgrade of our low-margin large digital agency customers from our marketing services base of customers on to SaaS with no change in pricing. Historically, we lacked an upgrade path for these clients with Business Center, but market so grow now provides the motion. With key marketing automations representing a significant upsell opportunity that will drive improved economics over time. This gross margin compression was the primary factor of adjusted EBITDA coming in below guidance for the quarter. We view it as a deliberate near-term investment in a previously underleveraged segment of our customer base. In the first quarter, SaaS ARPU reached $378, an increase of 13% year-over-year. We ended the quarter with 96,000 SaaS subscribers. Seasoned NRR of 93% represents the natural attrition of smaller, lower spend clients, within our base. Importantly, churn among our high-value clients has been trending favorably, underscoring the effectiveness of our client experience initiatives and our confidence in long-term health of the business. Multiproduct adoption continues to accelerate in the first quarter. Clients with 2 or more SaaS products grew to 26,000 or 30% of our base compared to 24,000 or 25% a year ago. Moving over to Marketing Services. First quarter revenue was $50.9 million and above guidance. First quarter Marketing Services adjusted EBITDA was $13.2 million, resulting in an adjusted EBITDA margin of 26%. As anticipated, this performance reflects the natural cadence of our print publication schedule, which is weighed towards the second half of the year from a revenue recognition standpoint. Importantly, this time dynamic has no impact on billings or free cash flow generation as our book-over-book decline patterns have remained consistent and predictable over time. First quarter marketing services billings totaled $54.5 million, down 33% year-over-year, reflecting the intentional shift in our strategy, as we continue to initiate upgrades of legacy digital marketing services products for clients to our SaaS platform. The decline will persist, but at a managed pace. We remain on track to exit marketing services by 2028 with cash flows lasting through 2030, ensuring strong liquidity as we fully transform to a pure-play software business. We ended the first quarter with net debt of $258 million, bringing our leverage ratio to 1.7x. Now, I'll turn the call over to Cameron to walk through the guidance. Cameron Lessard: Thanks, Paul. Let's dive into guidance. For the second quarter, we expect SaaS revenue in the range of $114 million to $115 million. For the full year, we are raising the low end of our SaaS revenue to a range of $463 million to $471 million. For the second quarter, we expect SaaS adjusted EBITDA in a range of $12 million to $13 million. For the full year, we are maintaining SaaS adjusted EBITDA guidance to a range of $70 million to $75 million. For the full year, we are raising our marketing services revenue to be in the range of $157 million to $163 million. For the full year, we are maintaining Marketing Services adjusted EBITDA guidance to a range of $30 million to $35 million. One thing worth keeping in mind as you model the year, Q2 carries a lighter print publication schedule relative to other quarters, which will create some timing variation in EBITDA due to the cadence of revenue recognition. This has no impact on billings or free cash flow and as print volume ramps in the back half of the year, Marketing Services EBITDA will reflect that accordingly. The quarterly phasing is outlined in the investor presentation and the full year range is unchanged. Before we close, I just want to step back for a second. This transformation is working. SaaS is now 70% of our revenue, something that felt like a distant goal not long ago. And as we look towards 2027, we expect to return to overall top line growth. For those of you who have been watching the story and waiting for the other side, we're nearly there. The business is at a genuine inflection point. We're no longer managing around decline. We're leaning into growth, advancing our AI initiatives and building something we're really proud of. We appreciate your continued support and your belief in what we're building. We look forward to updating you next quarter. Thank you. Operator, let's move to questions. Operator: [Operator Instructions] Your first question comes from the line of Scott Berg with Needham & Company. Scott Berg: Joe, I guess first question is, you're talking about your move upmarket that you seem on the SaaS side, at least that you seem to be continually more positive on. Any anecdotal evidence on how many more modules those customers are taking or how much larger the ARPU of your larger kind of customer segment is? I think that would be helpful if you have any details there. Joe Walsh: Sure. Thanks, Scott, for the question. We are moving upmarket. Our overarching plan here is to move our ARPU from $4,000 to $8,000 and we're making steady progress, 13% ARPU growth in the most recent period. As with everything with us, our metrics don't move in a perfect straight line because there's a lot of noise as we continue to transition the old business away. But we're having a lot of success moving upmarket and we're doing it in a few ways. Firstly, and maybe most importantly, we put very sophisticated sales automation in place over the last few years, and we're targeting all of our sales efforts at larger businesses. We literally have a list of who we want you to go and talk to. And what that means is that rather than selling the solopreneur who maybe has $300,000 or $400,000 of annual revenue, we're selling a midsized business that has $1 million of revenue and 12 employees or something. And it makes a big difference for us in terms of retention, their willingness and ability to pay and their ability to buy more from us over time. So, that is actually the big story here is if you look at quality customers, and I know that there's noise in our gross number of customers. And that's because we're transitioning legacy customers and legacy systems as we wind down this gigantic marketing services business, it's bringing over some subscale customers. And sometimes we're able to get those customers moving and engage with software and buying more and heading in the right direction. And sometimes they churn out. And so those -- that process is a little bit noisy, which is why gross numbers haven't been a perfect measure. But if you look at quality customers, it's steadily growing. And ARPU is pretty steadily growing. Again, it bounces around a little bit, but the overall direction is up. So, as far as your question about modules, we're increasingly having more and more success with people buying multiple products from us and becoming stickier. You see that number moving up. And these bigger businesses, a lot of times are coming in bigger to begin with. So, if you look at our new sales velocity, they tend to be bigger. So, you got your finger on the story. It's us moving away from solopreneurs, moving to bigger businesses and all the noise that, that creates, Scott. Scott Berg: Understood. And then Joe, you talked about the engagement story and some of your AI functionalities improving. I think we're all looking for evidence amongst different enterprise software vendors and how customers are leveraging these technologies through these vendors out there today. As you have more experience or your customers have more experience with this functionality, how should we think about the monetization efforts of these going forward? Are you able to monetize any of this functionality separately? Or do you think this is really something that you embed into the core product and we realize some of those financial benefits through just the core pricing maybe improvements over time? Joe Walsh: It's a terrific question. So, that first -- excuse me, the way you finished is, I think, the way we start. And that's that we are massively enhancing the product by putting AI features, by clustering agents around what we're doing so that we can deliver better results, we can dial in people's campaigns. And there's definitely a data moat that builds over time because you get smarter and smarter with their data, with their campaigns and there's a switching cost if someone were to ever leave that. So, I think it helps -- really helps our retention, helps us deliver a better experience with the customer, things -- some things that were harder to do or that they needed to spend time on the software to do can just happen without them even logging in as you move along here. So, I think all of these make the software more attractive, easier to use, will improve retention and improve our ability to get price without having discrete pricing. Now having said that, when I look at our road map of what we're building and what we're doing, I do think that there will be significant monetization opportunities down the road, but we are not going for that at the moment. We're just going for making the product easier to use and more powerful, so that we have stronger retention. Operator: Your next question comes from the line of Arjun Bhatia with William Blair. Alinda Li: This is Alinda Li on for Arjun. Joe, what are the early customer feedbacks from customers on the new AI products? And how are you seeing that in early conversations with prospective customers as well? Joe Walsh: So, I mentioned some of them on the call, things like image generation and review response. Those have been in for a while, and it's just steadily building. People are discovering that when they go to do their social posts, it's just easier to use these tools and so on. So, that's been a steady melt up now for a while and going very well. I think some of the stuff that we're coming out with now is really exciting. We're taking a lot of the key functionality, melding everything together. And we're able now to take a lead, give you a transcript of the lead, grade the lead 1 through 5 based initially on a set of assumptions we make based on the words in the lead, but over time on your own data, dial that in for you. And those people that are using these tools are experiencing quite a bit stronger conversion of leads. No leads are falling through the cracks. So, we've got particularly some of our partners have been taking the lead on that as we've been initially rolling this stuff out in beta and now it's out now, kind of teaching us what's possible with it. So, we're pretty excited about this. We think it's going to be -- make our software easier to use. The dream scenario is that this software helps you efficiently grow a local business without having to log in all the time that gets working in the background for you. And that's the big deal. It's always hard to get the roof or off the roof to get the chiropractor to let go with the patient and go in there and mess with the software. And so, when the tools do it for them, it makes a big, big difference. So that's really -- it's moving it closer to them and making it easier for them to get value. Alinda Li: That's helpful. And last quarter, you talked about the initiative of Market, Sell and Grow. And can you just give us a little bit more update of how that initiative and strategy has been going? I know there's a lot of integration in terms of the Keap automation inside of the Market, Sell and Grow initiative. Can you just give a little bit more color from last quarter? Joe Walsh: Yes. We also, in the last quarter, mentioned the new platform that we're developing. So, at the moment, we have Keap and Marketing Center. We have a method that we're able to deliver the value of both. It's sort of -- I hesitate to say bundle, but it's sort of almost like a bundle where we're using them together. And that's sort of that Market, Sell, Grow footprint of things that we're doing. But the new platform just puts it all together. It's not a bundle, it's not separate. Everything is together and unified. And it's all AI from -- written from the ground up. We basically have rewritten the whole thing. It's been a lot of work to do, but it's incredible. And it's in the hands of some customers right now, and we're dialing, dialing in everything. So -- but Market, Sell, Grow really is -- it's our -- markets are super fast-growing main thrust, which is Marketing Center, which is about efficient growth for local kind of bigger small businesses. And then with Keap, you have what are essentially automations or agentic assistants that help them through the process of responding to leads, if they're busy and they don't follow up right away, it continues to nurture them. And then after a sale is made, it continues to keep that customer warm and stay in touch and create a connection so that the next time they have a need, you get them back. And these are the kinds of things that really genuinely help the small business. These are the tools that they're looking for and that's what Market, Sell, Grow is all about. Operator: Your next question comes from the line of Matt Swanson with RBC. Matthew Swanson: Yes. fantastic. Maybe following up on the question that was just asked, Marketing Center being up 30% is awesome and it clearly shows the success you guys are having with this new go-to-market. Last quarter, I think, Joe, you had mentioned there was some potential for cannibalization just kind of as you shift the focus. Can you just give kind of an update on that, I guess? And just how that 30% growth in Marketing Center will kind of increasingly be reflected in your overall growth rates as maybe some of these other headwinds get offset? Joe Walsh: Yes. I mean I think over time, that is the company is, we're replacing the current Marketing Center platform with a new one very soon. And the new one has Keap fully integrated and is written from the ground up with Agentic tools everywhere and an NCP layer on it. So, I mean, it's very, very cool. But yes, our sales organization and our customer base see the power and results of Marketing Center, and that's the center of gravity for the company. Everything is moving in that direction. And so, the sales reps are not as much running around out there trying to sell stand-alone Keap or stand-alone business center. Everything is driving towards this Market, Sell, Grow platform. Everything is driving toward Marketing Center, particularly the new one. So, your read on it is right. And everything is driving up market. So, if you think about our business, if I were to look at it from the outside, I would look at the quality customer progress and the way that's moving up, and I would look at Marketing Center as really the company and look at those, and I'd put my projections in my ruler on the progress there. We're not going to be building Keap out in the future as a separate thing. We're bringing the powerful unbelievably good functionality it has inside of the main try offering. And similarly, we really are not adding a lot of new business centers. The sales rep when presented with the choice of selling a business center or Marketing Center, all the rapid development, a lot of the heat and light are on Marketing Center. So, that's really what they're selling. So, I think you got to -- I'm reading in the way you asked the question that you haven't figured out. Matthew Swanson: All right. That's good to hear. Another -- the quality SaaS client bar chart in the deck, I think it's also telling a pretty compelling story. Could you just give us some context from like a product standpoint of what that $400 threshold looks like, if that makes sense? Just kind of like what is the customer spending $400? What does that mean from a product standpoint? Joe Walsh: Yes. We've got a bunch of extensions or add-ons that are beginning to sell really well. You will know we control a pretty big part of the kind of marketing universe and there's a -- for small businesses, there's a battle for them out there. When they look at getting customers, there are 2 giant trolls standing between them and their customer, Google and Facebook. And those leads are super expensive. I mean they're very, very efficient at monetizing those leads. And so, when you talk with particularly service type businesses, they're like, is there some way I can get leads around Google or around Facebook, like not have to go to them. And so, think about all the directories we control around the world in Australia and New Zealand and the U.S., we control these big directory sites. And then we've built a network of other directory type sites, whether it's Nextdoor and Yelp and Citi Search and all these other site and we have that all network together. So, we have a pretty significant amount of non-Google traffic that we are able to source. And we've packaged these really cool kind of growth packages together that we're able to sell to customers. And in an age of AI answer engines, they're having renewed buoyancy because the AI answer engine doesn't look it up in Google and then give it to you. It goes out and searches the stuff itself directly. And so when you look at a yp.com fence contractor in Tupelo, Mississippi, that's been on our site for 17 years, they look at that as solid authoritative content that answers the query that you put in, and it delivers that answer. And so, it's pretty cool. So, anyway, back to your question, we've got add-ons where we're drawing from who we've been in the past and pulling all that together. And that's working great because not only are we helping you measure your marketing, but we're helping you do some of it, too. Operator: Your next question comes from the line of Jason Kreyer with Craig-Hallum Capital Group. Jason Kreyer: Joe, can you just maybe step back and talk about the sales motion and the difference between the upmarket clients and those at the low end? And then how do you position the sales team to be in the right place to capitalize on the upsell opportunity? Joe Walsh: Yes. Great question. So, look, we -- job one for us is to wind down the old Directory business. So, every morning we get up, that's the first thing we got to do because we've got this big business, and it's got some legacy technology and legacy processes and systems, and we're winding that business down. And in so doing, we're variabilizing and collapsing that legacy cost structure down. And we're good at this. We're doing it every day. But to do it, a lot of times, we've got customers that are sitting out there on legacy platforms or legacy tools that we need to move off of those in order to shut them down and turn them off. And the upgrade over to our modern stack is phenomenal for them. But there's communication involved. There's a lot we have to do. So, that eats up some of our time. And it does bring over some subscale customers. There are some customers over there that are just solopreneurs or very small businesses that may not be our perfect ICP. That's why you see noise in the gross client number because we brought over some unnatural SaaS customers. And some of them we were able to talk to them and get them moving and they buy more stuff and they say, "Hey, this stuff is really cool, and they become a good source. Others are like, no, it really is not for me. I was just trying to buy listings in a phone book or something. So, that takes some of our time. When we go outside and start prospecting, we, both through our marketing and through our excellent sales force, we're deploying them against a targeted list of our ideal clients. And so, to think about it this way, the HVAC company that has 4 or 5 trucks on the road would be our target versus the guy who works -- his wife runs the office and he does it and his brother-in-law helps him in the summer. That had -- the total company has got like $400,000 of revenue. That's not our target. We're not really going and looking for that guy. We're putting our sales energy against selling the bigger ones that maybe have $1 million of revenue, or $1.2 million or $1.3 million of revenue because they tend to be much stickier and they tend to have a willingness to pay and an ability to buy more stuff over time. And I would say, Jason, if I'm really honest, in this journey. If you could go back and maybe change things or whatever, when we first started our software business, we pretty much would sell anybody who would talk to us. And that gave us a lot of experience because when we studied our customer base, we found that the very, very smallest ones were churnier and the bigger ones were steadier. And that's just a better way to build our business. And now we've spent a lot of time developing Marketing Center for those larger guys, for those bigger businesses. And we brought in Sean Wechter from Boomi, and we've become really good at integrating with other software tools. And so, if you're on ServiceTitan or you're on, I don't know, some other big CRM tool and you need your marketing cared for, we are interconnecting and working well with those tools. So, that was maybe more than you wanted, but gives you some sense of where we're spending our time and how we're focusing. Jason Kreyer: Yes. No, that's good. I do have a follow-up. Maybe this is for Paul, but just trying to get a sense of the trajectory on both the customer count and the dollar retention figures. Just if you have any insights into, are we stabilizing now when those things can start to peak up in the next few quarters? Joe Walsh: I'll tell you what, I'm going to share this answer with Cameron. Cameron is my data expert. So, I'm going to get him involved here. Look, we sort of guided you guys directionally that we would probably be about flattish to maybe down slightly for the year as some of the conversions that we made over the last year or so stick and some didn't. And now the sales that we're making, each sale that we're replacing them with are much larger. So, in some cases, 2 leave and then 1 new coming in is as big as the 2 that left. So, there's a little bit of just qualitation going on, if you will. But let me let Cameron assist with the answer a little bit. Cam? Cameron Lessard: That's right, Joe. So, Jason, what you're seeing in the overall customer count is that effect. You're adding larger customers and losing the subscale customers. So, I think we expect that to stay flat starting from the beginning of the year to the end of the year. On the seasoned NRR metric, that will probably stay around the same range as well. You are losing some subscale customers, and that will weigh on that. But I think if you step back and look at what we've done over the past 12 months, our overall churn has trended in the right direction on the overall customer base, and that will be reflected in the season base overtime. And our quality customers, roughly 70% of the revenue, they have excellent retention as of right now. So, that will start to trend NRR in the right direction as you move out. And so, we want to make sure that we keep those quality customers having the best client experience and making sure that retention stays strong. So overall, I think you won't see a lot of big changes in those metrics throughout the year. So, I would just forecast relative flatness. Operator: There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Option Care Health First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, Nicole Maggio, Senior Vice President of Finance. Nicole Maggio: Good morning, and welcome to the Option Care Health First Quarter 2026 Earnings Conference Call. With me today are John Rademacher, President and Chief Executive Officer; and Meenal Sethna, Executive Vice President and Chief Financial Officer. Before we begin, a reminder that today's discussion will include certain forward-looking statements that reflect our current assumptions and expectations. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. We assume no obligation to update any forward-looking statements, except as required by law. We will also use non-GAAP financial measures when talking about the company's performance and financial condition. For more information on the specific risks and uncertainties as well as non-GAAP measures, we encourage you to review the information in today's press release and presentation posted on the Investor Relations portion of our website as well as our Form 10-K filed with the SEC. Additionally, for the Q&A portion of today's call, we ask that you limit questions to one question and one follow-up participant. With that, I will turn the call over to John. John? John Rademacher: Thanks, Nicole. Good morning, and thank you for joining us. We're pleased to share updates on our first quarter of 2026 today. Before I do this, I want to take a moment to say thank you to the Option Care Health team for managing through a dynamic first quarter with an unwavering commitment to our mission of transforming health care by improving outcomes, lowering the total cost of care and delivering hope to patients and their families. As the nation's largest independent provider of home and alternate site infusion therapy, our strategy is built on national scale with the patient at the center of everything we do. Our network of home infusion pharmacies and specialty pharmacy centers of excellence that focus on chronic and rare disease therapies along with our comprehensive nursing capabilities uniquely positions us in the marketplace. We combine consistent high-quality clinical care with local responsiveness, leveraging our platform of infusion suites and clinics to drive clinical innovation while meeting patients where they want to be. This model helps us deliver reliable, clinically excellent care for hospitals and health systems, specialty physician practices and health plans across the country. In an environment of ongoing economic pressures across health care, we are on the right side of the cost curve, partnering to deliver high-quality care at the appropriate cost in settings where patients prefer to receive it. As affirmation of the great work our team does every single day, we continue to receive patient satisfaction scores in the low 90s and Net Promoter Scores in the mid-70s. Turning to our results. The first quarter reflected mixed performance for our business. Adjusted EBITDA and adjusted EPS performance were aligned with our expectations, but our revenue growth of 1% did not meet our expectations. We had strong execution across our acute therapy portfolio, a transitional period for our chronic therapy portfolio and continued focus on strategic initiatives that will better position us to win. On the acute side, our commitment to strengthening our capabilities to transition patients on to service, invest in broadening our referral source relationships and focus on resources driving clinical value realization helped us deliver revenue growth in the high single digits, well above market growth. As I've mentioned previously, providing these therapies require strong partnerships with hospitals and health systems, are very time-sensitive and demand tight coordination across our expert and clinical resources. This area of service is hyper local, and our teams continue to operate at a very high level and position Option Care Health as the partner of choice. Across our chronic therapies, revenue for the quarter was a slight decline versus last year, reflecting certain industry dynamics that were more challenging than we anticipated. Breaking this down across the larger therapeutic categories we serve, we delivered solid growth in our IG neuro portfolio in alignment with our expectations. Across our Autoimmune and Chronic Inflammatory Disease Portfolio, which we refer to as CID, we saw a greater reset than anticipated in patient census. Our guidance from earlier this year included a number of assumptions given the multitude of variables impacting shifts in our patient census and therapy mix. As we discussed on our last earnings call, patient registration activities throughout the first quarter are a key input in understanding whether results align with our assumptions. We saw a significantly higher volume of patients that had insurance plan, benefit design or formulary management changes, doubling the number of patients requiring benefit reverification and reauthorization versus last year. This elongated many approval decisions into late March. As we closed out the quarter, therapy transition and patient retention patterned differently than we expected, reducing our patient census more than we anticipated. In addition, the therapy mix of our remaining patient census was less favorable than originally planned. As we have previously discussed, given the recurring nature of revenues for patients on chronic therapies, an unfavorable drop in census will take some time to recover. Moving beyond CID, in our other specialty portfolio, we saw slower-than-expected growth of certain therapies. We expanded the breadth of our targeted specialty call points but did not achieve the acceleration we initially expected. Across our rare and orphan program portfolio, we were also notified of launch delays or slower ramp for a few of our rare and orphan programs due to regulatory or commercial launch readiness that will impact our growth expectations for later in the year. We remain confident in the strength of our platform to support these clinically complex therapies and the value they will provide despite these delays. With these forces converging as we exit Q1, we are revising our full year revenue guidance as the industry dynamics are more impactful than anticipated. Meenal will provide additional details in her commentary. In response, we are taking decisive actions to sharpen execution, focus and invest in the most attractive growth opportunities and strengthen our commercial and operational competitiveness. We are increasing the strength and size of our commercial team, realigning resources and rebalancing coverage across our top specialty practices and accounts. We continue to focus on operational excellence to further capture therapy level economics and enhance our admission conversion rate while deploying technology designed to ensure a more seamless workflow from referral to start. And we are refining our go-to-market model to scale efficiently, simplify the provider experience and strengthen our specialty pharmacy offerings for chronic and rare disease. Moving on to our alliances. We continue to foster positive momentum across the relationships with payer and pharma partners. Our relationships with health plans and conveners continue to provide significant value to their members as we partner to rightsize care. Our existing site of care initiatives are performing better than expected, and we anticipate this momentum to carry throughout the year. The consistent feedback from the various plan sponsors who have active programs with us is that these initiatives bring real cost savings to the plans and provide increased choice and satisfaction to their members. Our portfolio breadth of both acute and chronic therapies as well as our ability to provide clinical insights and our quality and cost efficiency make us well aligned with our payer partners to help them lower the total cost of care and reduce waste in the system. We believe our performance positions us well to both capitalize on current programs as well as capture new offerings. Pharma program development also progressed as expected, and we are preparing for new launches later this year. We continue to actively pursue additional opportunities to support pharma partners in commercialization of their new-to-market products, and we believe our unique pharmacy network, nursing excellence and clinical competencies make us a logical choice. We are also seeing a strong pipeline of infused and injectable drugs to treat clinically complex patients, and we are engaged with pharma manufacturers and innovators who are seeking partners with our capabilities to add to our over 600 therapies already in our portfolio. We believe these opportunities will continue to be an important catalyst to drive our growth. Our ambulatory infusion clinic utilization continues to increase with visits growing 14% year-over-year, driven by commercial and operational collaboration and market access expansion. We are now operating in 28 locations with advanced practitioner capabilities in key markets, and we will continue to drive performance through deeper partnership with local providers. These trends reinforce our confidence in clinic-based growth as an important complement to our diversified model. And we continue to leverage our entire network of infusion suites, conducting 34% of our nursing visits in one of our suites or clinics during the quarter. We also saw continued traction in our oncology portfolio, a small but growing part of our business. We believe this represents a meaningful opportunity for continued growth as the market dynamics shift and more oncology products move into the infusion clinic and home setting. I want to close by emphasizing that while I am not satisfied with our revenue growth momentum, I do believe our business fundamentals remain intact and solid. We are in an execution-driven organization and are focused on building from this reset through coverage, conversion and enhanced service levels, which we believe will translate into sustainable growth and long-term value creation. And with that, I will turn the call over to Meenal. Meenal? Meenal Sethna: Thanks, John, and good morning, everyone. Our first quarter revenue was $1.4 billion, up slightly over 1% compared to last year. Our acute revenue growth was in the high single digits and our chronic revenue declined slightly versus last year. Total company revenue growth in the quarter was negatively impacted by approximately 600 basis points due to headwinds within our CID portfolio. As a reminder, our CID portfolio incorporates a number of different therapies, and we still expect the Stelara and related biosimilar subsets of these therapies to represent less than 1% of 2026 company net revenue and gross profit. Gross profit dollars also declined slightly over last year due to the decline in chronic revenue. We had previously estimated that the gross profit dollar headwind related to the CID portfolio would be $25 million to $35 million. With clarity of those CID portfolio resets, we now estimate an approximately $55 million gross profit headwind for the year, which includes the additional patient loss John spoke about earlier. SG&A grew 4%, reflecting the wraparound of investments made in 2025, along with ongoing investments in commercial resources to support future growth. Adjusted EBITDA of $105 million was down 6% over prior year, but in line with our expectations as the acute performance and execution on our strategic initiatives offset the dynamics in the chronic portfolio. Adjusted EPS of $0.40 was flat with prior year with an uplift of $0.02 from the year-over-year benefit of share repurchases. Operating cash flow for the quarter was a usage of $12 million, in line with our seasonal expectations. First quarter is typically the lowest quarter in the year due to seasonal patterns and incentive compensation payments. We saw measurable improvement from our early inventory management initiatives in the quarter, including better supply and demand alignment. We expect to see additional benefits from our working capital initiatives as the year progresses. And we ended the quarter at a net debt to leverage ratio of 2.2x. During the quarter, we also expanded our revolving credit facility to enhance financial flexibility from $400 million to $850 million. This increased capacity better aligns our capital structure to our capital allocation strategy. As a reminder, our capital allocation priorities start with organic investments to drive revenue growth, capacity and optimization of our cost structure. Acquisitions are next, focusing on adjacencies and tuck-ins that align with the breadth of our portfolio. And our final priority is periodic share buybacks. In the first quarter, we repurchased over $17 million of our shares. Moving on to our full year forecast. We are adjusting our full year net revenue guidance to a range of $5.675 billion to $5.775 billion. This represents just over 1% growth versus prior year at the midpoint. This incorporates a negative 600 basis point revenue growth headwind higher than the 400 basis point headwind we had previously estimated due to the lower CID patient retention and therapy mix noted earlier. We are maintaining our full year EBITDA and adjusted EPS ranges with our February guidance with projected EBITDA of $480 million to $505 million and adjusted EPS range of $1.82 to $1.92. That corresponds to growth at the midpoint of 5% and 9%, respectively. Our EBITDA guidance range incorporates the forecasted $55 million CID portfolio headwind noted earlier. We expect that to be realized evenly through the year. Our EBITDA guidance also reflects reductions in variable operating costs, including variable incentive compensation and other cost management actions. We now expect SG&A growth to remain at or slightly below gross profit growth for the full year 2026. Additionally, for the year, we're maintaining our estimates of net interest expense to be in the range of $50 million to $55 million and a full year tax rate in the range of 26% to 28%. We are adjusting our operating cash flow target to at least $320 million, which incorporates the lower revenue and cash-based EBITDA reduction. I also wanted to provide some color on the second quarter for modeling purposes. The following assumptions are on a sequential basis, reflecting second quarter growth over the first quarter of 2026. We expect second quarter sequential revenue growth in the mid-single digits with EBITDA sequential growth in the high single digits. We anticipate seasonality to be consistent with prior years with sequential growth over the course of the year. And with that, I'll turn it over to the operator to open up for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Lisa Gill of JPMorgan. Lisa Gill: Just two things I just want to try to understand a little bit better. I understand looking at the [ IQVIA ] data, what happened with Stelara in the quarter. But can you help me to understand the increase in the headwind versus the initial on the gross profit side? I understand the revenue side, but help me to understand that. And then just secondly, I just wanted to follow up on the benefit reverification that you talked about as far as timing goes and what you saw in the quarter? Is that commercial? Is that some of the changes that we've had, whether it's the ACA or something else? Just want to understand what's happening there and how we'll see that come back around as we go through the other quarters. John Rademacher: Yes, Lisa, it's John. I'll start with your second question first, and then I'll turn it to Meenal to talk about the product profit drivers and the headwinds from that perspective. So as we went through the quarter, we called out, and I think everyone is aware that the first quarter is a really important quarter as you go through the process of turning the calendar and all of the things associated with benefit reverification and authorizations and those types of things. As we had called out in the prepared remarks, we saw a significant increase in the patients that we had on service that either had a switch in health plans, had a benefit design or a formulary change that increased the amount of work we had to do to qualify them and to move them on to service as we went into the new year. And this doubled the amount of patients that were impacted on that. We also saw that the payers increased some of the standards that they had set to qualify patients for the enhanced clinical services that were provided and also that influenced some of the product selection that the formulary management moved forward. This elongated that process over the quarter. And many of those determinations and decisions really weren't made until the March time frame as we went through the process and really worked through that bolus of activity. And as we exited the quarter, we saw not only that changes in the portfolio and the census due to the switch out of Stelara, but also the mix of products we had talked about not all biosimilars have the same economic value to us. on that as well as not all of the products, and there's about 40 different products in what we categorize as the chronic inflammatory disease have the same profit dynamics. So as we looked at the -- as we rolled through the end of the quarter and looked where we were exiting, we saw that this was different than how we had originally modeled and planned for it due to these different factors through that process. And so starting with that lower census and then carrying that through the rest of the year is really what is driving a big portion of where the revenue reset is, knowing that it's going to take time for us to fill, knowing that you lose that annuity of a patient that is on census for a chronic condition and carry that forward. So that's what we saw, and it was really pushed towards the back half of the quarter as that increase in volume and the increase of activities associated with all of the changes given this year and the dynamics in Medicare Advantage plans, the IRA implications and the biosimilar switch in a formulary management perspective. Meenal Sethna: And then, Lisa, it's Meenal. So your first question was about the GP headwind and the increase to the $55 million. So just going back a couple -- a few months here, we had originally, as we put forward our assumptions for our full year guide back in January, we had assumed that, that headwind would be $25 million to $35 million, somewhere in the middle there, really with a focus around Stelara, the Stelara IRA and then the biosimilar conversion. As John just mentioned, as we've gone through the quarter, through the first quarter, what we found was there were some significant changes versus what our assumptions were, one, in the patient census itself. but then also therapy mix. So this $55 million now represents. The bigger part of that change is really related to the change in the patient census, where we had assumed a number of Stelara patients converting to some other therapy as part of our portfolio, and that didn't happen. So the loss of that patient is what that is. And then secondly, with the patients we did retain on census, we saw a slightly unfavorable mix when all is said and done given the multiple therapies out there. I'm sure that one of the next questions will be how do you feel about the $55 million over the course of the year, given the fact that we have this reset in the first quarter, and we -- it's going to take us a while to build up the census, but we're assuming this particular headwind will pattern out evenly through the rest of the year through the rest of 2026. John Rademacher: And the only thing I would add to that, Lisa, is we now have clarity around how we are -- how the portfolio evolved and how the patient census moved forward. We believe that we have gone through the process of the reverification and reauthorization with the patients as you do at the beginning of the year. And the first quarter is really that driving force to give us that clarity and now confidence that we will build sequentially moving forward. Operator: Our next question comes from the line of Pito Chickering of Deutsche Bank. Pito Chickering: On the guidance, you talked about 2Q EBITDA up high single digits. So that's $112 million, $114 million range, which implies a very large ramp-up into the back half of the year. Can you bridge us, one, how we get to the 2Q EBITDA growth of high single digits? And then two, I think just solving into the back half of the year ramp, I'm looking at teens sequential growth in 3Q and 4Q and how we accelerate from, I guess, from 2Q. So basically, how can you bridge us from 1Q to 2Q growth? And then can you bridge us from the large back half of the year ramp? John Rademacher: It's John. Let me start. As I said in my prepared remarks, it was a mixed result, but there were positive aspects of the business. And again, we remain -- we believe that the fundamentals remain intact. When you look at the progress that we've made and really the strength of the results in our acute therapies, which tend to have higher gross profit as well as really good dynamics for us on that. You look at the growth that we saw that was continue to move forward in our IG neuro portfolio. You look at how we have been partnering with payers on site of care initiatives and that moving better than we had expected, the continued work with our pharma partners and the programs and the pipeline that remains, and we're going to continue to move that forward. As well as what we're seeing in the infusion clinic, there is a lot of areas that continue to make really solid progress and continue to drive that growth, which is why you saw the adjusted EBITDA strength that we had in the first quarter, even though we were going through this reset. So I do want to emphasize that there are really positive things happening in the business and the foundation, and we're going to continue to focus our energy and effort on driving the growth, not only in those areas where we're having success, but then shoring up in these areas where we know we have to accelerate, reaccelerate our growth through that process. Meenal Sethna: Sure. And Pito, it's Meenal. I'll add just a few other comments to what John mentioned. Specifically, we wanted to give -- wanted to offer just some ramping thoughts, which is why we provided the second quarter guidance. As I mentioned in some of my prepared remarks, there's work that we have been doing around some cost reductions. And so that's some of the carry that goes forward as well as naturally, we, of course, have some variable costs also that are aligned to revenue. So we're doing a little more scrubbing there with some cost down. But importantly, I also want to reiterate what John said, we've got large parts of our business that are doing very, very well, like on the acute side of the house, on the IG neuro side of health within our chronic portfolio. So we expect to drive some growth through there, which will also help us from an EBITDA perspective as well as gross profit dollars that we're working on also. On your question on the back half of the year, I'll take a step back and also say, look, we have a normal seasonal pattern on top of everything else, which is in any normal year, we tend to see sequential growth starting from the first quarter, which we've always said is our lowest point up to the fourth quarter, which tends to be our busiest quarter of the year. So there is a natural lift that we have. And then also, John talked about, look, it's going to take us some time to rebuild that census loss that we have. Our expectation is that rebuild starts now, right? We're working on the rebuild starting in the second quarter, a number of actions that we're taking going forward to move that. So we would expect to get some continued tailwind from our efforts with all the investments that we're making in our commercial resources as well to really drive some additional growth on a sequential basis, Q3 and Q4. Operator: Our next question comes from the line of David MacDonald of Truist. David MacDonald: John, just a quick question. You talked about conversion and that being a little bit lower. which I just want to make sure I'm interpreting this right, suggests to me that on the front end, you guys weren't able to kind of muscle through some of the administrative workload just given the heavier design changes and things like that. A, is that correct? And then B, in terms of fixing that, is it a matter of kind of adding more resources on the front end? And was it just competitors were processing these folks a little bit more quickly than you guys and you were losing a little bit of share? Just a little bit more detail there would be helpful. John Rademacher: Yes, Dave, thanks for the question. What we saw is that elongated process was really part of the -- just the reverification process. I would say, yes, it passed the team, but we're prepared for that. I don't want to make it that it was -- we were not processing them through. What we found was there are some PBMs that have preferred biosimilars. And so we expect that we lost some of the patients to some of the competitors through that process. The economics are not the same on all of the biosimilars for us. So there are some that just didn't make sense for us to take if that was the preferred route of therapy. And then as I said in my comments, there were higher standards. If you remember, a lot of our patients required additional or enhanced clinical services that wrapped around that. And therefore, there were some denials and other aspects where patients no longer qualify based on those higher standards. And so they moved to other forms of administration, whether it's self administration with the products that within that. So that's where we really looked at it. Yes, we're always looking at making certain we have the right staff in place and that we're being responsive as possible in that it took longer this time around given all of the different things associated with it. But I think as we're moving forward and we've gotten through the bolus of activity, I don't see that as being anything that would be -- would hold us back for getting back on and reaccelerating our growth as we're looking to bring on new referrals and new patients into Option Care Health service lines. Meenal Sethna: And Dave, I just wanted to add one other point to John's is what we were trying to emphasize when we talked about really double the number of patient authorizations and reverifications that we needed to work through, it just took a bit longer, not because of necessarily just us and our resources, but also the multitude of back and forth that had to happen, and it really went into late March this year, which is longer than the typical cycle that we see given a lot of the market dynamics going on with plan changes, I'd say, a lot more dialogue around the verification and prior authorization work. Operator: Our next question comes from the line of Brian Tanquilut of Jefferies. Brian Tanquilut: Maybe just to double-click on this, right? I mean these patients need to go somewhere is my guess. I mean they obviously still need the drug. So just curious, like, I mean, back to David's question, how confident are we? I mean, it seems like this is a market share loss situation on one hand. And also curious like your visibility into this given that you did your earnings call in March, and it feels like it's the first time we're hearing about it. So just curious like how can you impart confidence in the investor base to believe that this is an issue that will improve quickly and to have visibility into guidance for the year? John Rademacher: Yes, Brian. So as we called out, the first quarter is the busiest quarter for all of the work associated with the benefit reverification and authorization process. And as we exit the quarter, we have gone through the entire patient census as part of that activity associated with it. So to your -- I guess, your question, but again, we reaffirm, yes, we lost those patients to other service providers. So it was retention loss and those patients went somewhere. As we have talked about before, there is a portion of this where there is self-administration as part of the therapy plan moving forward. And so some of those patients potentially converted over to self-administration. We can continue to try to support them through our specialty pharmacy capability set. But there's also opportunities where it just didn't make economic sense for us to hold on to those patients given some of the dynamics with different biosimilars and others through that process. So we expect that they did go somewhere else and they're not on census with us. But we believe we are through the work that's necessary in that first quarter to get through the entire patient census and understand where that is. And now this is the base that we believe is where we're building on as we move forward. To your comment, when we had the earnings call and as we've called out, a vast number of the patients that we had on service had not gone through that process. If you look at the therapies, many of the patients aren't receiving care for 8 to 12 weeks is their cycle. So many of them had not even gone through the process of their next dose by the time we had and we laid the earnings call. So there was still a lot of unknown. We tried to call out that the first quarter was going to be something that we were monitoring closely. But at that point in time, we didn't have enough evidence to know where the patient census was going to land. And so that's where, again, as we now have this clarity, as we're exiting the first quarter, we are bringing forward kind of our new view that is different than the modeling that we've done as we entered into the year. Meenal Sethna: And Brian, I just wanted to take a step back and maybe just add some comments. This was a really unique situation across Stelara and one that is -- we expect at this point, this is onetime and it's done, and this gives us clarity going forward. But when we've been -- I know talking about this for a while, with the IRA backdrop, which really drove some significant shifts that we see now in the first quarter around categories and a lot of different category economics going on. Separately, there were a lot of market shifts that also occurred, right, significant changes in Medicare Advantage plans and memberships and enrollments and transfers. And actually, a large portion of our patient Stelara patient census were skewed towards MA plans as well. So that added to the complexity of this, along with this particular transition also included a large number of biosimilars and other brands. So I would call this a pretty unusual, pretty unique set of circumstances. We believe at this point that we've had the reset. We have a patient census now we have clarity. And from here, we're going to move forward with the -- starting with the second quarter sequential growth that I talked about earlier. Operator: Our next question comes from the line of Joanna Gajuk of Bank of America. Joanna Gajuk: So a couple of follow-ups. Just to confirm, when you're talking about the therapy mix changes and lower patient census, are we still talking about Stelara and therapies sort of in that category? Or are we talking about the sort of impacting some other therapies like ENTYVIO, I guess, which is also big for you? John Rademacher: Yes. I mean it's primarily around the shift of the Stelara patient census. Again, as we had outlined, the full chronic inflammatory disease therapeutic set was in alignment with that. But the vast amount of this is the reset of those Stelara patients as they have transitioned to other products moving forward. Meenal Sethna: Yes. I think, Joanna, you could think about it this way, right? We had a census of Stelara patients, there were multiple different therapy choices that those Stelara patients had, which were when we refer to the CID portfolio, there are a number of different therapies, some of which you mentioned that those patients could go to as well as some other biosimilars as well as potentially staying on Stelara. So that's how we think about it is Stelara patients with a lot of different choices as they were working with their providers and their particular insurance plans. Joanna Gajuk: And if I may, a clarification. So I appreciate the answer around the ramp-up you expect. And it sounds like there's some cost savings that allowed you to keep your EBITDA guidance the same even until now this headwind is $20 million or so higher than previously assumed. So is that really the $20 million is the cost savings? Or can you help us kind of break down that offset, that number into buckets? Meenal Sethna: Sure. So I think just for reference, what you're referring to is back in January, we talked about a gross profit headwind of approximately $25 million to $35 million relating to Stelara and the biosimilar conversion. Based on where we are today, we estimate that headwind to be $55 million. And again, in large part because of the patient census and the loss of the patient census and a little bit on the therapy mix. For us, as we took a step back and looked at this, I don't want us to forget that we had really good momentum across other parts of the business. So when we take a look at the acute side of the business, which was growing in the high single digits, very solid growth across our IG neuro portfolio as well. So part one, to answer your question is we really want to maximize the momentum across areas of the business to really drive some additional gross profit, and we've been successful doing that. I think that's part of it. Clearly, we are going to have to take a look at cost. We've already been doing that. We've already taken some actions this year, and there's some other things that we will do. That's also net of reinvesting into the business with the additional commercial resources that John spoke about. So we're continuing to do that. And then invariably, we have some -- as we've reduced our revenue guidance, we have some variable costs now that we're going to scrub through and as we reduce some additional variable costs, including, frankly, some incentive compensation that will be reduced. The combination of all that is why we felt comfortable maintaining both our EBITDA and our earnings per share EPS guide. Operator: Our next question comes from the line of Constantine Davides of Citizens. Constantine Davides: Just a couple of quick ones. Maybe a follow-up on guidance. Can you just talk about maybe some of the assumptions, low end versus high end? Is that purely a function of kind of the revenue brackets you provided? And where is your conviction? Or what would have to happen to get to the higher end of your EBITDA outlook? And then second, John, you kind of called out the acute performance still pretty strong in the first quarter. What are you seeing now that you've kind of lapped that competitor withdrawal? And what's your expectation for growth here as you're seeing it in the second quarter? John Rademacher: Yes, Constantine, it's John, I'll start and then I'll let Meenal reply to really the first part of your question. On the acute, again, the team continues to perform extremely well. As you called out, I mean, we've lapped some of the competitive closure and continue to see strength in the growth of that business. We believe there still is opportunity. We are deepening our partnerships with health plans or with health systems and hospitals in those local markets. We know this business is one that requires to be very local and very responsive in helping to transition those patients on to care. The investments that we've made into our people, our process, our technology allows us to do that. Our nursing network is a strength of this enterprise and one that we will continue to rely on as we move forward. So we are extremely confident that we can continue to grow and be that partner of choice given the investments we've made, but also given the way that the team is executing and performing and deepening those relationships. Meenal Sethna: Yes. And Constantine, just your questions on the guidance, I would say, one, first quarter for us really gave us the clarity that we've been talking about, right? We've had this patient reset. And from here, we're going to grow, we'll grow sequentially throughout the year. I'd say our confidence, we feel good about the guidance that we put out from a revenue perspective. And if you'll -- you probably noticed that we reduced the range of the guidance and that's part of that confidence. I would say what are some of the levers that we have. First of all, at close to a $6 billion revenue, there's always going to be some puts and takes that go on over the course of the year. But our team is very execution oriented. So I would say everybody is on deck, all of our commercial resources and those supporting those commercial resources are on deck to really look at how do we grow? What are the vectors of growth that we have, ones that we've been going after, new ones that we're going after? How do we rebuild that patient census? What are some other areas of growth opportunities that we can add into the pipeline, and I feel good about that. So that's what gives us confidence in the low end -- or sorry, in the high end, but just thinking about a number of variables. And I would say revenue growth for us is the single largest opportunity when you think about fall-through from an EBITDA perspective. So that's our primary growth. But again, we're not going to forget that as needed, we will make adjustments into our cost structure if that's what it takes. So I feel confident about both the revenue guide we put forward as well as the EBITDA and the earnings per share guide. John Rademacher: And the only other thing I'd add is, look, our decisive actions and what we're looking to do to really drive the reacceleration of the business focuses around coverage, conversion and enhanced service levels. And so we have plans in place that we are executing around that, that elevate the commercial execution, that increase the size and strength of our commercial presence to capture more of the market demand. We're focusing around converting more of the patients that we receive as referrals on to service with us. And we are focused around some of the enhancements in our service capabilities and service levels to not only attract with payers and pharma partners, the strength of that portfolio, but also to continue to execute and be that partner of choice for the providers that are referring patients on to us. Operator: Our next question comes from the line of Erin Wright of Morgan Stanley. Unknown Analyst: This is Michelle on for Erin. So I just wanted to check for this headwind with Stelara and the chronic therapies. So would you still expect now that there's any risk transitioning into 2027, where prior, we thought we would be through this period now that we have this reset census data? And is it possible that throughout the rest of 2026, there would be any other resetting expectations or that it won't sequence kind of the way you're thinking in terms of being relatively stable over the next few quarters in terms of the headwind? Meenal Sethna: Sure, Michelle. It's Meenal. So I'll give you the short answer is no, we don't expect additional headwind in 2026 nor any carryover in 2027. As we've been talking about, we feel that Q1 was the reset. We now have clarity and we now know what our patient census is from here. We don't expect any shifts other than normal patient shifts as they're working with their particular provider, but we don't expect anything outsized from that. We expect 2026. Our hope is also that this is the last year that we're having to talk about Stelara. And from here, we really want to be able to talk about the other growth vectors and other growth opportunities that we have as we continue to expand our portfolio. Operator: Our next question comes from the line of Charles Rhyee of TD Cowen. Lucas Romanski: This is Lucas on for Charles. I want to ask about the strong acute revenue growth you saw in the first quarter, high single digits above your medium- to long-term target of mid-single digits. Does your '26 guide assume that this high single-digit growth continues throughout the rest of 2026? And then also thinking about the margin profile in the past as well as on this call, you talked about acute having a higher gross margin compared to the chronic portfolio. Can you help us understand how those two categories compare at the EBITDA margin level? Meenal Sethna: Yes. Why don't I -- Lucas, why don't I start with just the acute growth? So we've been -- as both John and I've talked about, we've been very pleased with how well the team has really been driving the growth opportunities that we believe we have in acute. I would say we have lapped the number of the competitive closures that we've been talking about for a while. But at the same time, the team has done a great job at really building those even more relationships with referral sources and really driving both additional patient growth, but also clinical value realization opportunities as well. So our -- as we look ahead to the acute side of the business, we feel really good about being able to continue a momentum that is above market growth, which we're doing right now. And I think the team is really executing on all cylinders when we think about that. Beyond that, we haven't gotten into a lot of detail around profit markers between acute and chronic. But I would just say that overall, both parts of the business are important to our portfolio. They really fit together when we think about the value that we provide to all of our stakeholders, the payer communities, the pharma communities and frankly, to our patients at different points in time, there may be patients who need both sets of therapies. So we become a real important part of the health care ecosystem to all of our stakeholders. And that's why we really want to ensure that portfolio we have, the therapy mix we have is quite broad. Operator: Our next question comes from the line of Michael Petusky of Barrington Research. Michael Petusky: So I guess probably this is for Meenal. In terms of what you guys expect from the mix between Sonic and acute and sort of putting together what you said about the second half and full year guidance and all the rest. And I know historically, you guys like to talk about gross profit dollars. But to me, it looks like gross margin needs to lift for the remainder of the year sort of to get to your guidance. I mean, is that a fair statement in your view? Meenal Sethna: Look, I would say as it comes to both gross profit dollars and margin, we do look at both. So I don't want to minimize one or the other. I think ultimately, right, the dollars are the ones that drop to the bottom line when we think about are we growing our EBITDA, are we growing our earnings per share. But we also do take a look at the margin profiles of the different therapy mixes and the different parts of our business. So we are focused on both, but ultimately, it's the gross profit dollars. And by the way, we always ensure that the therapies that we are providing are profitable. So that's a key element of what we're doing. The gross profit dollars really allow us to reinvest back into the business as we've talked about the commercial resources and other areas, but the margin is one of the many metrics we keep an eye on. Michael Petusky: Okay. And then just sort of a follow-up in terms of the modeling of this. You alluded to stock comp may be one place that you guys can look to. The last year, 1.5 years or so, including the first quarter, you guys basically have sort of looked at sort of $40 million on a yearly basis and sort of track to that in the first quarter. I mean, what might that look like for the remainder of the year? I mean could that go more towards like a run rate of $30 million in terms of stock comp going forward? Meenal Sethna: Yes. And if I misspoke, I apologize. When I was talking earlier about cost reduction opportunities, I was referring to variable cash comp more than anything without getting into a lot of detail. So that's really -- look, if I take a step back, we have lowered our guidance. That was not a decision that we took lightly. And if we don't achieve what we felt was our guidance, there are going to be implications to our variable compensation, but it's more on the cash side. It was not a comment about our stock compensation. Operator: Our next question comes from the line of Matt Larew of William Blair. Matthew Larew: John, if I think back over the years, I think this is one of the first times probably where you referenced losing some patients to competitors. And I realize there's some idiosyncrasies involving Stelara here that maybe make it an anomaly. But this is also the time, I think, in an industry has always been competitive, where there's been more competitive entrants that have been popping up. You've had a number of the larger payer-owned entities that have exited acute and are exclusively focused on chronic. So it does seem like that market may be becoming more competitive. So I'm just curious, as you think about -- you referenced the reset of patient census in March and then the guide and sort of your forward outlook being predicated on building back that census and getting patients back. You referenced needing to deploy or expand commercial resources. I guess what do you assume about your share going forward or about your ability to get patients back on census? And is it possible, I guess, that the sort of costs for patient acquisition may be higher either temporarily or sustainably going forward given the competitive dynamics? John Rademacher: Yes, Matt. So it has always been a competitive environment. As we have called out before, I mean, there's over 800 providers of home infusion and alternate site infusion therapy. So it's -- the competitive dynamics have always been there, and we believe we have a competitive product that we can sell and service in the marketplace. I think what you called out is what we're seeing. There's just some very unique circumstances with the Stelara and the IRA that changed this part of our portfolio dramatically, right, as these events happen, both with -- you look at a significant number of patients that change their health plans. You look at benefit design changes and formulary changes with the introduction of all of the biosimilars and some preferred products that are in those formularies for some of the different payers through that process. So I would say this is unique to that situation. I do believe in the strength of the enterprise. I do believe in the strength of the foundation that we have. When you think of a position for being both a national provider, but also being very local in our responsiveness, I think we will continue to be well positioned as we move forward. This is just one of those situations where there was a shift away from some of the enhanced clinical services that we were providing for the patient cohort. And I think that has been the biggest driver behind the changes that we've seen as well as some of the formulary management aspects that have driven different decisions around what product to move on and how that either remains or moves away from our service model. Operator: Our next question comes from the line of Raj Kumar of Stephens. Raj Kumar: Maybe just some data-related questions here on the kind of chronic growth. You called out the strength in IG and neuro, but you kind of also saw some weakness in some of the other specialties just related to delays of program integration. So it would be helpful just to kind of see how that chronic business grew relative to the kind of high single digit to low double digit that you kind of had at the beginning of the year ex the CID impact. John Rademacher: Yes. We -- again, as we had called out, when we take a look at some of the other categories, we were very pleased with the progress that we're making on IG neuro. That was an area, again, that had really solid growth across a broad spectrum of products within there. We saw across various other specialty products, again, continued strong growth on that. What we called out on the other specialty is we had made some shifts in our commercial resources and made some investments in having better coverage across other specialties in order to enhance and to grow through that process. That has not accelerated the way that we had anticipated in the first quarter. It is one that we are continuing to be focused on and drive forward. But we think that when you look at the breadth of the portfolio that we have, there are still opportunities for us to drive that growth as we move forward. But we were calling out that we had less than expected performance and that, that is an area that we will focus on as we move ahead. I don't believe that the rest of the portfolio is feeling what we felt in the chronic inflammatory. We are still seeing growth in those areas. It's just not at the pace that we had anticipated given some of the investments that we made. Raj Kumar: Got it. And then just maybe following up and kind of appreciate all the color on the revenue acceleration efforts. And so as we kind of think about what it means from a capital investment standpoint and then some of the time lines associated with the different pillars, I guess, does that kind of drive still confidence in the overall long-term framework of high single-digit top line growth? And maybe just kind of any color around the conviction around that going forward? John Rademacher: Yes. Our investments are to reaccelerate growth, right? And we are clear around the mandate. And as Meenal called out, I mean, the organization entirely, not just our commercial team, our entire organization understands the importance of getting us back on a growth trajectory in alignment with those expectations that are set. These investments and really our focus on the near term around these three pillars is to drive that acceleration and reacceleration and the focus as we move forward. Again, our belief in the fundamentals of this business, our belief in the foundation that we have, our belief in the clinical value and the clinical realization that we can drive given this platform remains intact. This was a reset based on some of these unique market dynamics. And our belief is that we are going to drive the business and as an execution-minded organization, we are going to be able to get back on that moving forward. Operator: Our next question comes from the line of A.J. Rice of UBS. Unknown Analyst: This is James on for A.J. My question is kind of similar to the last one you just answered, maybe just expanding on a little bit about the capital deployment priorities. It sounds like maybe that M&A and share repurchases, will that kind of just be on the back burner for the remainder of the year, more of a 2027 item as you focus on getting back to that stronger revenue growth? Meenal Sethna: Sure, James. This is Meenal. I'd say the short answer is no, we have priorities, and we're going to continue to focus on all of those. We have been talking a lot on the call and even recently about the organic investments that we're making, but that's also because that's really our first priority is how do we reinvest in the business to grow organically. We're absolutely still committed to M&A activity. We've talked about adjacencies and tuck-ins. We have a very active process and an active funnel going on. And you probably saw that we expanded our revolving credit facility. We more than doubled it. And that was in large part to be able to enable us to fairly seamlessly move forward with some nice M&A deals. So that's why we've expanded that revolver because it gives us quick access to capital when that happens. And then lastly, I've been talking about for several months now that we would continue to focus on periodic share buyback, but that's our third priority. So you're not going to see us in the market all the time with a standard program. But where it makes sense on multiple variables, we'll definitely -- you'll definitely see us in the market buying back shares. So our capital allocation priorities remain intact, organic M&A, periodic share buyback, and there's no change to that. Operator: This concludes the question-and-answer session. I would now like to turn it back to John Rademacher for closing remarks. John Rademacher: Thanks, Elliot. In closing, we have demonstrated consistently over the years that we are a resilient and agile organization with a team that recognizes the important role we play in serving patients and delivering on our promises. We are moving quickly to develop and execute our near-term recovery plan while we continue to invest in the long-term growth of Option Care Health. The resolve of our team has never been stronger nor have the opportunities been greater. Thank you for joining us this morning. Take care. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Kip Meintzer: Greetings, and welcome to Check Point Software's 2026 First Quarter Financial Results Video Conference. I'm Kip Meintzer, Global Head of Investor Relations. And joining me today are Chief Executive Officer, Nadav Zafrir; and our Chief Financial Officer, Roei Golan. Before we begin, I'd like to remind everyone this conference is being recorded and will be available for replay on our website at checkpoint.com. During the formal presentation, all participants are in a listen-only mode that will be followed by a Q&A session. During the presentation, Check Point's representatives may make forward-looking statements. Forward-looking statements generally relate to future events or future financial and/or operating performance. These statements involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Any forward-looking statements made speak only as of the date hereof, and Check Point Software undertakes no obligation to update publicly any forward-looking statements. In our press release, which has been posted on our website, we present GAAP and non-GAAP results, along with a reconciliation of such results as well as the reasons for our presentation of non-GAAP information. If you have any questions after the call, please feel free to contact Investor Relations by e-mail at kip@checkpoint.com. Now I'd like to turn the call over to Nadav. Nadav Zafrir: Thank you, Kip. And thank you all for joining us. So I'm going to begin with the key operating dynamics of the quarter and obviously talk a little bit about how we're advancing our strategy to drive sustainable long-term growth. So to begin, in our first quarter, we delivered double-digit growth in non-GAAP earnings per share and adjusted free cash flow with revenue growth at 5%. Subscription revenue remained a key strength, driven by strong demand across our emerging technologies, which actually generated 45% growth in calculated billings led by e-mail security CAM and SASE. At the same time, we do see a decrease in times research projects that resulted in lower-than-expected product revenues. As we discussed in our last earnings call, during the second half of 2025, we conducted a comprehensive go-to-market assessment with the objective of accelerating both new logo acquisition and increasing wallet share in large enterprise accounts in order to enable the successful execution of a multi-pillar platform strategy. So based on this, we implemented changes to our go-to-market model to align with these goals. And the transition to the new model did create short-term disruption to the rhythm of our sales execution and primarily affects our appliances business. Now while we're confident that the changes made are spending the sub for success in the mid and long term, we do see a short-term impact on our business that will negatively affect our 2026 revenue projections. We believe these headwinds are transitory and they reflect a deliberate reset to position our business for improved execution and scalability. We're already seeing that the current pipeline trends and ongoing customer engagements and our plans to further invest in our firewall business make us optimistic about the future growth trajectory. Beyond that, our strategy continues to be anchored around our 4-pillar approach, which we believe is well aligned with the evolving security requirements of enterprise, particularly as AI adoption expands the threat landscape. And in support of our go-to-market execution, we're strengthening our leadership team with 4 key appointments. So first, Sherif Seddik has been named Chief Revenue Officer and will lead our go-to-market organization. Sherif has successfully led our international sales business over the past few years. He brings more than 3 decades of global sales leadership experience, and he'll be replacing Itai Greenberg. I want to take this opportunity to thank Itai for his continued support during my first year and for his leadership in the go-to-market changes. Beyond that, [indiscernible], who has led our CTEM offering since the acquisition of Cyberint and has driven 96% year-over-year ARR growth will join the leadership team. You know that as organizations operate in this increasingly [indiscernible] exposure management is becoming mission-critical because it enables security teams to rapidly identify emerging threats. And the most important part is materially accelerate their mediation. And I think we have an advantage here, and I'm happy to welcome [indiscernible]. Alongside that, to lead our AI pillar, I'm happy to say that [ Adam Elin ] has joined as General Manager of AI security, and we'll also join the leadership team. Adam brings deep experience at the intersection of cybersecurity and large-scale enterprise security operations because in his previous roles, he was a CISO fidelity, [indiscernible], but he's also a founder of Blue Box security. I think Adam adds really a proven operator perspective, which is so essential in this time and we will focus on building the platform, our AI security platform to scale with the speed, the rigor and a strong commercial pipeline. And then lastly, Rafi Kretchmer is appointed a VP of Global Marketing. He replaced Brett Theiss, so we wish well on his future endeavors. Beyond that, look, you're all aware, AI is a watershed moment for the security industry. When you look at the emergence of these frontier AI models, including metals and GPT class, they're driving 2 structural shifts in cybersecurity. First one is that the barrier to sophisticated cyber attacks is literally collapsing because AI is democratizing capabilities that were once a exclusive to nation state and some very large elite "criminal organizations" and this is exposing a far broader set of enterprises to material risk. So that's number one. Number two, cyber attacks are undergoing structural industrialization. The Agentic AI enables [indiscernible] to continue scan global infrastructure, and they're generating a continuous flow of novel attack techniques. And so manual operations are giving way to automated attack pipelines. And this is what we call a checkpoint, the AI attack factories. Now when you look at the convergence of these 2 forces, it really creates a different threat environment, larger attack population that is executing more sophisticated campaigns with greater speed and volume and the time to exploit is shrinking dramatically. And we believe -- I believe that this is directly validating our ethos of prevention first, which we're second to none in the industry, in my opinion. Beyond that, a checkpoint, we're not waiting for this threat environment to materialize. Our response is ready and active. It's structured, of course, across our 4-pillar framework. The security for the network through our hybrid mesh, CCAM and workspace security. Now during this quarter, we introduced solutions to secure enterprise AI transformation. As an example, we launched the AI defense plan which is designed to secure the genetic enterprises across employee AI usage, the applications and the agents that both of these use the people and the applications. Beyond that, we introduced the AI factory security blueprint. It's integrated with the NVIDIA GPU service pinning on the server itself. And this provides end-to-end protection for AI infrastructure and we are very bullish about this. Most recently, we also announced our partnership with Google Cloud. We're integrating this AI Defense place with Germany enterprise agent platform. And this can deliver real-time runtime protection at scale. We also delivered AI-driven exposure management, enabling customers to close the remediation gap through: one, improved intelligence, than the risk prioritization and finally safe remediation, which is critical, the time to remediate in organizations today. And then finally, we launched a secure AI advisory service to help enterprise government deploy and ultimately scale AI with security and doing so responsibly. And so to close my opening remarks, our experiencing near-term headwinds in our clients business and adjusting our annual revenue guidance, we remain confident in our ability to gain market share in this expanding security market -- the emerging technologies continue to perform strongly and position Checkpoint in a really good place to secure this rapidly growing enterprise attack surface driven by our adoption and we believe that our differentiated strategy, our core capabilities, our strong financial profile with its industry-leading profitability. And at the end of the day, a disciplined execution over time position us to really benefit from the accelerating demand for secure enterprise and create AI, which is transforming the organizations at scale. So before I take the question, with that, I'll turn to Roei to give you some of the financials. Roei Golan: Thank you, Nadav. So thank you, Nadav, and thank you, everyone, for joining the call. So as Nadav mentioned, the third quarter was a solid quarter with 5% growth in revenues, driven by 11% growth in our subscription revenues. Our total revenues reached $668 million and were $2 million below the midpoint of our projection as a result of lower revenues from firewall appliances that impacted our product revenues. When we are looking around subscription revenues, they grew by 11% to $323 million and were at the midpoint of our projections. Our adjusted free cash flow was very strong and reached $457 million, $70 million above the midpoint of our production and grew by 11%. Our non-GAAP EPS was $2.50 and was exceeded our guidance with 13% growth year-over-year. So as mentioned, we had 5% growth in revenues, while our deferred revenues grew by 8% to $2.06 billion. Our calculated billings totaled to $548 million reflecting a 1% decline year-over-year, while our current calculated billings grew by 2%. Our [indiscernible] performance obligation grew by 7% and reached $2.592 billion. So as we -- as Nadav indicated earlier in the call, we had lower-than-expected product revenues, mainly as a result of the disruption affected by the changes we made in the go-to-market organization. As we are looking in the second quarter -- into the second quarter, we do see this disruption [indiscernible] plants revenue. But based on the finance that we see, we expect to see an improvement in the second half of the year. It is important to note that our new business continues to be stable, and our fire subscription ARI continue to grow year-over. When we are looking on our subscription revenue, we do see projectory for reacceleration, and we do expect to see acceleration in our subscription revenues in the second quarter and for the full year driven by strong demand by emerging pillars, mainly by [indiscernible], system and SASE. So as indicated, our total subscription business continues to be strong. We continue to experience strong demand for our emerging products, which remains the primary driver of our revenue growth. In Q1, our Email Security SASE in ERM in total exceeded growth in ARR and over 45% in calculated billings year-over-year. It is important to note that although the revenues are still not significant for the total business, we see a significant growing finance for our AI security offering and that's together with the [indiscernible] expect to drive the subscription revenue growth in the next few quarters. When we are looking at the revenues by geography, so 46% of our revenues came coming from EMEA, which had 6% growth [indiscernible], 42% of the revenues came from America and believe a 4% growth year-over-year, and the remaining 12% came from Asia Pacific and this had 2% growth. When we are looking on the P&L for this quarter, so gross profit increased from $564 million to $586 million, representing a gross margin of 88%. Our operating expenses, excluding R&D grants, increased by 14%, while on a constant currency basis, our OpEx increased by 12%. Q1 results include approximately $27 million of benefit from R&D grants to be received at the new Israeli incentive program law, which was ratified during the period, and that's reflecting the surge impact in our financial results. Our operating expenses, net of R&D grants were $321 million and increased by 5% year-over-year. When we're looking on these grants, we do expect to have an approximately benefit for the total year of $100 million on our operating income, reflecting the new law that was just approved. So just finalize. The increase in our OpEx is primarily as a result of our increase in our workforce as a result of the investment in our AI security and investments in sales and marketing program. Looking on our non-GAAP operating income, it continues to be strong at $265 million or 40% operating margin. Our non-GAAP net income increased by 8% and reached $265 million, while our GAAP net income reached $192 million similar to last year. Our non-GAAP EPS grew by 13% and reached $2.50 while our GAAP EPS was $1.81, represent 5% increase. Moving into our cash flow and cash position. So our cash balances as of the end of the quarter, together with master [indiscernible] short-term deposits reached $4.4 billion. During February, we completed the acquisition of [indiscernible] for approximately $92 million of net cash consideration. Our adjusted free cash flow increased by 11% and reached $457 million. In addition, we continued our buyback program and purchased 1.9 million shares for a total of $325 million at an average price of $170 per share. To summarize. So strong double-digit growth, non-GAAP EPS and adjusted free cash flow, we do see continuous strong demand for our emerging technologies SASE, e-mail security system. And from the other hand, we did see -- we do see in the near term lower new business from firewall that affected our revenues. When I want to go into the guidance for the second quarter and for the full year. So for the second quarter, our total revenues are expected to be between $660 million to $690 million. Our subscription revenues expected to be between $328 million to $338 million and non-GAAP EPS is between $2.40 to $2.50 while our GAAP EPS expected to be around $0.70 less. While our adjusted free cash flow is expected to be between $145 million to $175 million, regarding the cash flow, the free cash flow, important to say that there is some -- there are some payments, significant payments that moved from Q3 to Q2. But again, that's mostly shifting from Q2 to Q3. When we are looking on the full year guidance, so as a as indicated, we are adjusting the revenue guidance, our cost of revenues guidance for the full year. The new -- the [indiscernible] is between $2.770 billion to $2.850 billion. That's a reflection of expected lower revenues on firewall appliances mainly in the second quarter. Our subscription revenues were not changing. We do see strong demand for emerging products, and we opt to finish in the upper end of the range, but we are keeping the same range for the full year. Same thing for non-GAAP EPS, we are not changing our non-GAAP EPS expected to be between $10.05 to $10.85. GAAP EPS is going to be slightly higher, again, mainly because of lower share count and slightly higher acquisition-related costs. And our adjusted free cash flow, we are not updating the guidance, same as we gave between [indiscernible] I'll stop sharing. [indiscernible] Kip Meintzer: Sorry about that guys, having a little bit of technical difficulty. Starting off today's Q&A is going to be Brian Essex from JPMorgan, followed by Rob in the Piper Sandler. Brian Essex: I wanted to dig into product revenue performance. We'll take the easy question. was macro or customer decisions to sweat assets not a factor at all? And if not, can offer a little more color around the depth of the go-to-market changes. Where was the friction in the process most apparent? Where did the system break down? And what gives you confidence that this is just a near-term issue? Unknown Executive: Thanks. So look, I don't think the macro is the issue here. When you look at our -- the changes that we've made to our go-to-market, they are significant. So it's optimizing accounts to account managers. It's doubling down on our marketing, doubling down on our channels. But it did create a short-term headwind in terms of execution as many of our people changed their role or changed accounts, and I see this as the main driver or the main headwind that we're seeing in terms of the firewall business. So I don't think this is -- we don't see a macro problem. We're actually already seeing that the engagement with our customers and the funnel going back to normal. So we're optimistic that this is sort of a blip but it does take a little time to sort of get the motion back and everybody in their seats, et cetera. But for the long run, we believe this is the right thing to do, and we're going to continue to invest. Now this is just on the workforce, but also leadership changes in America leadership changes in other areas. So there's a process here that we're going through. I think we're at the tail end of the disruption and very optimistic about the future. And at the same time, when I actually look at the demand side, we're seeing different areas of growing. So as an example, we're very bullish on new AI data centers where I think we have a very unique capability for the longer term, that's how we see the market, and we're optimistic. Kip Meintzer: Next up is Rob Owens from Piper Sandler, followed by Joseph Gallo from Jefferies. Robbie Owens: Obviously, the world has been changing quickly over the last 6 weeks. I'd love to understand your perception relative to what's happening and how that's influencing Checkpoint's business. But in line with that, it seems like you're losing momentum at a critical time for cyber here. So how do you ensure that this doesn't lead to longer-term share losses as customers are having to make decisions in the near term to protect against these next-generation threats? Unknown Executive: Well, honestly, I actually think that we're gaining, not losing when you look at the big picture, right, take [indiscernible], an example, right? We think that, as I said, this is going to create a demarketization industrialization and change the nature of the business. And I actually believe that we're really well positioned to answer that. At the same time, when you look at the relevant pillar, [indiscernible] has grown 96%, e-mail, which we are one of the best-in-class in the industry and ready for this AI revolution is growing over 40%, et cetera. So that's one thing. The other thing is when you look at the fundamentals of the change in cybersecurity, I actually think that our ethos of prevention first as an example, if you look at the latest reports by NSS and [indiscernible]. Again, once again, we're at 99.9% ability to stop a tax of known CBEs. This was always important. I think now it's becoming really critical because that's exactly the change that's happening. You're going to have to be able to block as fast as possible or everything that is possible and then you're going to have to remediate extremely fast. I think from both sides of the equation, we actually have an advantage here. Kip Meintzer: Next up is Joseph Gallo from Jefferies, followed by Adam Tindle of Raymond James. Joseph Gallo: I know you talked about the impact to appliance execution, but I think the most exciting part of the story is the subscription growth and the potential for acceleration there. But if you look at current billings, and you take out products, that only grew 3% year-over-year in 1Q. So just you're guiding to 12% subscription growth and acceleration in the back half. Maybe just walk us through a little bit more about the confidence in that? And then just any broader commentary on how we should think about billings going forward. Unknown Executive: So I'll take it. So you're right in terms of current billings, excluding products, but that takes into account also maintenance and software and maintenance updates. And actually, pretty flattish right now. So if you're excluding that, so actually the growth of subscription is much higher subscription billings. And we do see, by the -- we see the final even for the second quarter and also -- and mainly for the second half of the year. We see very strong demand for our subscription packages, our subscription offering, if it's email, [indiscernible] we discussed. And also AI security. Also the numbers are still not significant in terms of bookings for AI security, but we see very significant funnel that was created just in the last few weeks. We see the enthusiasm about it. We have a new leader there. And now that's managing this business. So definitely, we feel positive about the subscription also for the next few quarters to be accelerated. Kip Meintzer: Next up is Adam Tindle from Raymond James, followed by Shaul Eyal of TD Cowen. Adam Tindle: I just wanted to just take a step back to kind of 2 major things that we're having to digest here on this call. The first one, I want to understand what exactly is happening to product revenue that is causing this revision? Is there changes to terms of distributors? Is there issues of supplies and shipping? What exactly is changing and happening that's causing this mechanically? And the second thing that we're digesting here is the go-to-market changes that you're implementing I wonder, we've gone through this before with checkpoint in the past, a number of changes to go-to-market leadership. When you look at these, if you could maybe compare and contrast some of the things that have been done in the past to this time, what you've learned and what might be different with these go-to-market changes? Roei Golan: I can start on the third one, and Nadav will take the second. Yes. So on the -- in terms of the product side, same affected the product. So we did the changes in the go-to-market organization. part of these changes were a lot of changes for assignments for eco managers that will work from large enterprise and enterprises that moves from accounts to other accounts. This has some kind of -- again, something that was expected, but that had more disruption than we expected on the business, mainly on the new business. On the new business on the -- I'll remind you that the funnel for research projects for new business on firewall takes a little bit more time than the sales cycle is longer than a sales cycle for selling send e-mail or other products or this kind of product profile is usually takes longer. And we see disruption in final creation mainly in Q1, that's affecting mainly some of it in Q1, but mainly in the second quarter. And therefore, we see the finance starting. We see a very nice improvement in the last few weeks after all people are on and the relevant roles and they are starting to open their accounts. And we're starting to see the finance creative in the second half or the second half of the year. But as we mentioned, there is a near-term headwind, specifically for the second quarter. Nadav, do you want to take the second one? Nadav Zafrir: Sure. Adam, thanks for the question. Look, we I would say a couple of things. Number one, it's my job to continue and optimize and see that I have, that we have the right leaders in the right place I think that one change that we're doing, which is, I think, a differentiation is beyond just the structural changes that Roei spoke about. We're also investing more in marketing. We're doubling down on the channels. To your question about the personnel changes that we're conducting, we do want to bring strong leaders that come from the security business with the right experience, right? So in our last earnings call, we announced Rachel Roberts, who's taking as President of Americas. We -- and she has experienced vast experience in the cybersecurity market. Tom alone joined us and needing the global Adam Eli comes from the industry and is going to be the AI security. So the idea is to bring seasoned leaders that know this business and then put like we go-to-market organization. So these 2 things work together. And the third thing is, which we've been speaking about is the multi-pillar approach that we're coming with. So all in all, I'm very bullish about where that is going to take us. But I do acknowledge that in the first quarter, this has created a disruption, but I think it sets us up for success as we go forward. And you'll see more people joining us at different levels from different companies as we are just getting the right people, the right data, the right processes to create this sustainable growth. And we have the vision, we have the mission. I really believe that we have a meaningful headwind with the products that we have, and we're bullish about where that's going to take us. Kip Meintzer: All right. Next up is Shaul Eyal, followed by Shrenik Kothari. Shaul Eyal: Nadav [indiscernible] are we maybe sticking with the product revenue question as you guys know, checkpoint as well as its competitors. You guys are selling a number of appliance families, low, mid, high tier markets. Is there a specific market here in which you're seeing increased pressure or the current softness is pretty much across all market tiers? Unknown Executive: It's across what I would say, mainly around the large. And again, many of the results of the disruption in the go-to-market because there were many changes to assignment of enterprise and large enterprises are many consuming the large boxes. So that's -- I would say that. But again, we see the cost of bottom. Unknown Executive: I will say this Shaul that -- I'm trying to put together the trends that are coming. And I know that this is sort of zooming out a little bit, right? But when you think about the priorities of large security organizations in the -- today and in the next couple of years, which I think are going to be chaotic. If you believe that this democratization industrialization of the attackers, and the changes that agentification is doing in everyone's network is real, then I think that our firewalls are actually very well positioned for this future. It's nothing else because of the ability to prevent every known CVE and deploy it through our IPS in hours, not days or weeks. This is becoming more and more critical. I know that we've been preaching this for a long time, but I think this is now going to become more important. And I think gives us an advantage not with -- only with the customer like growing with the customers that we have, but going after new logos, which is actually a part of the change that we've made in the go-to-market organization. Now as [indiscernible] said, getting new logos in CTEM is much faster than getting new logos and firewall. But I think we have what it takes, and we've done the adjustments we put the right people in the right places. We'll continue to do it. It's never good enough. But I think it actually gives us a headwind not only in the emerging categories but also in the core in the firewall, which is alive and kicking it, forget checkpoint for a second. I think when you look at where the world is going right now, network security is becoming so much more important. It's one of the only places where you can really prepare an organization for the AI adoption. It doesn't happen overnight, but I truly believe this is a tailwind for Checkpoint. Kip Meintzer: Next up is Shrenik Kothari followed by Keith Bachman from BMO. Shrenik Kothari: Yes. Just maybe to switch gears from appliances, Nadav, you mentioned about the data [indiscernible] and factory blueprint and between that and the new AI defense plan, the Gemini agent integration, the sector AI, it seems like you are trying to go after multiple layers of the enterprise study strategically very compelling and talk about the opportunity. But just how should we think about monetization of the top from where you see the near-term opportunity this year in the next 12 months? Nadav Zafrir: Yes. So I'll say this, it is a process. We're making very investments, right, in a couple -- I think 6 months ago, we told you about the acquisition of [ Lakera ] as an example. This is where we're building a truly foundational model. We believe that if you look at the security for AI, you won't be able to use existing large language models that can do everything known to humanity right phones and protect. But rather, if you want the latency, the accuracy in the cost, we are going to have to train our own model. So that's a huge investment. We're investing in the researchers, we're investing in the GPUs. We're investing even thinking out of the box, we created a game called Gandalf where we have over 1 million worldwide users that thousands of them attack us every day so that we can put that into the -- to our small language model to continuously breed it so it can get better and better. That's a big investment. Now on top of that, we're building security for AI as a platform, so for users, for employees, for applications, whether they're looking inside or to customers. And both of these, both people and applications using agents. And we're doing the security to the people. We're securing run time. We're doing it, as I said, with Gemini. We're also doing it with Copilot for Microsoft. Now all this is heavy investment. Now Adam is coming in to lead also the commercial side of this. We're hiring the first salespeople to drive this. And we think that it's going to be still a small part of 2026, but each potential for the future. That's one thing. Beyond that, it's also going to feed into our other pillars because by having those foundational models, we also have people that are simulating sort of in what we call the future labs, what these attacks of the future are going to look like. So it's not just the AI pillar. It also feeds into our intelligence, it feeds into our e-mail security it feeds into our endpoint security. And I think over time, the value of real security, real proactive security is going to become more and more important. So at the end of the day, it's a big investor but I think it's essential, and I think it positions us well for what's coming. Kip Meintzer: All right. Next up in place to Keith Bachman is going to be Todd Weller and that will be followed by [indiscernible]. Todd Weller: Just a question on memory pricing. What are you seeing in terms of impact? More importantly, how are you thinking about it kind of going forward over the remainder of this year? And then any kind of additional pricing actions being contemplated? Unknown Executive: So memory pricing continue to inflect to increase. I mean we see this trend continues. As I mean, as for what we are looking at is when I set our revenue -- our product revenues, I talked about it already when we gave the full year guidance. We took into account some disruption from the memory cost, fundamental cost also on the firewall business. Right now, I think it's tough to say if there is anything related to that. I mean we are looking on the final for the second half of the year, we see good finance for firewall. So I mean, tough to say how it will impact right now. I don't know to tell you it impacted the behavior of our customers in terms of buying firewalls buying the clients. But definitely, I can tell you that the memory costs are continued to surge, and I don't see it stop, I mean, in the near term. Kip Meintzer: Next is [indiscernible] with BofA. Unknown Analyst: I keep asking you the same question. I'm going to come back to the same question. You joined the company a few years ago with hope that growth is going to accelerate. You've done many things on sales on products and growth has decelerated instead of accelerating in the sense that we are now at 5% environment. It's just not big enough for such a great space there could not be a better space for you to grow and accelerate revenues -- revenue growth. So the question is, what is not working with the strategy? What is not working? How can you change the growth trajectory to the point that we see double-digit sustainable double-digit growth. And really to synthesize the question, the issue is what is the problem? Meaning, is it about sales execution? Is it about portfolio? Is it about the employee composition and the fact that maybe a culture needs to change. I'm trying to understand -- what do you -- what can you do in order to change the growth trajectory? Unknown Executive: Well, first of all, I totally agree that we couldn't be in a better industry right now. And I think that, like you said, that's why I'm here, and that's what I'm here to do. Look, as we said before, yes, some of it is execution, and that's why we're making these changes that we just spoke about, which are meaningful, hundreds of people, getting new accounts, moving seats, pretty new leaders I think it's essential, giving us a short-term headwind, but I think we'll drive that sustainable growth that you're looking for. At the same time, I do want to say that when you look at the total product portfolio that we have, although it's still not the biggest part of what we do, if you look at the emerging technologies that we have, right, e-mail, CTAM, SASE and hopefully -- and now joining with security for AI, that as [indiscernible], as we spoke about before, is going really, really fast and becoming a bigger piece of what we're doing. So all in all, I think that the vision and the strategy are there, we're making the changes that we need to do. it does take time. And we need to continue course and have the patience to get there because we need to do it with discipline. And that's what we're doing, and it's going to take time. But believe that we're in the right business with the right products. In every one of the pillars that I spoke about, we're also looking at acquisitions. And I believe that when you bake all that together with the leadership that we're putting in place, we'll be in a good place in the future. Kip Meintzer: Next is Joshua Tilton from Wolfe followed by Jonathan Ho of William Blair. Joshua Tilton: I love getting no warning. But with that in mind, I'll take you to one. Maybe one for Roei. Can you just reiterate exactly what you expect in the second half for appliance. I wasn't sure if you said stabilize or recover? And then maybe just talk to kind of the visibility you have or maybe the confidence you have around that view? Unknown Executive: So for the second half of the year, you do expect to see improvement. Right now for the second quarter, we do expect to see a decline sharper decline in the product revenues. But for the third quarter and the fourth quarter, it's going to be gradually. We receive a much better funnel also for the appliances. And we do expect to see improvement there. It doesn't mean that we're going to grow in Q3 and Q4 product revenues. But definitely, we're going to show better performance compared to what we have -- what in -- what we had in Q1 and what's expected for the second quarter [indiscernible] Joshua Tilton: Can you just talk to like what's driving the confidence in that view? Is it just what you see in the funnel? Like any incremental color would be helpful there. Unknown Executive: So we see progress in the -- we see improvement in the [indiscernible] we're looking. We are checking all the time, I mean, these metrics on a week year basis. We see improvement in the final for the second half of the year. We see very nice deals, large deals in the funnel that are progressing. And we -- and again, we are doing these checks. We are doing the discussion with the go-to-market leadership of the world we feel more confident about the second half of the year. We do see the already some nice deals have been we already won over competition, or our competitors, win backs or cloud enterprises. Of course, it's not going to be -- we're not going to see revenues in the second half of the year, but we see some -- these kind of deals being closed and will affect our revenues in the second half of the year. But all of that together put us in much better -- I mean much better view for the second half. Kip Meintzer: Next up is Jonathan Ho, followed by Peter Levine. Jonathan Ho: You referenced some strong growth in your securities for AI solutions, but they're still relatively small contributors. But with that strong pipeline build, particularly in the last couple of weeks, when do you expect AI security to be more of a material contributor? And will this be more sort of stand-alone products or can there be maybe a stronger given the spear type solution where you can land some new customers? So cross-sell within your base versus [indiscernible] Unknown Executive: Yes. Thanks for the question. Look, early innings, right? And I think to become a substantial part of our revenue, that will only happen in -- as a stand-alone that will only happen and it's a big investment. Organizations are going to inevitably even those that are trying to sort of slow down the adoption inevitably need to adopt new AI for their employees, for their applications, et cetera. We're all seeing it in our own personal life. We're seeing it in our businesses, et cetera. but it's a process. And so as a stand-alone business, I think to be substantial to Check Point, 2027. Beyond that, you're right. It's not just the stand-alone. So for example, it's part of our workspace pillar where workspace employee usage is sold as a bundle through our workspace when you look at the infrastructure level, where we spoke about the firewall business, being able to double down on the infrastructure and embed AI in the NVIDIA GPUs. Again, as Roei said, we're only seeing the first links of these projects happening. But as they happen, I think we are gaining advantages. So to answer your question, I think it's both as a standalone and as a contributor to our other pillars. And even to our -- not just as our product is one of the fastest-growing things in security for AI is the AI red teaming, as an example, which is a part of our services business. So it does have an impact on each one of those and as a stand-alone but to be a real impact on our revenue and become a significant part of 2027. Kip Meintzer: All right. Thank you, Jonathan. Next up is Peter Levine, followed by Saket Kalia. Peter Levine: Maybe just to double down. So we last reported mid February, just help us what -- like when do you really see the material impact to the go-to-market strategy? And then maybe help us understand the deals that were impacted are these upsells renewals or like net new deals meeting, what's the level of confidence that if it was net new deals since you're still in the pipeline? Obviously, you talked about stabilization in the second half. But just help us understand like the impact on like where [indiscernible] for? Unknown Executive: I think when we report it back then in February, we were in the middle of deposit. I mean, we are [indiscernible] we started it some time in January, but in the middle of the process. We did expect some kind of disruption back then. But when we looked and after when I -- when we look -- we are looking at February and March, we did see this disruption in our funnel, affecting the funding creation mainly for the second quarter and some for the third quarter, we did see some delays on finance creation. We see that coming with we do see these delays expecting it. And we've seen in the last few weeks, the impact, you see that in the last few years, we do see a significant change in the finance creation. And these delays mainly impact the second half or the first half of the year. And again, there are -- of course, there are several deals that have been pushed from one -- from first half to the second half. It's important to say that renewal business looks stable. We don't see any -- many affected new businesses and in firewall and that's the main change. I mean when we put back -- I mean we are being in the middle of the process. And as Nadav said, today, we are -- I think we are in the last inning, we're almost done with these changes, and we are now more confident what we see for the second half of year. Kip Meintzer: Up next is Saket Kalia, followed by Eric Heath. Saket Kalia: Okay. Great. I want to shift gears a little bit and Roei, maybe the question is for you. The growth in emerging ARR and billings was great to see, 40%, 45%, I think those numbers were. Can you just remind us how big those businesses are in aggregate as a percent of subscription revenue. And then I want to connect that back to some of the go-to-market changes. How can some of the go-to-market changes maybe support growth in those emerging products going forward? Roei Golan: So we don't -- we're not disclosing it, but these specific 3 products are slightly below, I would say, slightly below 30% of our ARR for subscription. So think about that area, the specific 3 products. And Nadav, do you want to talk about [indiscernible] Nadav Zafrir: When you look at the go-to-market adjustments that we've made, it does support exactly what you said, right? We're doubling down investment on these pillars but also integrating our work -- our sales sports together with them. That is when we want to become a multi-pillar organization, we want our account managers to be able not just to do firewalls but also the emerging business. So that's part of the change that we're doing. Beyond that, we need to go to our channels and introduce them to these new products, which some of them are novel to them. So you're right. On the one hand, we need to push these emerging technologies and capabilities faster and we're doing that. But at the same time, we are going to go after new logos, win backs, et cetera, with what I believe is a tailwind of what's happening from the attackers perspective and our capabilities. And at the end of the day, it's obviously the change itself is disruptive. But now I think we're at the tail end of the discussion, as Roei said, we're starting to see the upside but it's never ending. We've got to get the right people. We've got to get the right data. We got to get the right processes. And then again -- but ultimately, it's putting a really big focus on our go-to-market all the way from funnel creation, demand creation, channels, the people, the processes, et cetera. And that's what we're doing. And I think it positions us for the future. Kip Meintzer: All right. Next up is Eric Heath followed by Roger Boyd. Eric Heath: I wanted to come back, I mean, to your comment about M&A. It's been part of the strategy with tuck-ins and you have the balance sheet strength, which is a strong cooper yourself and relatively muted valuations out there, broadly speaking. So just -- anything you can share about more transformational M&A as part of the strategy going forward? Unknown Executive: Yes. Thanks, Eric. So we're looking at this based on our pillar approach, right, which at least in my mind, is very, very clear. What do we want to achieve in the hybrid niche? What do we want to achieve in CTAM, what do we want to achieve in workspace. And in each one of them, our M&A teams are constantly hunting for early-stage start-ups with foundation with technologies that we can take advantage of, but also larger opportunities. And I do think that one, our balance sheet; second, our discipline. And third, the volatility in the market is going to create opportunities for us, and we are going to make those moves when it's strategically within what we want to do in the pillar. We believe that from an execution culture merge -- we have the ability to do it. When all these DUCs are lined up, that's when we're going to make those bigger moves. Kip Meintzer: Next up is Roger Boyd followed by Matthew Hedberg. Roger Boyd: I wanted to come back to emerging products. I think you mentioned 90% growth in CTEM, 40% growth in e-mail. Just any sense on where you are in terms of SASE growth. And to what extent is that business impacted or not impacted by some of the dynamics you're seeing across products and firewall right now? Unknown Executive: Yes. Thank you. So look, SASE has become a fundamental part of the hybrid mesh network security, and we're making really big investments there. We have -- our R&D part is rushing to complete our feature list. We're now able to go upstream to the larger enterprises and creating some differentiated unique capabilities. In terms of the impact, no, I don't think it was impacted by the go-to-market change. I think the go-to-market change primarily affected our core firewall with people moving around. In fact, we're doubling down on our SASE sales capabilities. We joined forces with our CGS, our cloud network security sales force with SASE. So in effect, that we now have a bigger team and more salespeople that can do both. And as this matures, the most important thing for us is to make sure that our general account managers can also be selling SASE and that's sort of the trajectory we're going into. But it is becoming more and more important around our hybrid mesh network security as organizations are moving. And in fact, I think adoption of AI is actually going to make this even more critical. Kip Meintzer: All right. On our last questioner today is going to be Matthew Hedberg. Matthew Hedberg: With all the advancements from some of the AI models and with [indiscernible], I mean it's got to represent an incredible challenge for not only customers, but even for some of your engineers. Like how -- what is the focus internally with keeping up with this rapid change from these frontier models? And like how do we as a secret community adapt to this? Unknown Executive: Yes. Look, I think that's sort of the biggest question that we're all looking at, right? So when you think about it, we're witnessing democratization and industrialization from the attachment side. That's a huge shift. And our networks as they become identified, they really change the nature of the network because if you really want to harness agents, you got to give them the ability to get into different data sets and so that creates different pathways that we haven't seen before. This is not a new shift, but it's accelerating dramatically. And so look, we're preparing for this era for a long time. It's not just about the single model announcement like [indiscernible] and I think we're executing intensively over the past year. I'll give you one example of what sets us apart we have the depth of the research. We have folks in Tel Aviv in Zurich, in San Francisco that are building this foundational model that we're constantly feeding in order to anticipate that future. And again, like I said before, this allows us not just for the latency and accuracy, but also the cost structure. We started working in different verticals like banking, health, energy, with large design partners so that not only we try to anticipate what the attackers are doing, but they also tell us what they are doing in order to optimize their own organizations, irrelevant, not because of cyber, but because how they want to harness these models. And together, we're trying to understand how to security adopt them. One of the things that I I'm very glad to see is that someone like Adam Eli is joining us. And then we're seeing like we're securing Microsoft Copilot. We're securing Gemini at Google. And so you're right. This is a fundamental change. I think at the end of the day, on the one hand, we want to move really fast with AI adoption. On the other hand, we need to use our decades of hardening our environment. so that we can get ahead of the curve before exploits go public. In this case, I think that our IPS signature and WAF rules is best in the industry right now. And so I think it positions us well. I think there are going to be many more models. I think a lot of them are going to become publicly available. And so we're really just seeing the beginning of this on 0 days become 1 day. The time to patch is going to need to accelerate dramatically. This is where we're bringing our CTEM capability. And again, when you put these things together, I really think that we have a proposition to customers that not just going to keep them more safe, but also allow them to do this AI adoption. Having said all that, look, there's a lot of unknown. I want to be very clear about that. Some of the things that we're seeing with these new models is truly a game changer. And so what we're doing in order to try to stay ahead of it is not just to try to see what's happening in the wild, but also to get -- to try to simulate how the attackers are going to take advantage of these tools because the whole attack process, everybody is talking about vulnerabilities, but there are so many other things that we need to be aware of in order to stay ahead of this. In that sense, these are really accelerating time. I think like we said before, this is a good time to be in this industry from a business perspective, but it's also one of the most important times to be in this industry. so that we can keep this digital world running. Kip Meintzer: All right, guys, thank you very much for attending. I'm sure we'll see you guys throughout the quarter, and we'll be speaking to quite a few of you over the next few days. Have a great day, and we'll see you guys soon. Unknown Executive: Bye-bye now. Thank you.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden's Reports First Quarter 2026 Results. Just a reminder, this call is being recorded. [Operator Instructions] I would now like to turn the call over to Aaron Reddington. Please go ahead, sir. Aaron Reddington: Good morning, everyone, and thank you for joining us for Belden's First Quarter 2026 Earnings Conference Call. With me today are Belden's President and CEO, Ashish Chand; and Executive Vice President and CFO, Jeremy Parks. Ashish will provide an overview of our first quarter results before turning to a discussion on today's announcement that Belden has entered into a definitive agreement to acquire Ruckus Networks from Vistance Networks. Jeremy will discuss the financing aspects of the transaction and our immediate delivering plans. We issued press releases related to our earnings and this transaction announcement earlier this morning and have prepared slide decks for both announcements. These materials and a transcript of our prepared remarks are currently available online at investor.belden.com. Please note that the presentation used during today's call is the transaction announcement presentation. The regular earnings presentation is loaded to our website for your reference. Turning to Slide 2. I'd like to remind everyone that today's call will include forward-looking statements, which are subject to risks and uncertainties as detailed in our press releases and most recent Form 10-K. We will also reference certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures can be found in the appendix to our presentation and on our website. And now to Ashish. Ashish Chand: Thank you, Aaron, and good morning, everyone. This is a significant day for Belden, and we appreciate you joining us. Today, we announced an important step in our solutions journey, an agreement to acquire Ruckus Networks, a market-leading provider of Wi-Fi and enterprise switching solutions. This transaction directly accelerates our evolution into a full stack IT/OT networking solutions provider. Ruckus brings industry-leading wireless and switching technology that our customers in hospitality, education and health care are actively demanding and that we soon will be empowered to deliver as part of a complete end-to-end networking solution. Equally important, these same capabilities create a compelling opportunity to bring high-performance wireless and switching to our industrial customers who are increasingly looking to converge their IT and OT environments. Together, Belden and Ruckus will offer something no single competitor can match, a complete active and passive networking solution spanning the industrial edge to the enterprise campus. We're excited about what this means for our customers, our partners and our shareholders, and we look forward to sharing more details on the transaction today. Before we do that, let me cover the highlights of our first quarter results on Slide 4. In short, we had a strong start to the year in the first quarter. Our team executed well, and we continue to build on our momentum with healthy year-over-year organic growth in key verticals. For the first quarter, both revenue and adjusted earnings per share exceeded the high end of our guidance range. Revenue totaled $696 million, up 11% compared to the prior year, and adjusted EPS came in at $1.77, also up 11% compared to the prior year, demonstrating the earnings power of our growing solutions portfolio. Revenue for the quarter increased 7% organically year-over-year with growth across all our markets in major regions. The Americas were particularly strong with the U.S. up high single digits year-over-year. Across our market categories, automation delivered solid mid-single-digit organic growth with broad-based gains in key verticals, including discrete and energy. Smart buildings grew double digits organically, propelled by momentum in our priority verticals and accelerating solution adoption. Broadband rounded out the quarter with mid-single-digit organic growth during a seasonally slower period. Our profitability continues to strengthen. Adjusted EBITDA was $118 million, up 14% year-over-year, and adjusted EBITDA margins expanded 40 basis points to 17%, reflecting our growing solutions mix and continued operational leverage across the business. As we discussed last quarter, we continue to pass through copper and tariff-related costs, which modestly diluted our reported margin percentages. Excluding these pass-throughs, adjusted gross margins were flat and adjusted EBITDA margins expanded approximately 100 basis points year-over-year. Incremental EBITDA margins once again aligned with our target range, underscoring the operating leverage in our model. At the same time, we are continuing to invest in the foundation of the business, putting capital into capacity, footprint optimization and our back-end systems to scale solutions delivery and support long-term growth. Turning briefly to guidance. Assuming a continuation of current market conditions, we expect second quarter revenue of $735 million to $750 million, GAAP EPS of $1.53 to $1.63 and adjusted EPS of $1.95 to $2.05. Underlying demand signals remain encouraging, though near-term visibility is limited and the macro environment remains fluid. Our outlook reflects a balanced, measured view consistent with typical seasonal patterns. This guidance is provided on a stand-alone basis and excludes any contribution from the proposed Ruckus acquisition. Taken together, these results reflect the momentum in our solution strategy. Customer demand for integrated IT and OT networking solutions is accelerating, and we are well positioned to capture that opportunity. This was another quarter of consistent execution, reinforcing our confidence in our outlook and long-term strategy. Turning to Slide 5. I want to take a moment to reflect on the journey that has brought us to today's announcement because context here is important. When we began our solutions transformation early in 2020, we made a clear commitment to investors that we would systematically transform Belden from a product-centric company into a solutions-driven provider of integrated networking infrastructure, and we would do it in a measured, disciplined way that created lasting value for our shareholders. The results speak for themselves across four clear objectives. First, we said we would deliver consistent financial results with healthy growth, and we have. Since 2019, we have grown revenue at a 5% CAGR to a record $2.7 billion in 2025. At the same time, we grew adjusted EPS at a 12% CAGR to a record $7.54 in 2025. Second, we said we would advance our solutions offerings to transform the business. Solutions reached 15% of total revenue in 2025, on track to achieve and even exceed our 2028 target, a target that today's announcement accelerates meaningfully. Third, we said we would expand profitability while continuing to invest in growth. Adjusted EBITDA margins continue to expand with incremental margins consistently in the 25% to 30% range, demonstrating the operating leverage embedded in our business model. And fourth, we said we will deploy capital with discipline and purpose. Throughout this journey, we have repurchased over $700 million of outstanding shares while simultaneously executing multiple strategic acquisitions to build out our solutions portfolio. Each of these steps has been deliberate and interconnected. The solutions mix growth drives margin expansion. Margin expansion generates cash flow. The cash flow enables disciplined capital deployment. And finally, capital deployment, including today's announcement, further accelerates the transformation. This is what executing on a multiyear solution strategy looks like. And today's announcement is a logical next step as we look to strengthen our solutions offerings with active products that have a strong market presence in our priority enterprise verticals. Now please turn to Slide 6. Before I walk through the details of the Ruckus transaction, I want to be clear about something important. Our strategy has not changed. What you see on the slide is exactly what we committed to on our last Investor Day, and it is exactly what we are executing against today. Four pillars: growing our portfolio of best-in-class networking and data products, advancing our solutions capabilities, enhancing growth with selective M&A and delivering long-term earnings and free cash flow growth. Each of these is progressing. Our product portfolio continues to strengthen. We are seeing increasing adoption of our integrated offerings and our solutions pipeline is growing as customers look for more comprehensive end-to-end capabilities. Our margin profile remains solid, supported by favorable mix and continued operating leverage even as we invest in innovation and go-to-market capabilities. And on Pillar three, selective M&A. This morning's announcement is a direct and deliberate expression of that commitment. As we've shared previously, our M&A pipeline has been focused on closing key gaps in our technology stack that strengthens our solutions offerings, including wireless capabilities, expanding access to customers pursuing IT/OT convergence and enhancing our software platform. Ruckus advances all three. The Ruckus acquisition is not a departure from our strategy. It is our strategy executed at scale. It fills a critical gap in wireless and enterprise switching capabilities, expands our addressable market and accelerates our ability to deliver the end-to-end IT solutions our customers are asking for. Taken together, these four pillars reinforce that our transformation is on track, our execution is consistent and that we are building a stronger, more durable business. With that foundation in mind, let me now turn to the details of the Ruckus transaction. Now please turn to Slide 8. This morning, we announced that we are acquiring Ruckus Networks from Vistance's Networks for approximately $1.85 billion in cash. Simply put, this is a pivotal acquisition for Belden and is a major step towards building the most complete IT-OE networking platform in the market. Ruckus Networks is a market leader in enterprise Wi-Fi and switching with 48,000 customers globally across many of our existing target verticals. Ruckus immediately strengthens our financial profile and puts us on a trajectory to exceed our 2028 solutions mix target. The combination creates a unified platform that is well positioned to take advantage of customer demands as IT and OT continue to converge. Now on to Slide 9. Ruckus is a market leader, and that leadership is what drew us to them. Their technology portfolio is best-in-class, first to market with enterprise Wi-Fi 7, a leading enterprise switching portfolio and unified wired and wireless management offerings. These are not incremental capabilities. They are differentiated and they're exactly what our customers are asking for. Their vertical presence is equally compelling. Hospitality, education, health care, warehousing and manufacturing are also core Belden verticals and align nicely with our existing footprint. Ruckus has deep roots with 48,000 customers globally and strong channel partnerships built over many years. That installed base represents an enormous opportunity for Belden. And the financial profile speaks for itself. $687 million in revenue last year with gross margins above 60%. That is immediately and structurally accretive to Belden's margin profile and earnings power. Finally, Ruckus has a strong experienced team of over 1,700 employees. I've gotten to know their leadership well, and I look forward to combining our teams to deliver an even more compelling offering for our customers. Turning to Slide 10. The most powerful long-term driver of this transaction is IT/OT convergence. Today, customers increasingly operate in environments where enterprise and industrial networks must seamlessly work together, and they are looking for partners who can deliver across both worlds. The combination of Belden and Ruckus positions us to do exactly that, creating value in several important ways. First, Ruckus is a significant growth catalyst that meaningfully expands our addressable market. Their industry-leading Wi-Fi and enterprise switching strengthen our solutions momentum across priority enterprise verticals, including hospitality, education and health care, whilst bringing world-class active networking in markets where Belden already has deep customer relationships and trusted brand presence. Second, it extends Ruckus' high-performance platform into our industrial base where demand for converged IT and OD connectivity, including edge capabilities and the enablement of physical AI at scale is accelerating rapidly. And finally, it creates an immediately compelling financial profile with accretion to gross margins, EBITDA margins and adjusted EPS, a meaningful step-up that advances our progress against our long-term financial framework. Please turn to Slide 11. And I want to spend a moment here because this slide tells you exactly why we believe this is the right transaction. At a high level, the two product portfolios are highly complementary. -- where Belden is strong, passive infrastructure, OT wireless and industrial switching, Ruckus has minimal presence. And where Ruckus leads in enterprise wireless and enterprise switching, we have been actively looking for complementary capabilities to round out our portfolio. This is not an overlap story. It is a completion story. Our customers in hospitality, health care and education have been clear about what they need, a single trusted partner capable of delivering both the physical infrastructure and the high-performance wireless and switching layer on top of it. Ruckus gives us exactly that capability. Their Wi-Fi and enterprise switching platform is purpose-built for these high-density mission-critical environments, and it maps directly to the customers we've been working to win. The opportunity runs in both directions. Ruckus' technology can also be extended into our extensive industrial customer base, customers who are actively converging their IT/OT environments and need exactly this kind of high-performance wireless capability. Combined, we deliver a complete higher-value end-to-end active networking solution spanning enterprise campuses, high-density public venues and industrial facilities. Now turning to Slide 12. Why Ruckus and why now? The answer starts with Ruckus itself. As of deliberate investment in sales, technology and go-to-market are now translating into accelerating commercial momentum. Their Wi-Fi leadership positions them at the forefront of a multiyear upgrade cycle across both enterprise and industrial environments. And their AI-driven cloud networking capabilities are increasingly what customers demand. Ruckus is at an inflection point, and we intend to capture it. The strategic fit is equally compelling. Customers today require secure, interoperable solutions that span both IT and OT environments. Together, Belden and Ruckus deliver exactly that, a complete wired, wireless and software networking solution. As the economics are attractive, we are acquiring a high-growth, high-margin asset at a disciplined entry point, and Jeremy will walk through the financial details in a moment. We are excited about the significant growth opportunity this acquisition provides us with and look forward to closing the transaction in the second half of the year. With that, I'll turn it over to Jeremy to provide insight into the financial aspects of the transaction. Jeremy Parks: Thanks, Ashish. Turning to Slide 14. This is a disciplined and financially compelling transaction. We are acquiring Ruckus for approximately $1.85 billion in cash, representing 13x projected 2026 adjusted EBITDA. This is an attractive entry point given the company's growth profile and margin structure. Ruckus operates with gross margins of approximately 60%, which are significantly higher than Belden's current margins, reflecting their highly differentiated active product portfolio. This provides an immediate uplift to our consolidated margin profile. The transaction accelerates growth, expands margins and is accretive to adjusted EPS immediately following close. We will share additional details on our expectations at a later date. To finance the acquisition, Belden has obtained fully committed debt financing from JPMorgan, which provides flexibility to optimize our permanent capital structure between signing and closing based upon market conditions. This transaction has been approved by both Boards of Directors. And as Ashish mentioned, we expect to close in the second half of 2026, subject to customary closing conditions and regulatory approvals. Finally, I want to be clear about our capital allocation priorities post close. Delivering will be our top priority. We have a clear path to rapid reduction in our leverage, which I will walk through when we get to Slide 16. Turning to Slide 15. The strategic and financial impact of this transaction is significant. And most importantly, it is a leap forward in our solutions transformation. Together, Belden and RUCKUS will deliver high-value differentiated solutions that strengthen our existing offerings and meaningfully expand our addressable market. On a 2025 pro forma basis, RUCKUS represents approximately 20% of combined revenue and importantly, takes our solutions mix from 15% to over 20% of the business, accelerating our progress against our 2028 solutions mix target. Financially, Ruckus brings a high-quality profile to the combined company with high single-digit revenue growth, gross margins above 60% and EBITDA margins of 20% in the first full year of ownership, each meaningfully above Belden's current profile. As a result, the transaction is expected to be immediately accretive to earnings per share. The combination is a stronger, more differentiated solutions platform that meaningfully strengthens our financial profile. Now let's discuss the financing behind this transaction and our plan to deliver with Slide 16. As I mentioned earlier, our debt financing is fully committed by JPMorgan. We have a clear and well-defined path to bringing net leverage to approximately 2.9x by year-end 2027 and back to our long-term target of approximately 1.5x by year-end 2029, as illustrated in the chart at the bottom of the slide. That path starts with a strong cash generation profile. The combined business will have an adjusted EBITDA base of approximately $650 million, complemented by Ruckus' low capital intensity, which maximizes free cash flow conversion. Together, these drive a pro forma unlevered free cash flow base of more than $360 million, providing substantial capacity to pay down debt quickly. As we prioritize delevering, we intend to temporarily pause both share repurchases and strategic M&A until leverage returns closer to our long-term target. Throughout this period, our priorities are clear: disciplined execution of our combined business, continued investment in organic growth and rapid delevering to return to our long-term target capital structure. With that, I'll turn the call back to Ashish for closing remarks. Ashish Chand: Thank you, Jeremy. To summarize, we are highly confident in this transaction and the way it accelerates Belden's evolution into a full stack ITOE networking solutions provider across our target verticals and industries. We have strong conviction in our capability to successfully integrate Ruckus into our portfolio and believe that this transaction will create lasting value for our shareholders. I would like to thank the leadership teams at Vistance and Ruckus for their partnership throughout this process. Ruckus' people are central to the value of this business, and we are excited about what we can build together. I look forward to welcoming their more than 1,700 talented employees to the Belden family. Before we open the line for Q&A, I want to thank our entire team for their hard work and dedication to improving Belden every day. Today's announcement would not have been possible without their commitment to our solutions transformation and their continued execution at the highest level. Thank you all for joining us today. We appreciate your continued interest in Belden. With that, operator, please open the line for questions. Operator: [Operator Instructions] We'll take our first question from Rob Jamieson with Vertical Research Partners. Robert Jamieson: Congrats on the quarter and the acquisition. So I just want to start on RUCKUS. I mean this is -- sounds like a very highly complementary acquisition that's clearly going to help your acceleration on the Enterprise Solutions side. I just wondered if you could expand a bit more on how this aligns with the solution strategy a bit more. What does this bring to the portfolio? I guess more importantly, like what are some of the secular growth opportunities this will enable you to capture in like the near and medium term? Ashish Chand: Sure. And you're right, Rob. It certainly accelerates our strategy in terms of the enterprise markets, but I think it's equally compelling on the industrial side or the overall automation side. So -- the way to think about this is that we have made our vision really to provide our customers with the most comprehensive network solutions that can take them all the way from basic digitization all the way to autonomy, right? And it's digitization followed by harmonization, followed by convergence and then you get to autonomy. And convergence actually has a few aspects. So there's obviously the IT/OT convergence we talk about, which is the kind of big theme. But within that, there is a wired wireless convergence and there's also embedded security. And I think today's announcement really positions us to be a leader in terms of that IT/OT convergence plus the wired wireless aspect of it. So it's a fairly comprehensive solution. I don't think there's really anybody else in the market that has that full stack, the way we do. Obviously, the vertical markets Ruckus focuses on and Belden focuses on are complementary. So that's another -- it kind of -- it makes it more complete. And when you think about it from a customer's perspective, they are really looking for one single -- I'm going to say a single pane of glass, but one single system all the way from the industrial edge to their, let's say, IT data center. And I think that's the opportunity, right? It's really taking Belden to a different level in those conversations. And finally, it's the simplification. A lot of our customers don't have the expertise to deal with this complexity that comes from more velocity, variety and volume of data across many different types of pieces of the network. So getting it all together makes it simple, reduces total cost of ownership. So multiple, multiple reasons why this comprehensive IDOD strategy will work for us. Robert Jamieson: Perfect. That's very helpful. And then just as a follow-up, I know that this is going to accelerate the solutions-based mix. But where should we think about solutions as a percentage of total mix trending in the medium term? Is that going to be closer to like 30% as you look further out? And then also just on the slide of the software exposures here. Can you talk a bit about how and what RUCKUS brings from the software side and how that might align with or enhance the Horizon software platform? Ashish Chand: Yes. So on the first question, Rob, we'd articulated a goal of over 20% by 2028 in terms of solutions mix. We were already -- even pre-Ruckus, we were already on track to get there. As you know, we did 15% in 2025. I think in the medium term, it's more the 30-ish percent number that you mentioned. I think that's the right framework to keep in mind. That's what gets us excited about this opportunity, especially. And then in terms of the software, so I think there are 3 aspects of what is going on there. Let me start with the one that's the most exciting. So if you think about traditional Wi-Fi 6, which is more based on RF technology, as you get to more Wi-Fi 7, Wi-Fi 8, this has to become -- the technology has to become more deterministic and you need AI optimization really to make that happen. Otherwise, it's just too complex. So Ruckus is pretty advanced in terms of how they are working on that entire capability. And that's something we didn't have previously, right? So we had wireless products, but not with that level of AI-driven complexity. So that's an important addition to us. Second, Ruckus has a single Belden Horizon-like approach with their kind of software platform that does unified wired and wireless management. I think this is a great opportunity for us to combine that platform at some point with Belden Horizon. Horizon has certain vertical-specific capabilities. Ruckus is kind of more horizontally simplified. And I think there's -- there are positives and negatives that both will -- they'll cancel each other out and become more powerful. And then Ruckus obviously also has an offering which is more of a Network as a Service offering. And that's also something that Belden has started at a very basic level. I think Ruckus is at a more advanced stage here. It has more exposure to those IT vertical markets that demand it. So that's the third aspect of software that will come out of this transaction. Operator: We'll take our next question from William Stein with Truist Securities. William Stein: Ashish, I'm hoping you can talk a bit about the origin of this transaction relative to other ones. Is this sort of a sales or banking-led transaction? Or -- yes, let me just ask it in sort of an open-ended way. What was the origin of the transaction? Ashish Chand: Will, we've admired Ruckus for some time. As you know, we've talked about 3 areas where we need to build capability. One is edge, one is wireless and one is cybersecurity. And in that framework, we've always had a well-developed funnel. We've -- we've liked Ruckus for quite some time. This actually did not originate through a bank process. Really, this is something that at the right time, there was a mutual discussion. I obviously don't want to go into too much detail here in terms of specifics. But really, we saw the benefits of how this can become a big complementary acquisition for us. At the same time, the leadership at Vistance realized that Belden would be a good home. And I think that conversation progressed very well, matured in a relatively short period of time, and then we started this process. So I think it was more a mutual understanding of what we can bring for each other rather than anything else. William Stein: Okay. As a follow-up, I'm wondering, I would expect that Ruckus might have been a customer of your, let's say, the more passive elements of your portfolio. And then by extension, I would assume that Ruckus' competitors are also customers. Is that correct? And does that create -- I don't know if I want to say channel conflict, but some sort of conflict with customers as we consider the competitors to Ruckus? Or do I -- maybe I misunderstand. Any clarity you can provide on that would help. Ashish Chand: No, Ruckus, if you think of Ruckus' core offerings, it's enterprise switching and wireless systems and of course, the software portfolio that covers all of that. Ruckus is not actually buying anything from Belden. Now it's possible that some of Ruckus' installers when they deploy Ruckus products and solutions in the field, they may sit on some Belden passive networks. But frankly, that's a choice that changes project to project based on the systems integrator and installers. So no, there isn't really any conflict will hear in terms of Ruckus' competitors buying Belden products. If you think about Ruckus' competitors today, they actually do not -- I mean, I know this fact. We don't actually trade with them. But of course, they are in the industry. We sometimes work together on standards bodies. We collaborate on certain other things. But we also compete in some -- at some points in time because we have wireless in our industrial portfolio from the legacy Belden side. So it's pretty clean from that perspective, Will. Operator: [Operator Instructions] We'll take our next question from Mark Delaney with Goldman Sachs. Mark Delaney: CommScope previously owned RUCKUS and CommScope also historically had a presence in markets, including structured cabling as well as broadband. So I'm hop to understand if there are synergies available to Belden that weren't there for CommScope or more broadly, why you think the portfolio will perform better with Belden than it did in the past with CommScope before they sold some of their business lines to Amphenol. I think I guess similar to Slide 11 in the deck and some of your prepared comments, but if you could speak more on this topic, it would be helpful. Ashish Chand: Mark, that is an interesting question. I think it's got more to do with the maturation of the market and the trends that are emerging now, especially with the more complex demands of Wi-Fi 7, Wi-Fi 8, physical AI and how all of that will manifest, frankly. I think if you think about the CCS division of CommScope which is focused on structured cabling and broadband, they might have had some overlap with Ruckus in terms of end customers or there were very different buying processes at play 3 to 5 years ago and opportunities for synergy were limited from that perspective. I think what we've seen in the last 3 to 5 years is a lot more convergence. And I think it's accelerated significantly over the last, let's say, 18 to 24 months because of the whole idea that customers want to go towards autonomy and they need converged networks for that. So really, this is a more kind of recent phenomenon. That's one. I think the second thing is you might be right to some extent in that Belden had invested in the solutions selling approach maybe a little sooner than some of our competitors in the basic networking or passive networking area. So to that extent, maybe we are better positioned to benefit from the complementarity of this acquisition. So I think it's more market-driven, frankly, versus any specific capability or inherent weakness that CCS had. Mark Delaney: My other question was just on the existing Belden business. You mentioned positive underlying demand signals, but also somewhat limited visibility. I think your guidance is for relatively typical seasonality as you characterized it. So maybe if you could just speak a little bit more on the demand signals you're seeing in the current business and on balance, if it's strengthened or weakened over the last 90 days. Jeremy Parks: Mark, this is Jeremy. Yes, you're right. I think that we're forecasting or guiding a quarter that looks a lot like Q1 just with typical seasonality. As you know, we're a relatively short-cycle business. But in general, I think the trends in each of our businesses have been positive up to this point. I mean industrial seems like it keeps getting stronger. PMIs continue to go in the right direction. So I think from an end market standpoint, industrial is relatively healthy. Smart buildings has been doing fairly well. That's been growing now for the last 5 quarters or so organically at a pretty decent pace. It was up double digits year-over-year in the first quarter. And I would expect them to have a pretty good second quarter. And I think broadband will improve as we move throughout the year. So I think broadband will grow as well. I think the good thing is all 3 businesses were up at least mid-single digits organically in the first quarter. And I would expect things to kind of move along at that same pace in the in the second quarter. I think we're obviously always trying to be a little bit cautious when there's so much volatility in the macro environment. But I would say, as we sit here today, we feel good about the second quarter. Operator: And we'll go back to William Stein from Truist Securities. William Stein: I'm hoping you can give us any update on your exposure to AI infrastructure demand. A few quarters ago, this was an area that you spoke about with maybe one hyperscaler, one instance of their data center. And we've been hoping to hear about landing elsewhere and expanding in the place you are. So, hoping you can update us on that. And then along with that, any comments as to whether this acquisition would potentially improve your prospects in that end market? Ashish Chand: Yes. So, Will, we do see AI data centers as one of our top growth opportunities over the next few years, but of course, along with physical AI. So, I think of both of those as connected. They're not necessarily connected in terms of the sales process. But as you get more AI data center capacity, it enables eventually more physical AI in the field. So, what is FLIR -- so by the way, before I go into that, our AI data center business, it had good growth this quarter too. I think we were up -- data centers as a category was up double digits. So, it's been coming along pretty well. Our customers keep talking about the need for converged solutions in AI data centers. They don't want to focus on buying pieces and pulling them together. They want us to do that. This is, by the way, one of the reasons why we have integrated with OptiCool. You might have seen that announcement because that brings advanced cooling straight to the rack to support AI workloads. So we are approaching AI data centers with that converged offering. We haven't really focused on just supplying passive networks by competing on price. Those conversations take a little longer. You're really getting into the full build -- design and build cycle there. And we've had -- apart from that one big win we talked about, we've had consistently midsized wins every quarter. So it's a very, very consistent flow. And then, of course, linked to that will is the whole physical AI opportunity. And this is very exciting. I mean, as you know, at a very -- just as a summary reminder, we do enable closed-loop physical AI systems in collaboration with companies like Accenture, NVIDIA and other select OT technologies where we combine vision, digital twins, some real-time orchestration, et cetera. We talked about the security -- sorry, the safety fence example from the automotive customer. And we are very focused on delivering the full deterministic fully secured network, which will deliver the low latency time synchronized connectivity. So that's the focus. And there, we are doing a number of pilots right now. So very exciting. A lot of our customers want solutions that will integrate cameras, edge computing, software AI platforms, industrial connect and we've gone forward with a number of companies. Many of them, by the way, in the U.S. focused on bringing manufacturing back. But those pilots are underway right now. And I think between physical AI and the AI data center opportunity, we will see this emerging as one of our top growth opportunities, if not the top one. Operator: And we'll go next back to Mark Delaney with Goldman Sachs. Mark Delaney: On RUCKUS, are you able to share a bit more on the end market exposure specifically for that business? I imagine a lot of it is what would be considered enterprise for Belden. But I'm curious to what extent they're also selling into factories and industrial markets? And to what extent there may be an opportunity for Belden to accelerate the growth of the RUCKUS portfolio into industrial and factory settings. Jeremy Parks: Yes. Mark, so from a vertical market standpoint, you're right. RUCKUS is mostly or primarily focused on enterprise segments. So hospitality, education, those are the 2 biggest verticals, but they sell into a lot of other enterprise verticals as well. They do have some exposure today into what we would consider industrial markets, primarily into automated warehouses and material handling, where we also play today, but that's the only area of overlap. So I think from our perspective, there's actually a lot of opportunity to bring their products into some of our legacy industrial markets and then obviously, to combine their products with some of our passives on the enterprise side. Ashish Chand: So, if I can add to that, the short- to medium-term opportunity we see here, Mark, is in discrete manufacturing. At this point in time, as you may know, the majority of data, machine data is transmitted in a wireline format and not wirelessly. But that is expected to take over in the next 3 to 5 years to become more 50-50 and then the majority might move wirelessly. So, a lot of our discrete customers are planning for that change, and they need advice. Right now, they struggle because they don't actually have a company that they can go to for that comprehensive blueprint, which they will need in the next 2, 3 years. So that's the opportunity mainly. So apart from material handling, we see this expanding rapidly into discrete. Mark Delaney: Helpful. And then just circling back to the existing Belden business. Maybe you can clarify how much revenue exposure you think Belden has via distribution network to the Middle East and if that's something you try to factor into your outlook. You imagine given the uncertainty there that, that was part of the thought process with guidance, but if you could be a little bit more specific around your exposure and what's included in guidance relative to that region? Jeremy Parks: Yes, Mark. So our Middle East exposure is relatively small. It's less than 5% of our total revenue. It's primarily in the enterprise side of the business, smart buildings, where we're selling into UAE and a few other countries. I think from our perspective, we've got that business roughly flat sequentially and not significant growth built into the guidance. So I don't view it as a significant risk for second quarter, just given the size of that business. And up to this point, by the way, it's kind of held up. So it's been okay. Mark Delaney: Understood. And then just lastly on supply chain. It's been a difficult area for companies globally to manage, especially with certain semiconductor chips and memory. I'm curious if you could speak a bit more to Belden's ability to get the materials that needs to support the business and your confidence in passing on any higher costs and sustaining the margin objectives. Jeremy Parks: Yes. I think our -- our view is that we'll continue to pass on inflation to the extent it's real true market inflation. I think we've been successful doing that over the past several years. Our exposure is more so on some of the commodities, metals and plastics and things like that, oil-based compounds. But obviously, we do have electronic components. And I think we've been successful passing those on as well. The legacy Belden business does not really have much exposure to some of these memory price increases. So it's not been a major issue for us up to this point. But yes, for sure, to the extent that prices on chips and circuit boards and other components have gone up, we've been able to recover that in price and our expectation is that we'll continue to do so in the future. Operator: And that does end our question-and-answer session. I would now like to turn the call back over to Aaron Reddington. Please go ahead. Aaron Reddington: Yes. Thank you, operator, and thank you, everyone, for joining today's call. If you have any further questions, please contact the IR team at Belden. Our e-mail address is investor.relations@belden.com. Thank you very much. Thank you, ladies and gentlemen, and this does conclude our call for today. You may now disconnect from the call, and thank you for participating.
Operator: Good day, and welcome to the TriNet Group, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Alex Bauer, Head of Investor Relations. Please go ahead. . Alex Bauer: Thank you, and good afternoon, everyone. Joining me today are Irving Tan, WD's Chief Executive Officer; and Kris Sennesael, WD's Chief Financial Officer. Before we begin, please note that today's discussion will contain forward-looking statements based on management's current assumptions and expectations which are subject to various risks and uncertainties. [Technical Difficulty] Good morning, everybody. Sorry for the technical [indiscernible]. My name is Alex Bauer. I'm Head of TriNet's Investor Relations. Thank you for joining us, and welcome to TriNet's first quarter conference call and webcast. I am joined today by our President and CEO, Mike Simonds; and our CFO, Mala Murthy. Before we begin, I would like to preview this morning's call. First, I will pass the call to Mike for his comments regarding our first quarter performance. Mall will then review our Q1 financial performance in greater detail, we comment on our 2026 financial guidance and outlook. Please note that today's discussion will include our 2026 full year financial outlook and other statements that are not historical in nature, are predictive in nature or depend upon or refer to future events or conditions such as our expectations, estimates, predictions, strategies, beliefs or other statements that might be considered forward-looking. These forward-looking statements are based on management's current expectations and assumptions and are inherently subject to risks, uncertainties and changes in circumstances that are difficult to predict and that may cause actual results to differ materially from statements being made today or in the future. Except as may be required by law, we do not undertake to update any of these statements in light of new information, future events or otherwise. We encourage you to review our most recent public filings with the SEC, including our 10-K and 10-Q filings for a more detailed discussion of the risks, uncertainties and changes in circumstances that may affect our future results or the market price of our stock. In addition, our discussion today will include non-GAAP financial measures, including our forward-looking guidance for adjusted EBITDA margin and adjusted net income per diluted share. For reconciliations of our non-GAAP financial measures to our GAAP financial results, Please see our earnings release, 10-Q filings or our 10-K filing, which are available on our website or through the SEC website. Please also note that going forward, these filings may be released up to 48 hours after our earnings release. With that, I will turn the call over to Mike. Mike? Michael Simonds: Thank you, Alex, and good morning, everyone. I'm pleased with our start to 2026. In the first quarter, the TriNet team kept our clients as our first priority, navigating a volatile business and geopolitical environment. For today's call, I'll start with our first quarter performance, then highlight the actions we're taking to drive growth; and finally, discuss the potential impacts of AI, a widely discussed subject during the quarter. Our strong first quarter adjusted earnings per share up 25% over prior year reflect our disciplined approach to both repricing health fees and managing our expenses. Health fee repricing over the last year created a headwind for new sales and retention, including our January 2026 renewal, where attrition was about 2 points worse than prior year. Our pricing addressed both heightened medical cost trend and a cohort of underpriced business. With our January renewals complete, all cohorts within our customer base are now priced in line with more historical practices. And despite the impact of our January repricing, we expect overall 2026 retention to be better than full year 2025. We're already seeing a tangible improvement here in the second quarter where attrition due to health pricing has already declined by 30%, a trend we expect to continue throughout 2026. New sales grew modestly year-over-year in the first quarter. The increasingly volatile business environment pressured March close rates. For sales opportunities in the post proposal stage, we saw the time to close extend by about 15%. However, given pipeline visibility, our pricing position relative to the market and several sales initiatives that are coming online which I'll talk about in just a minute. We expect a solid full year sales growth for 2026. On insurance, performance improved as we benefited from stable health cost trends and disciplined pricing resulting in an 84% insurance cost ratio. A feature of our model is our ability to quickly respond to changes in insurance outcomes. We responded quickly to rising cost trends, and we'll do so again if and when trends moderate. We remain disciplined on expenses, aligning the business to its current scale, automating processes and advancing our talent optimization strategy. As a result, we delivered strong earnings and profitability in Q1 and we believe earnings are now tracking to the top half of our annual guidance. Our strong operating performance enables us to invest further in our products and services through acquisition, partnerships and internal build efforts, we're extending our value prop on issues our clients care about. These new capabilities, in combination with our investment in sales capacity, represent important steps in our return to sustainable growth. During the quarter, we completed the acquisition of Cocoon, an industry-leading employee leave management application aligned with our compliance-first approach. Cocoon should integrate seamlessly into our platform and address a significant customer pain point. With an automated leave of absence solution, we expect improved NPS scoring and increased retention along with further competitive differentiation in our PEO and ASO offerings. Next, we announced partnerships powering TriNet Global and TriNet IT. TriNet Global powered through our partnership with multiplier delivers global workforce visibility, compliance build workflows and localized support, enabling our clients to expand internationally with confidence. TriNet IT powered through our partnership with electric AI, embeds device and asset management into HR workflows, reducing IT effort, lowering costs and improving security. We remain on track to deliver our new benefit bundles, simplifying the buying process and aligning the right set of plans with client needs. As benefit bundles are released during the second quarter, we expect to benefit from their impact during the fall selling season. Alongside these investments in our offering, we continue to invest in our go-to-market capacity. Our broker strategy is increasingly driving deal flow and sales opportunities. Broker RFPs grew by nearly 12% year-over-year in Q1, and we're seeing Q2 broker RFPs accelerate off that number. We improved our broker experience with automated trusted adviser status and enhanced renewal access. In addition, we grew our most senior and productive sales reps by 10% year-over-year in Q1. Our ASCEND program graduates its first class, which will represent over 10% of our sales focus this fall. And with more than 100 trainees in the pipeline by year-end, we believe we can sustainably grow our sales force in 2027, both in terms of number and in terms of quality. In summary, we're improving our product, services and go-to-market capabilities. We've brought health fees in line with risk and increase the accuracy of our pricing processes going forward. As a result, we expect improved conversion rates on new business and higher retention rates in the client base. We're moving quickly on numerous fronts, which is a testament to my colleagues across the company. Increasingly, their efforts are being enabled by investments in AI, which brings me to the last topic I wanted to touch on before turning things over to Mala. We certainly understand that AI is an important topic for all of our stakeholders, and we see AI's impact across 2 dimensions. First, its impact on TriNet's operation sales service model and second, the external impacts on our client base and industry. Starting internally, this March, we launched TriNet Assistant, an AI tool giving our customers and colleagues access to our HR expertise whenever and wherever needed. Already TriNet Assistant is proving its impact. We just navigated tax season. Historically a period that sees a significant spike in inbound volume. Between March 31 and April 16, inbound volumes typically increase on average by 12%. TriNet Assistant successfully handled much of that demand driving a 6% reduction in inbound contacts through the busy period, delivering timely, accurate responses and improving overall service productivity. TriNet assistant will continue to evolve, broaden and become more effective with increased utilization. Similar examples of AI have emerged in our product development processes where 30% of code and 50% of our test cases are now AI generated and moving directly into peer review for production deployment. Sales agents are supporting our prospecting, quoting and closing processes. AI is supporting our colleagues on client engagements, capturing notes, suggesting answers and automating correspondence. As we have talked about on this call for the past few years, TriNet has operated with excellent client-facing technology, but many manual processes behind the scenes. The runway for AI to drive real improvement in client outcomes and efficiency is substantial, and we're excited about the capacity it creates for our colleagues to focus on what matters most, working directly with our clients. The ability to apply judgment, build relationships, manage risk is where my colleagues stand out and where I believe the resilience of our business model lies. During the first quarter, there's been robust discussion about the long-term threats of AI. TriNet sits at the intersection of employers, employees and government where AI supports rather than replaces the human responsibilities we take on behalf of our customers, things like handling payroll, human resources, insurance, taxes, compliance and more. Our customers aren't just buying software or knowledge. They're transferring risk and liability to TriNet. Further, they're buying real and human expertise to step in at high stakes moments, ensuring employees get paid when problems occur that health care coverage is there when needed and having someone in their corner when regulators inquire. As for AI's impact on SMBs, it's early and still very uncertain. We believe SMBs will be impacted differently across the various industry verticals. In verticals where AI adoption is highest, such as technology, client hiring has not changed materially over the past 2 years, suggesting AI is creating as much opportunity as it's replacing. There also seems to be a growing correlation between AI adoption and faster new business formation as small businesses do what they always do, move quickly to innovate and take advantage of new opportunities. Rest assured that TriNet will be there to capture our share of this market. So in summary, AI is undoubtedly driving change, but given our business model, we see AI as a positive opportunity to serve more SMBs and serve them better. Overall, we are off to a strong start, successfully navigating a difficult operating and business environment. Pricing is normalizing, expenses are managed and we're trending toward the favorable end of our 2026 financial guidance. We see significant AI opportunities across our operations and product and we are pursuing them. There's more work ahead but momentum is building, and we look forward to updating you as the year progresses. With that, I'll pass the call to Mala. Mala? Mala Murthy: Thank you, Mike. While the macro environment in the first quarter was uneven, TriNet's solid financial results were driven by disciplined pricing, better-than-expected insurance performance and strong execution. Over multiple cycles, we repriced our health fees in a disciplined and measured way. The impact on new sales and retention was considerable. I'm pleased to say that our trend plus price increases concluded with our January 1 renewal, and our retention outlook is improving. Furthermore, in the first quarter, we saw health costs materialize lower than forecast, which, when combined with our disciplined pricing, drove improved ICR performance. Our discipline extended to expense management. We made difficult decisions in the quarter, which resulted in meaningful run rate cost savings. Expenses are increasingly aligned with the scale of our business, and capital has been made available for investment and for shareholders. As our acquisition of Cocoon shows, we have capital available for acquisitions, supportive of our product and services. With that, let's dive into our fourth quarter financial performance in 2026. Total revenues were $1.2 billion, declining 5% year-over-year in the first quarter as expected. Total revenues in the quarter were supported by insurance and professional service revenue pricing, which were offset by declining WSE volumes. We finished the quarter with approximately 299,000 total WSEs, down 12% year-over-year. As a reminder, total WSEs include platform users or those users who are accessing our platform as well as co-employee WSEs or those users receiving the full benefit of our PO services. We ended the first quarter with approximately 273,000 total co-employed WSEs, down 12%, largely due to the cumulative impact of our repricing actions. Retention improved in February and March as we expected. Our full year retention forecast remains on track. We see year-over-year improvements beginning in Q2 and lasting through Q4, supported by more normal health pricing distribution beginning with our April 1 renewal, a trend we expect to continue through the year. Regarding customer hiring in the first quarter, [indiscernible] was slightly negative, better than our forecast. Professional Services revenue in the first quarter was $189 million, declining 10%, in line with our forecast. The largest impact to professional service revenue was from lower coemployed WSEs, which was offset partially by low single-digit pricing. We saw continued strength from our ASO business. ASO ARR has doubled year-over-year, remaining on track to become a meaningful contributor to professional service revenue growth. We were also pleased with our success in upselling PO2 ASO customers and retaining PO customers in our ASO. As we expand ASO we expect this upsell and retention dynamic to increase in importance. And finally, the headwind from the change in reporting methodology for state tax-related revenue in 1 state, was offset by difficult to predict normal changes in other states. As a result, we no longer expect this to be a headwind to our 2026 professional service revenue. Interest revenue in the first quarter was $14 million, a decline of 22% versus the prior year and in line with our forecast. The expected reduction of cash balances with certain tax credits drove the decline. Turning to Insurance. Insurance Services revenue declined 4% in the first quarter, primarily driven by lower overall WSEs offset by pricing. When divided by average co-employee WSEs, insurance service revenue grew 9.6%, reflecting our repricing efforts. Insurance costs in the first quarter declined by 9% year-over-year. And when divided by average co-employed WSEs, grew just 3.7%. As a result, our first quarter insurance cost ratio came in at 84% and over 4 points year-over-year improvement. Half of our 4-point improvement was expected and the result of our repricing efforts. The other half of the improvement was attributable to favorable development from 2025. So our results were a little better than expected, but one quarter does not make a trend. We passed the prior year favorability into our full year outlook, and we are encouraged by the general direction of our ICR. In the first quarter, operating expenses, which exclude insurance costs and interest expense, grew by 6% year-over-year. Operating expenses were impacted by a $14 million restructuring charge as we rightsize the business for its current size and executed our ongoing talent optimization and automation strategy, including AI implementation. For the first quarter, GAAP earnings per diluted share were $1.90 and adjusted net income per diluted share was $2.48. Our earnings were supported by strong cash generation. During the first quarter, we generated $186 million in adjusted EBITDA, representing an adjusted EBITDA margin of 15.2%. We generated $149 million in net cash provided by operating activities and $123 million in free cash flow. Free cash flow benefited from the 2025 tax law changes and timing of cash tax payments. Our capital priorities remain investing in our business for growth. M&A and returning capital to shareholders via share repurchases and dividends. The first quarter saw us leverage our strong cash generation and deliver on all 3. We returned $71 million to shareholders across share repurchases and dividends. We repurchased approximately 1.3 million shares for $58 million and we paid a $0.275 dividend in the quarter. Furthermore, we announced a 5% dividend increase to $0.29 per share. We also leveraged our cash generation to acquire Cocoon. Cocoon is an industry-leading leave of absence software suite, which addresses a key TriNet customer pain point. From a financial perspective, Cocoon as a stand-alone product is expected to be modestly dilutive to 2026 adjusted earnings per diluted share and neutral to 2027 adjusted earnings per share. The primary benefit of the Cocoon acquisition will come from increased PEO client retention. -- product integration is expected to be completed in 6 months with TriNet reaping the full benefit in 2027 from an improved customer experience and more efficient workflow. Turning to our 2026 outlook. We are reiterating our full year guidance. Revenue is performing in line with our forecast and our stronger than forecast Q1 insurance performance has had the effect of shifting our full year earnings expectations to the top half of our guidance range, assuming no significant uncontrollable event. For 2026, we continue to expect total revenues to be in the range of $4.75 billion to $4.9 billion. Our professional services revenue guidance remains in the range of approximately $625 million to $645 million, and our ICR remains in the range of 90.75% to 89.25%. The -- as I discussed earlier, Q1 IPR outperformed our plan by about 2 points as a result of prior period positive developments from 2025. We do not expect to receive more benefit from the prior year. We believe it is prudent to maintain our full year range, and we acknowledge that our full year ICR is tracking to the lower half of our guidance range. Our adjusted EBITDA margin stays in the range of 7.5% to 8.7% and GAAP earnings per diluted share are in the range of $2.15 to $3.05 and adjusted earnings per diluted share in the range of $3.70 to $4.70. In conclusion, I'm encouraged by our first quarter results. We remain disciplined with our pricing and completed our repricing efforts. Health costs came in lower than forecast in the quarter. and our strong first quarter has us tracking to the top half of our full year earnings guidance. Finally, the macroeconomic environment does remain volatile, but we are optimistic on our future and remain prudent with our investment in that future. With that, I will pass the call to the operator for Q&A. Operator? Operator: [Operator Instructions] And the first question comes from Jared Levine with TD Cowen. Jared Levine: To start, I wanted to double-click on the demand environment in terms of some of those sales cycles being impacted in the month of March, was there any kind of broad flavor in terms of industry vertical, more global clients or clients with significant customer concentrations in the Middle East in terms of that demand impact? Or was it fairly broad-based there? Michael Simonds: Jared, it's Mike. Yes, fairly broad-based. We saw a little bit more as you move upmarket. Those tend to be a little bit elongated anyway, but that's where it was more sensitive. And again, it was good strong start to the quarter slowed or got extended towards the end of the quarter. And we're just going to kind of keep watching it here in the second quarter. But there's a lot -- as we look at the pipeline, the demand is strong. It may just be a bit of the decisiveness part. Jared Levine: Got it. And then I wanted to also touch on Taco here. So I guess, Mike, I guess, part 1 here. Can you discuss the revenue opportunity you see here, whether that's cross-sells with a separate SKU or overall platform pricing increases in the model. Can you just double-click in terms of that revenue contribution for FY '26 here? Michael Simonds: Yes, absolutely. And just I would start by saying welcome to the Cocoon team that is likely listening in this morning. We are delighted to have a very talented group of colleagues join us in a really industry-leading product. We went out commercially and decided Cocoon would be the right fit for us and the discussion led to this strategic outcome. . It's -- the primary benefit, as Mala had in her prepared remarks, is really about delivering better outcomes on these to our PEO clients first. And so teams are very heads down on integrating that into our client base. We know it's a significant opportunity in terms of improving our Net Promoter Score and ultimately, our retention. We've, as many on the phone would know, has just become increasingly complicated given a distributed workforce and a pretty active regulatory environment at the state and local level. So excited about this as another nice investment in our strategy around driving up NPS and retention. We will, on the heels of that be putting it into our ASO offering as a managed service as well. I do think -- it's a high-demand service. So I do think it's going to be additive to what's already some pretty heady growth that we're seeing on the ASO side. And maybe Mala, I'll turn it to you on revenue. Mala Murthy: Yes. Jared, I wouldn't go into further details on that. Just suffice it to say that the revenue contribution to this year is very, very modest. What we are more focused on, as Mike alluded to in his comments is really how do we integrate this product into our overall offering. And we are really looking forward to see the impact of that in improving our NPS and therefore, retention and really hope to capture that in terms of our revenue tailwind as we move into 2027 and beyond. Operator: And the next question comes from Tobey Sommer with Truist. Tyler Barishaw: This is Tyler Barishaw on for Tobey. Just going back to the Cocoon. Was this an opportunistic acquisition? And should we -- or should we expect TriNet to look to do more M&A throughout the year? Michael Simonds: Tyler, thanks for the question. Yes, I would say -- we started with -- we knew this is something that our clients really wanted. And so we were out more from a commercial partnership opportunity that led to -- yes, I would describe it as a strategic opportunity for us. I would say, though, stepping back into the broader part of your question, we feel very fortunate to have such a strong franchise and such a cash-generative business that gives us a lot of flexibility. And our priority is to invest organically in our teams and in our technology to drive growth. But inorganic is a lever that we can pull as well. And I'd sort of think of it across 3 pretty simple buckets. The first is capabilities and Cocoon falls into that. And there may be future opportunities. The SaaS market right now is a little bit depressed and there's some potentially some good opportunities there. I think of those on the relative small size like we've seen here with Cocoon. And then it's about scale and capability in first the PEO and then our small but growing ASO business. And is there an opportunity to bring in some scale there that also maybe matches up with a vertical or a geography where they've got strength and we've got a relative soft spot. So primary focus is organic investment in growth. But yes, where there are opportunities, we'd look for -- tend to be sort of small to midsize and bolt-ons. Mala Murthy: Yes. The thing I would also add, Tyler, is -- as we have said before, we'll stay disciplined in terms of how any of these opportunities align with us both strategically but also importantly, in terms of its financial profile, we'll state disciplined on that. Tyler Barishaw: Makes sense. And then just on free cash flow conversion, up to 66% versus 49% in the prior year quarter. Can you talk through solving the drivers of that improvement? Mala Murthy: Yes. I'd point to essentially a couple of different drivers, right? One is you saw our adjusted EBITDA improved year-over-year. So that certainly has an impact. But the primary driver of our improved conversion is the fact that we had lower cash tax payments with the advantages we have from the one big beautiful bill. So that really is the primary -- the bigger driver of our improved free cash flow conversion. I would say even without that, even excluding that, we did actually improve our free cash flow conversion year-over-year slightly. Operator: And the next question comes from Andrew Nicholas with William Blair. Unknown Analyst: This is Daniel on for Andrew today. I wanted to turn back to the strong outperformance on ICR in the quarter. And then extrapolating that forward, how we should think about the conservatism of the guide maintenance. I know you pointed toward the lower half there, but maybe you can dive deeper on what that means for the cadence of performance in the remaining quarters of the year. Mala Murthy: Yes. What I would say, Daniel, is, as we explained in our prepared remarks, we saw a significant improvement in our year-over-year -- about half of that was expected. The other half of that really is from the favorable development pertaining to 2025. And just to double click on that, the driver of that is, as we went into the second half towards the end of the year, we saw some volatility in how claims ran off -- and we have considered that as we finished up the year. As we moved through Q1 of this year, that actually plays favorably relative to what we had assumed and what our outlook was at the end of 2025. The reason I'm double clicking on that is I would say that is a onetime benefit that we saw in the quarter in addition to the favorability in year-over-year that we were already expecting. And therefore, think about the full year ICR as follows: the reason we said that we are tracking to the top, the more favorable end of our ICR guidance, the more favorable half of our ICR guidance is essentially passing through that benefit in prior period development that we saw in Q1. I'd say on the base run rate, the rest of the performance, I would say, for now, we are keeping expectations as we had in our February guidance. It's still early in the year. As you know, and as we have found from our experience with claims costs things happen. And so we are keeping pretty close watch on it. And we will update our guidance and update you all as we traverse through the year. Unknown Analyst: Okay. Understood. And then maybe turning to the WSE front. It sounds like the first quarter decline was roughly aligned with expectations for the quarter. But can you help us frame when you expect to see the trough in WSE declines this year now that we've lapped the repricing actions and whether that's still yet to come? And if so, when? . Michael Simonds: Yes, I appreciate the question, Daniel. I just would start by saying we absolutely see a real growth opportunity here, and that's our focus, particularly now that we've cleared a pretty big milestone for us with the January 1 renewal and having gotten all of our cohorts relatively in line. And so you take that -- you take what Mala talked about really good outlook for improving retention. That's our biggest lever as we go through the year. And as we think about the actions we've taken, we just talked about the benefits of Cocoon. We talked earlier about trying to assistant. The things that we are doing to improve the quality of our delivery and the value we're delivering to our clients. We see that retention improving and improving, and this is important in a sustainable way. Second piece that we control is sales. We've talked about that. I'm actually really encouraged by the brokerage channel and the volumes that we're seeing coming through there 12% up in RFPs in the first quarter. Second quarter is building considerably higher off of that. And then just having -- keeping a really good tenured senior people and having our ascend well-trained folks coming out into the market this year and building -- by the end of the year, we'll have absolute capacity up in the low double-digit range year-over-year and have done that again in a sustainable, high-quality way. So -- we're optimistic about -- just like with the retention, a year-over-year growth metric, which is encouraging to us. And so you take those 2 and put it together, Daniel, with the CIE expectation that we're just going to hold that very muted levels, and that gives us growing confidence that we can stabilize WSE count here for the balance of the year. And then as we look out from there ultimately drive growth but drive growth in a really sustainable way. Operator: [Operator Instructions] And the next question comes from Kyle Peterson with Needham & Company. Ross Cole: This is Ross Cole on for Kyle. I was wondering if you could double-click on professional services a little bit for the quarter and then your outlook for the year. it seems like it came in about around what we expected for this quarter. Do you see this also reaching the higher end of the guidance? Or maybe you can just kind of walk us through how you're seeing this for the rest of the year. Mala Murthy: Yes. Thanks for the question. As we said in our prepared remarks, professional services revenue declined year-over-year about 10%. And I'd say there are a few puts and takes in that, that I see sort of I'm watching as it plays out through the rest of the year. So obviously, it was heavily impacted by the 12% decline in volumes. But that was partially offset by low single-digit rate benefits that we saw in PSR. I would say, if I think about how that played against our expectations, it was about in line with our expectations. The -- a couple of other components within that is One is we did expect some headwind for the year from our SUDA margins, that is essentially neutral that is relatively modest in the overall scheme of our overall PSR. It's essentially, the benefit is in the single-digit million range. So again, it's relatively modest. And we have talked about ASO growth. ASO ARR, as we talked about in our remarks, actually doubled in the quarter. We are really pleased with the momentum we are seeing in it and if I look at our overall ASO revenue expectations for the year, also in line, it's coming in, in line with our full year forecast at this point in time. So if I sum it all up, what I would say to you is largely in line with our expectations with just a very, very modest speed on the SUTA piece because of the developments we talked about in our prepared remarks. Operator: And the next question comes from Brendan Biles with JPMorgan. Brendan Biles: First of all, like -- congrats on the results. Great to see the insurance cost ratio dynamics. I'd love to take an opportunity to just kind of step back and ask you to share your learnings over the last 2 years as it relates to this whole insurance price cycle change? And what gives you confidence that in future insurance price change cycles that TriNet will be more resilient? And then my second question, if I could tack 1 on, too, is on the AI companies, new AI entrepreneurship. Just a little bit more about that market, how TriNet is showing up, the trends you're seeing in AI-related start-ups or start-ups that have been accelerated by. That would be great. Michael Simonds: Thanks, Brendan. Two excellent questions. So I'll take the second one first. On the start-ups, like we hit earlier, it is pretty remarkable to see new business starts. And certainly, some of those are AI specific. And so we start to see those in our technology vertical and in markets that are really important to us. I would say that we typically will pick up start-ups a little bit later than in the cycle than when they're hitting like the BLS as a new business starts. So I'd be looking out, say, 6 months, 9 months, 12 months from now. Certainly, we're getting some good wins there. But I expect that that's going to build as we go through the year and get into 2027. As those firms scale to the point where there's enough complexity there that looking to a TriNet is going to make a lot of sense for them. . And then on your first question, we think a lot about that one around what have we learned through this part of the cycle. And I'd start by saying, like at the end of the day, it's a risk-taking business. So there is always going to be fluctuations and outcomes. And I wish I could, but I could never sit here and tell you we've cracked the code there and have found a way to kind of eliminate that volatility. I think it is all about getting better at how you're forecasting, how you're assessing the risk and then how you're applying that insight at the client level through your new business and through your renewal processes. And just I've been here a little over 2 years. One of the first things we did was really invest in our Insurance Services group. We brought in Tim Nemer, who has run actuarial and underwriting functions for some of the largest health care organizations on the planet. We've invested in further talent beyond that. We've actually gone through and redone our rating system. We've gone through and looked at how we present our health plan offer through the bundles. So all these factors go into just not fixing the problem and eliminating volatility but really sharpening our pencil and tightening that distribution curve. And I will say from experience in other companies, when you go through a cycle like this, it is really difficult to be as disciplined as we've done it, and it kind of gets embedded in your DNA on a go-forward basis. So I think it's going to be important for us, not just that we've turned this corner, which I do believe we have on the in-force block, but that we work really hard to make sure that the business we bring in going forward is brought in a sustainable way. Operator: And the next question comes from David Grossman with Stifel. David Grossman: Mike, maybe you could just reflect given the repricing of the book and the kind of impact it's had on assuming the insurance markets are fairly efficient, where do these people go. If, in fact, you're now appropriately pricing to risk, where do those clients that are going when they leave . Michael Simonds: Yes. David, obviously, we spent a good amount of time understanding why a client is leaving and then ultimately, wherever we can, understanding where they're going. And the probably unsatisfactory answer is there hasn't been a big change in the distribution of where clients are going. We have seen a big change in the distribution of why. And so we've seen -- and in Q1 is a good example, 2x the reason code for why people are leaving being due to help fee increases has grown to be a very significant amount of the attrition. And -- and that's pretty quickly reversed itself as we've gotten here to [indiscernible] in our outlooks going forward. So that sort of speaks to the why. . [indiscernible] to your question it really does depend. -- down market, you see people going into the open market where they're finding more standardized plan design and rate structures is a better match for their particular risk. You do see some going into other PEOs. And the reality is different competitors have different rating approaches and they're just going to see risk a different way. Upmarket clients may find that some sort of participating in the risk, so we see a little bit of people going into self-insured and level-funded type plans amongst some of the larger terminations. But it is a little bit distributed across that base. I guess, the last thing, David, is like -- you definitely see this -- the problem of what is now 2 years of elevated health care costs , we haven't seen in a long period of time. That is something that everybody has -- the carriers are dealing with it other PEOs are dealing with it. Everyone's got to deal with that same problem. It just leads to a lot more shopping and ultimately, it does drive some attrition. David Grossman: So do you think if the kind of the health care cost dynamic improves. Do you think that becomes a net tailwind for people to reengage with PEO, just more generally speaking? . Michael Simonds: I think that's a reasonable thesis. David Grossman: Got it. Okay. And then just now that you've had a little time to kind of process the changes in your go-to-market strategy. As you think about the broker channel, and I know you gave some statistics on increasing our fees. What do you think is resonating most with the brokers specific to TriNet versus other alternatives that they may have. Michael Simonds: I think the #1 thing is a really good broker cares, first and foremost, about the experience and the value their client is going to get. So where we can get repeated at that and where a broker has referred business in, they've seen kind of the quality of the delivery ultimately, that's our biggest and most important lever. And that's why it takes a little bit of time to build real sustainable momentum in the channel is you've got to prove yourself. But once you do, the leverage is pretty considerable. When you think about the penetration, 95-plus percent of SMBs get their health care through an independent broker or agent. It has a really nice scale effects once you get there. . I think for us, a lot of it is just looking at our processes and including the broker appropriately as an adviser to their clients. So unlike perhaps some other referral channels, in general, take a health insurance broker they're going to want to stay connected at renewal time. They're going to want to have access to and be able to help their client and where we can do that and our teams can go shoulder to shoulder, again, that's building trust in the relationship and in the quality of the delivery. So I would have, and I'm excited to see the first step is they need to give you opportunities, and that's the RFP growth that we've seen, and that's really performing well. The second piece is we need to get wins and get enough wins within the same relationships to sort of prove the value proposition. And that's kind of part of the story that we're at now. David Grossman: Great. And if I could just sneak one more in for Mala. On, should we think about the expense rate going forward the 1Q results less the restructuring action is that $100 million of a good reference point for the balance of the year. . Mala Murthy: David, I would just stay with the -- what we had said in February, right? We had said we expect our operating expense for the full year to be lower than prior year in the mid-single-digit range. And we are still staying with that as part of our overall expectations and guidance. Operator: And this concludes our question-and-answer session. I'd like to turn the conference back over to Mike Simonds for any closing comments. Michael Simonds: Thanks, everybody, for joining the call this morning. I hope you get a sense that we've had an important milestone, and we're starting to turn a corner here at TriNet. There is a real rhythm and consistency to the actions we're taking. It's gratifying to start to see some of those play through. A lot of work to do, and Alex and Mala and I look forward to keeping you posted getting out in a bunch of meetings over the coming weeks and months. And with that, Keith, that concludes our call. Operator: Thank you. And as mentioned, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.