加载中...
共找到 17,630 条相关资讯
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2026 Hubbell Incorporated 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. You will then hear a message advising your hand is raised. To withdraw the question, simply press star 11 again. Please be advised that today's conference is being recorded. Now it is my pleasure to hand the conference over to the Senior Director of Investor Relations, Daniel Innamorato. Please proceed. Daniel Innamorato: Thanks, operator. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for 2026. The press release and slides are posted to the Investors section of our website at hubbell.com. I am joined today by our Chairman, President and CEO, Gerben W. Bakker, and our CFO, Joe Capazzoli. Please note our comments this morning may include statements related to the expected future results of our company. These are forward-looking statements defined by the Private Securities Litigation Reform Act of 1995. Please note the discussion of forward-looking statements in our press release and consider it incorporated by reference to this call. Additionally, comments may also include non-GAAP financial measures. These measures are reconciled to the comparable GAAP measures, which are included in the press release and slides. Now let me turn the call over to Gerben. Gerben W. Bakker: Great. Thanks, Dan, and good morning, everyone, and thank you for joining us to discuss Hubbell Incorporated’s first quarter 2026 results. Hubbell Incorporated delivered strong financial performance to begin the year, with double-digit growth in sales, adjusted operating profit, and adjusted earnings per share. Organic growth of 8% in the first quarter was driven by double-digit organic growth in our Electrical Solutions segment as well as our Grid Infrastructure businesses within the Utility Solutions segment. Our core utility T&D markets remain strong, with highly visible load growth driving continued strong demand in transmission and substation markets, and aging infrastructure and resiliency investments driving strong demand in distribution markets. Electrical Solutions growth continues to be driven by strength in data center and light industrial markets, enabled by our leading brands and continued success in our strategy to compete collectively in high-growth verticals. We are raising our full-year 2026 outlook for total sales growth, organic sales growth, and adjusted earnings per share this morning, as we are confident Hubbell Incorporated’s strong position in attractive end markets and continued execution of our long-term strategy will enable us to execute through a dynamic operating environment. Before I turn the call over to Joe to walk you through our financial performance in more detail, I would like to highlight an emerging growth opportunity for Hubbell Incorporated in high-voltage transmission, a long-term megatrend that sits squarely in our core, and we are demonstrating early success in a multiyear investment cycle. As background, 765 kV transmission represents one of the most efficient methods to move large amounts of power over long distances in order to accommodate accelerating electricity demand from electrification and load growth. Operating transmission lines at higher voltages enables utilities to deliver more power per line with lower losses and fewer space requirements. For Hubbell Incorporated, high-voltage transmission represents a significant multiyear opportunity which is largely incremental to existing strength in traditional 345 kV transmission markets. Our leading position and strong customer relationships position us well to capture this opportunity, and we are demonstrating early success with several key project wins supporting this initial phase of high-voltage transmission buildout. Additionally, our portfolio depth and breadth position us as a preferred partner whom customers can trust to provide a full package of critical components. This solutions offering enables high service levels and reliability while driving installation efficiency and ease of doing business for our customers. We are actively investing to support future growth in this market, including development and testing of new product offerings in collaboration with major customers, as well as in capacity expansion investments. Overall, we believe 765 kV transmission represents an addressable market opportunity of approximately $1.5 billion over the next ten years, and we believe we are well positioned to serve this attractive long-term investment cycle. With that, let me turn the call over to Joe to provide more details on our Joe Capazzoli: results. Thank you, Gerben, and good morning, everybody. I am starting my comments on slide five. Hubbell Incorporated’s first quarter financial performance was strong, with double-digit growth across sales, adjusted operating profit, and adjusted earnings per diluted share. Net sales of $1.517 billion in the first quarter of 2026 increased by 11% compared to the prior year, driven by 8% organic growth and acquisitions contributing 3%. Consistent with our fourth quarter 2025 performance, both the Electrical Solutions segment and Grid Infrastructure products within our Utility Solutions segment delivered double-digit organic growth in the first quarter, partially offset by anticipated softness in grid automation. Acquisitions contributed three points to growth in the first quarter, with DMC Power off to a strong start and integrating nicely within our T&D business. From an operational standpoint, Hubbell Incorporated generated $301 million of adjusted operating profit in the first quarter, representing 18% growth versus the prior year, with adjusted operating margins expanding 110 basis points year over year. This improvement in adjusted operating profit and adjusted operating margin was primarily driven by strong volume growth in high-margin businesses. While cost inflation accelerated against 2025 exit rates, as anticipated, our pricing and productivity actions continued to keep pace, more than offsetting those higher levels of inflation on a dollar-for-dollar basis in the first quarter. We also accelerated our investment levels in the first quarter, as previously communicated, most notably to expand capacity in high-growth areas and generate future productivity. And as anticipated, we invested $7 million in our restructuring and related program to further streamline our operational footprint, primarily within our Electrical Solutions segment, which, as a reminder, R&R is included in our adjusted results. Adjusted earnings per diluted share were $3.93 in the first quarter, representing a 16% increase versus the prior year, driven primarily by adjusted operating profit growth. Below the line, higher interest expense associated with borrowings from the DMC acquisition and a slightly higher year-over-year tax rate were partially offset by lower share count as a result of prior repurchase activity. Additionally, we repurchased $168 million worth of shares in the first quarter at a dollar-cost average below $500 per share. We expect the net impact of these repurchases to be neutral to 2026 earnings, as a lower share count will be offset by higher interest, but the repurchases of shares at attractive valuations are expected to provide us with earnings accretion in 2027. Our balance sheet remains strong and is poised to invest on behalf of our shareholders. Our primary focus remains on internal reinvestments and acquiring differentiated businesses to bolt on to attractive areas of our portfolio. The pipeline of opportunities remains healthy and active, and we continue to remain disciplined in our approach. Share repurchases represent an additional lever that we can and will utilize to return cash to shareholders over time. Turning to page six to review our performance by segment, Utility Solutions delivered another strong quarter, with double-digit growth in sales and adjusted operating profit. First quarter performance overall reflected a continuation of the momentum we realized exiting 2025, with overall drivers very similar across end markets. Utility Solutions generated net sales in the first quarter of $949 million, which represented growth of 11% versus the prior year and includes organic growth of 7% and acquisitions contributing 3%. Organic growth of 7% in the first quarter was driven by 12% organic growth in our larger, higher-margin Grid Infrastructure business, where demand strength was broad-based across T&D end markets. Utilities are investing at heavy rates, and demand for Hubbell Incorporated solutions to serve the expanding critical infrastructure needs of our customers is driving continued momentum in orders and providing visibility to further strength over the balance of 2026. As we will highlight in a few minutes, we now anticipate our Utility Solutions segment to deliver high single-digit organic growth on a full-year basis. Outside of our core T&D markets, telecom and gas distribution grew attractively in the first quarter, while meters and AMI markets remained weak as anticipated. While grid automation organic sales declined 7% year over year in the first quarter, sales increased slightly on a sequential basis. We remain confident that meter and AMI markets have stabilized, and we anticipate easing comparisons and continued strength in protection and controls products will enable grid automation organic sales to return to slight year-over-year growth in the second quarter. Operationally, HUS delivered $[inaudible] of adjusted operating profit in the first quarter, representing 21% growth in adjusted operating profit versus the prior year, with adjusted operating margins expanding 190 basis points year over year. Operating profit growth was primarily driven by strong volumes in high-margin grid infrastructure products, favorable price/cost productivity, and acquisitions, which were partially offset by grid automation volume decline. Moving to page seven, Electrical Solutions results were also strong in the quarter, with double-digit growth in net sales and adjusted operating profit. For the first quarter, Electrical Solutions generated sales of $568 million, which represented growth of 12% versus the prior year. Organic growth of 11% was again driven by strength in data center and light industrial markets, as well as solid nonresidential growth, partially offset by softer heavy industrial markets. The Electrical Solutions segment achieved approximately 40% growth in data center markets in the first quarter, driven by strength in both balance-of-system component demand as well as sales of our modular power distribution skids. Data center order activity remained robust in the first quarter, as buildout activity continues to accelerate across hyperscaler and colocation customers, providing enhanced visibility for us to increase our full-year outlook in data center markets to more than 25%. Broader light industrial markets remain healthy, as solid U.S. manufacturing activity generated demand for electrical components, and our strategy to compete collectively in vertical markets continues to drive outgrowth. Operationally, HES delivered $93 million of adjusted operating profit in the first quarter, representing 10% growth in adjusted operating profit versus the prior year, reflecting strong volume growth. Adjusted operating margins of 16.4% were down 30 basis points versus the prior year, as benefits from volume growth and the associated operating leverage were offset by higher investments in restructuring and growth initiatives. As you will see in our press release financials, within the Electrical Solutions segment, we invested $6 million in restructuring initiatives in 2026 versus only $2 million in the prior year, which impacted year-over-year margins by approximately 80 basis points, as we execute on footprint optimization projects which we are confident will continue to drive long-term productivity and margin expansion. Price realization remains strong, which, combined with productivity, more than offset cost inflation on a dollar-for-dollar basis in the first quarter. Turning to page eight to discuss our full-year outlook, we are raising our full-year sales growth outlook to 8% to 11% and organic sales growth outlook to 6% to 9%. This represents an increase of one point to the lower end and two points to the higher end of our prior full-year outlook, and is driven by both incremental price realization to offset increased inflation relative to our initial outlook as well as enhanced visibility to continued demand strength in our T&D and data center end markets. Operationally, we anticipate double-digit growth in adjusted operating profit at the midpoint of our guidance range for 2026, driven primarily by strong sales growth in high-margin areas of our portfolio. We remain confident in managing price/cost productivity to neutral or better on a dollar-for-dollar basis over the full year. So the math on higher inflation, as well as planned investments to support accelerated growth initiatives, results in a slightly more modest outlook for full-year margin expansion versus our initial outlook. Below the line, we anticipate that a lower share count of 53.1 million shares on a full-year basis will be fully offset by higher net interest, while our assumptions for other expense and tax rate remain unchanged. Overall, we continue to anticipate at least 90% free cash flow conversion on adjusted net income in 2026, and we are raising our full-year adjusted earnings per diluted share outlook to $19.30 to $19.85 per share. Now let me turn the call back over to Gerben to give you some more color on our confidence to deliver on this increased full-year outlook as we continue to navigate a dynamic macroeconomic and geopolitical environment. Gerben W. Bakker: Thanks, Joe. Turning to page nine then and concluding our prepared remarks, while the current operating environment poses macroeconomic and geopolitical uncertainty, as well as dynamic inflationary and supply chain conditions, we are confident in our ability to deliver on an increased organic growth outlook while continuing to manage price and productivity in 2026 and beyond. From an end-market standpoint, our largest, most profitable businesses are exposed to end markets such as utility T&D and data center CapEx where secular growth is being driven by long-term investment cycles. Our recent order patterns and key project wins, along with customer conversations around long-term investment planning, are providing us enhanced visibility to continued strength in these end markets. From a price/cost standpoint, while inflation has increased relative to our initial full-year outlook, we have implemented additional price and productivity actions which we are confident will offset, and we anticipate that recent updates to various tariff frameworks are largely neutral to our existing tariff cost structure. Overall, we have demonstrated our ability to manage through an inflationary environment successfully over the last several years, and we are confident in our ability to continue to do so in 2026 and beyond. While we are closely monitoring macroeconomic and geopolitical conditions, our short-cycle demand is holding up solidly, and price and productivity actions are being realized. Hubbell Incorporated’s portfolio is well-positioned with more than 90% sales exposure to the U.S., and over two-thirds of our portfolio exposed to secular growth markets in data center and utility, which we anticipate will continue to perform well through a broad range of economic environments. In short, we are confident that Hubbell Incorporated’s leading position in attractive end markets, as well as continued execution on our long-term strategy, will enable us to deliver attractive financial performance over both the near term and long term. With that, we will now open the call for questions. Daniel Innamorato: Operator? Operator: Thank you, sir. As a reminder, to ask a question, please press 11 on your telephone, and wait for your name to be announced. To remove yourself, press 11 again. We ask that you please limit yourself to one question and one follow-up. One moment for our first question. It comes from Jeffrey Todd Sprague with Vertical Research. Please proceed. Jeffrey Todd Sprague: Hey. Thank you. Good morning, everyone. Was wondering if you could provide a little more color on the high-voltage transmission outlook—just the level of project rollout there, you see that pacing in? You gave a little bit of color there, obviously. And is that $1.5 billion TAM all incremental relative to your prior view on the market? Maybe we could start there. And it sounds like you do not see this squeezing out spending elsewhere. There has obviously been a little bit of concern that all the generation spending may eat into T&D spending. You are calling the core distribution side of the business also growing at a stable rate? Gerben W. Bakker: Yes. Maybe I will start, overall, Jeff, with transmission. And then substation, I would probably categorize in the same area, as that is continuing to do really well for us. We communicated high single-digits growth there and certainly, I would say we are off to a very good start against that background. Particularly, the comments around 765—it is the ability for utilities to bring more bulk power into areas where it is needed. It is a very efficient way to do that. We have some lines in the U.S. that were built, I think, over 20 years ago that are 765. There just was not a need for it. And I think that is becoming very clear right now that the ability to drive more bulk power is actually a very efficient way to do so. We are very well positioned. We have products today that can serve it already. We have won a couple of orders already in this. We are continuing to develop products, and these are just taking it to the next higher voltages. We are able to do that with our capability, certainly with our labs. So I would say very well positioned. And we look at this truthfully as incremental, Jeff. We see this as upside to what is already needed. Any time you have a 765, you need off ramps for that, where you take the power down—think highways and offshoots of that, off ramps with substations—and then step the voltages down. So we think it is an upside for us, and we think it can drive a point of growth above what we are currently projecting with transmission already. You need both, Jeff. That is why we do not see it. Certainly, we are not seeing that in the projects that are ahead of us, the orders that we are winning. I mean, it is a logical question certainly to ask—how far can budgets flex up—but you see too that utilities are continually increasing their CapEx budgets. And I think that is a reflection of acknowledging and realizing that you really need to spend in all these areas to get the outcome you need. Jeffrey Todd Sprague: Okay. Great. Thank you. I will leave it there. Daniel Innamorato: Thank you. Operator: Our next question comes from Julian C.H. Mitchell with Barclays. Please proceed. Julian C.H. Mitchell: Hi. Maybe just a question, please, around how we should think about operating margins through the balance of the year and the operating leverage cadence, if that has changed at all versus prior thinking, please? Joe Capazzoli: Good morning, Julian. As far as the operating margin goes for the year, we are really looking at the full year with a 20 basis point margin expansion, and that is going to lean a little heavier towards Utility with more expansion and about flattish on Electrical. As the year progresses, I think we see the Utility side of margin expansion being pretty consistent. And certainly, on Electrical, we see a little bit of headwind just on the year-over-year comp from last year’s second quarter in Electrical, and the back half probably flattish. So that is kind of how we are thinking about margin for this year. Keep in mind, there is a lot of inflation that has come on, and as we cover that inflation with price and productivity, that is certainly margin dilutive. So in our 20 basis points of margin expansion at the midpoint of the guide, there is about a point of dilution just from that price/cost math. Julian C.H. Mitchell: That is helpful. And then maybe just my follow-up on the thoughts on the first half and second quarter. Maybe I missed it, but did you clarify the share of earnings in the first half? Is it still mid-high 40s? And so we are looking at kind of a $5.20-ish EPS for Q2. Any pointers on second quarter or halves phasing, please? Thank you. Joe Capazzoli: Yes. So for the second quarter, we would think about a normal seasonal setup for this year. And let us think about that on the sequential. Typically, with our strong orders coming through first quarter, we would anticipate a second quarter step-up like we would normally see: high single-digits organic growth. And add to that, we are looking at price/cost productivity at about neutral on the dollars. And so that is really the constructive way to think about Q2. Operator: Thank you. Our next question is from Thomas Allen Moll with Stephens. Please proceed. Thomas Allen Moll: Good morning, and thanks for taking my questions. Sounds like versus last quarter, we are expecting more pricing for the year, perhaps also better volumes than originally expected. So I was hoping you could unpack that 6% to 9% organic for us. How much of that is price versus volume? And how do those compare to what you provided last quarter? Thank you. Joe Capazzoli: Coming into the year, we were anticipating about two points of price, and the majority of that was coming from wraparound from actions that we had implemented last year. As we saw some of that inflation, mostly on the metal side—copper, aluminum, steel—in the first quarter, we went out with price actions in the second quarter, and that added about a point to our full-year price outlook. So our full-year 6% to 9% organic has about three points price, with the rest being volume. If you think, Tommy, about the way that price rolled on last year, the year-over-years are going to start to wrap here into Q3. So we would anticipate that our contribution from price fades as the year progresses, and our contribution from volume growth increases as we step through the year sequentially. Thomas Allen Moll: Thank you. That is very helpful. I wanted to follow up on DMC. What update can you provide for us there? And in particular, are there any elements that you are seeing unfold better versus worse than the original plan? Thank you. Gerben W. Bakker: I would say, Tommy, DMC—as we stated in our last calls—is off to a really good start. This is squarely in the area where the highest investment is going on in utility, which is transmission, and particularly this is a substation application. So I would say so far, it is meeting and even exceeding a little bit our expectations. It is also an area where we are really focused on adding capacity. I think our ability to get more out of that factory this year and next year is perhaps more a function of our ability to get capacity in place because orders are really supporting. So we are very, very pleased with it, as we are with Systems Control—another acquisition we did last year also in this space and with very similar dynamics of good demand and need to add capacity. We are very pleased with them. Operator: Thank you. Our next question comes from Nigel Coe with Wolfe. Please proceed. Nigel Coe: Just want to go back to the margins. How are the Section 232 tariffs sort of changing the landscape, and maybe talk about both businesses? And I believe that you were utilizing U.S. steel down in Mexico, so any more color there would be helpful, and any thoughts on how to think about margins by segment as well? Joe Capazzoli: Sure. Starting with the tariff, I would probably start by answering it more broadly with the events of tariff changes in the first quarter, of which, yes, February was a piece of what changed. We also saw the repeal of IEEP, we saw 01/22 come online, and we saw some of those changes in February. The sum of all of that is about neutral to us for the year. So that impact was not significant. We were paying in February, going back to Liberation Day, so February—with product lines that would have had U.S.-melted steel—the changes there were entirely offset by some other impacts on some other product lines. So overall, not significant. On your question about margins, quarter to quarter, we have 20 basis points of expansion embedded in the guide at the midpoint for the full year. The margin expansion is going to lean more heavily towards Utility, and Utility is looking at margin expansion pretty ratably across each of the four quarters. Electrical is a little bit of headwind on the margin in the first half of the year, and that normalizes in the second half of the year to get to about flattish on the full-year margin for Electrical. Nigel Coe: Maybe on the back of Jeff’s question on transmission—obviously very healthy growth, very vibrant end market. Some of the big players in that space are growing strong double digits in transmission. Do you see scope for your business to get up to those kinds of levels, and is the scope of your content increasing with time? Gerben W. Bakker: On the scope, we continue to develop products, we continue to do acquisitions, and both DMC and Systems Control are two examples where scope is increasing if you add additional product lines. Also, as you look at where the voltages go—when we talk about 765—our content on that per mile would also go up slightly from the lower voltages. So I think in net, both on what we are adding to the portfolio and where the investment is going, it does increase our content a little bit. Certainly, what we are seeing is double-digit growth. Our scope is broad, and we serve the majority of what goes on a transmission line. If you think about a transmission line, 85% to 90% of material that goes up on that, we serve. I would say we are going to get our fair share of that growth. Specifically, how many generator assets short term—it is a little harder for me to comment on that dynamic. But I would certainly say we will participate and get our fair share of the buildout. Operator: Thank you. Our next question comes from Joseph John O'Dea with Wells Fargo. Please proceed. Joseph John O'Dea: Hi. Good morning. Just wanted to touch on grid infrastructure growth expectations throughout the year. Is it reasonable to see something like low double-digit organic through the first few quarters of the year, and then I think the comp gets a little bit tougher as you get into the end of the year, so maybe that is more mid- to high single-digit? And along with that, any color on electrical distribution—understandably, the transmission and substation are driving strength, but just what you are seeing on the distribution side. Joe Capazzoli: Good morning, Joe. I will take the first part of that question on the Utility organic. And you are thinking about it the right way in terms of mid- to high single-digit organic growth as the year progresses, and we are anticipating it is going to be pretty consistent—Q1, Q2, Q3, Q4. Gerben W. Bakker: Maybe on the distribution side of it, we have been talking about this for quite some time now. What is driving the need to invest there is a lot driven by upgrading and resiliency of the grid. We dealt last year—and the last couple of years really—with destock, where we talked about that underlying demand was still solid, but we were dealing with something very specific. I think that is proving out now, with the destocking behind us, that we are actually seeing the underlying demand, and the drivers of it are continued hardening. I think it is slightly lower than transmission and substation for the reasons that we talked about—getting that power that is so needed in data centers and other areas. But we are very optimistic. And there too, if we think about the start to the year, it is not just off to a good start in transmission and substation, but distribution as well. Joseph John O'Dea: And then just on the timing of pricing and the impact on demand—were the price announcements in the quarter in place middle of the quarter, or in place at the beginning of the second quarter? And really just around any influence on demand pull-forward. It sounds like no incremental pricing required to tariffs. Over reporting season there is some debate on what kind of pull-forward dynamics there were broadly across industrials, but the degree to which you saw any of that in the quarter—it does not sound like much carryover impact anticipated throughout the year. Joe Capazzoli: Price increases went in for us at the beginning of the second quarter, and that typically takes 30 to 60 days to work its way through the backlog and to get to a point of fully realizing the run rate of that new price. So that all sets in during the course of the second quarter. We did not see any significant impact or unusual behavior with pull-forward on demand. That order momentum that we have seen continue going back to the fourth quarter, throughout the first quarter, and into the second quarter—nothing unusual in terms of how that sets up around our price increases that we have implemented. Price increases so far have been sticking. Conversations with customers have been very constructive. And the basis for our price increase has been around metals, and that metals inflation has been very visible and very well accepted in the channel. Operator: Thank you. Our next question is from Christopher M. Snyder with Morgan Stanley. Please proceed. Christopher M. Snyder: Thank you. I wanted to ask about data center. Obviously came through really good—40% in Q1. And you raised the full-year data center guide to now over 25%, previously up 15%. Is this new 25%+ basically all of your available capacity, or if demand strength is sustained, is there an opportunity to ship more this year? Thank you. Joe Capazzoli: Good morning, Chris. We spend a lot of time on that topic with all the activity and the significant demand in data center. You would recall that roughly half of our data center exposure is in our long-cycle power distribution modular skid business, for which we have good visibility to demand. Orders are booked out through the year and there is little incremental capacity, and that feels pretty well situated, and that was well situated in our original guide. So no real change on how we are thinking about the long-cycle piece. On the short-cycle, book-and-bill side, we continue to see strong order demand coming through. We continue to add capacity in that space—every quarter we are adding more capacity—and we continue to add inventory to every extent possible so that we have stock on the shelf for that short-cycle book-and-bill side of products needed for data center. So we think we have a little more capacity, and we continue to invest in that productive capacity coming online. We will continue to do that as the year unfolds to increase our capacity and serve that growing demand. Christopher M. Snyder: Thank you. I appreciate that. Then I wanted to follow up on price/cost. It seems like a year ago, you led on price/cost and then over time into Q1 the cost inflation caught up, netting you closer to neutral. Should we expect the same thing into this next round of price increases—like you will lead a little bit off the bat and then it catches up a bit two or three quarters out? Joe Capazzoli: You are definitely right in your first comment in terms of how last year played out. We were ahead on price versus cost, dating back to Liberation Day tariffs, and that benefit of being ahead kind of situated in the second quarter of last year, and we continued to run positive on PCP in each of the quarters of Q2, Q3, Q4 last year. We were positive PCP on a dollar basis to start this year, and we are anticipating managing that equation on a dollar neutral or better basis. That does have an impact on margins, as you know that math well. Do we think we can continue to hold the line on margin neutral on price/cost? No. I think that was a little beneficial to us last year, but we are very focused on managing to neutral or better and driving that double-digit operating profit growth for this year. Operator: Thank you. Our next question is from the line of Chad Dillard with Bernstein. Chad Dillard: Question for you is on Aclara. Can you talk about the sales in the quarter and how that has trended sequentially? And then just more broadly, how that business is positioned for AMI 2.0, and how should we think about when that cycle kicks off? Gerben W. Bakker: As you know, Aclara is part of the grid automation business, and that business continues to inflect up. We are down year over year, but the decline started to shrink, and while we still are a little bit down year over year in the first quarter, as we communicated, we expect that to start turning to growth. If you peel that apart and specifically to your question of Aclara versus the rest, clearly Aclara had been declining higher while the other part of the business was growing. What you have seen is that Aclara decline is starting to get smaller and smaller. We still, in the first quarter, saw a decline in that business, and as you look ahead, that is an area that has been more challenged. As utilities manage budgets—it goes back a little bit to Jeff’s very first question of how are utilities managing budgets—our view, and certainly indications from conversations, is that they are de-selecting this a little bit over other areas of investment, and we have seen fewer projects come through. But the challenge for utilities is that this equipment is going to fail at some point. The lifespan of this is not in the range of what our typical components are. What we are seeing is more project discussions right now. We are quoting more projects. We won a pretty nice piece of business that is multiyear. From where we sit today with this business decline, we should expect, going forward, to start seeing this business realizing modest growth. We feel it has stabilized—we have seen the bottom—we are now starting to come up. We are not expecting great growth rates, but the dynamics are such that this business should grow from here. Chad Dillard: Great. That is helpful. And then moving over to grid infrastructure, I know in the past you have talked about your order rates within distribution. I was hoping you could give an update on how those trended for the quarter, and can you break down how much of the demand you are seeing is restocking the channel versus pure sell-through into the end market? Gerben W. Bakker: Our view is that the demand is what is going up on infrastructure and not going to stock. We are off to a good start on revenue, and that is driven by order rates on both the Electrical and Utility side, but particularly T&D was also up nicely in the quarter. We generally do not talk about book-and-bill a lot; it is about order rates because we are a more short-cycle business. Our orders were up over one. That is not atypical in the first quarter, where people are starting to get their orders in to get ready for construction season, and that is typically a little bit over one. We were up stronger than that—close to 1.2 to start off the quarter. That is both a mix of short cycle, or book-and-bill, that was solid, as well as projects. We talked earlier about some of these projects. We feel really good about the start to the year, and it is what has driven us to raise our organic guidance. I realize there is a piece of that that is price, but there is a piece that is volume as well. We feel really good about how we started the year, and we see a continuation of this—nothing unusual in it. Operator: Thank you. Our next question comes from the line of Scott Graham with Seaport Research Partners. Please proceed. Scott Graham: Hi. Good morning. Thank you for taking my question. You have a global manufacturing footprint. With inflation higher and some of the geopolitical uncertainties, how is your supply chain behaving? Are you getting what you need? Are you getting any pushback in any corners? I think I heard Joe say no, not yet, on pricing, but we are starting to hear “enough is enough”—some corners are pushing back on pricing in different markets. How is your supply chain behaving overall? And then as a follow-up, how is your acquisition pipeline? It looks like your balance sheet is very lean right now, and I was wondering what the outlook was for 2026. Anything you can say? Joe Capazzoli: Good morning, Scott. On the supply chain, we are not seeing any significant impacts or constraints. What would be more noteworthy is that over the course of the last couple of months, with some of the disruption in the Middle East, we did have a little bit of aluminum that we were purchasing out of that region—that would be a noteworthy area. We do have other qualified sources of supply around the globe. We were able to move that to other suppliers, and we were not, at the end of the day, impacted by that, but it was something we had to address. We are not seeing constraints in other areas yet—chips or metals or component parts of any substance. So I would say the supply chain, as we see it right now, is holding up well and supporting what we need to do to service our customer demand. Gerben W. Bakker: Let me take the second one on M&A. You are right to point out that our balance sheet certainly supports doing acquisitions at larger scale than perhaps we were able to afford in the past. Before we look at the pipeline, we are focused clearly around the core areas of our business—anything in T&D, around data center, and lines around our light industrial markets. Those are all areas that we find very attractive, and there is still, based on our pipeline of deals that we are looking at, plenty of opportunity to deploy our capital there. Of course, timing is not always very predictable. But you have also seen—and Joe highlighted—what we did in share buyback during the first quarter. In periods where perhaps there is a little bit of a void in acquisition, we think utilizing our balance sheet to do buybacks is another attractive area to deploy capital. Of course, our highest preference goes to CapEx, and we certainly have increased that, and based on some of my comments of areas where we are investing, you should expect to continue to see that elevated. The second one being M&A—and I would say there is a good pipeline there, both of what we would call bolt-ons, even those are getting larger, as well as larger deals. And then we have buyback as an option. So we see within those areas that we could fully deploy our balance sheet. Operator: Thank you. And our last question comes from the line of Analyst with UBS. Please proceed. Analyst: Thank you. I wanted to come back to the high-voltage opportunity through 2035. Apologies if I missed this, but is the $1.5 billion opportunity relative to Hubbell Incorporated’s $400 million to $500 million transmission business today? I just want to get a sense of how to think about the growth opportunity. Gerben W. Bakker: If you think about that math a little bit, it represents about 7,000 miles of high-voltage transmission—how we get to the $1.5 billion with our content—and that is over ten years, and who knows if that is longer or shorter, but if you use that as a basis, and then we are not the only participant in that. We certainly have a very good position in that market with our customers. If you add all those things up, we believe it can drive a point of growth above the high single digits that we provided for transmission/substations in the absence of it. Analyst: That is helpful. And the RTO/ISO recommendation for 7,000 miles—I think there are a few hundred thousand miles of high-voltage transmission in the U.S. overall—so could that be more market opportunity if there is increasing content of 765 kV in the U.S., on top of that $1.5 billion, or is it too early to say? Joe Capazzoli: I think the $1.5 billion was related to high-voltage transmission overall, so obviously there is a baseline market of transmission that is also growing strongly, as we said. So not sure what the question was driving that, but— Analyst: No. That is clear. Thank you. Operator: Thank you. Ladies and gentlemen, this concludes our Q&A session. We will turn the call back to Daniel Innamorato for closing remarks. Daniel Innamorato: Great. Thanks, operator. Thank you, everyone, for joining us. We will be around all day for follow-ups. Thank you. Operator: Thank you. And this will conclude our conference. Thank you for participating, and you may now disconnect.
Operator: Hello, and welcome to the Entegris' First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jeffrey Schnell, VP of Investor Relations. Jeffrey Schnell: Good morning, everyone. Earlier today, we announced the financial results for the first quarter of 2026. Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, and actual results could differ materially from those projected in the forward-looking statements. Additional information regarding these risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation. On this call, we will also refer to non-GAAP financial measures as defined by the SEC and Regulation G. You can find reconciliation tables in today's news release as well as on the IR page of our website at entegris.com. Joining me on the call today is Dave Reeder, our CEO. With that, I'll hand the call over to Dave. David Reeder: Thanks, Jeff, and good morning. The first quarter was a solid start to the year as we continue to execute with focus and discipline against the constructive and improving semiconductor industry environment. We are delivering on our commitments. Revenue increased 5%, slightly above the midpoint of our range, while most other metrics, including adjusted gross margin, EBITDA margin and non-GAAP EPS all exceeded our guidance range. I'm encouraged by these results, and we remain focused on the significant opportunities ahead to fully capitalize on the organization's long-term growth and earnings potential. As I mentioned, total revenue increased 5% in the first quarter as compared to the prior year, driven by a 7% increase in our APS segment and a 3% improvement in MS. Our unit-driven revenue, which is correlated to MSI, increased approximately 7% year-over-year, driven by growth in liquid filtration, advanced deposition and selective etch, all of which are critical product lines for our customers' new technology nodes. We're pleased to see the continued growth in liquid filtration, which posted its third consecutive record quarter. CapEx-driven revenue decreased modestly year-over-year in the first quarter, mostly driven by accelerating order patterns in the prior year quarter in response to tariff actions. Given our current bookings patterns, we expect 2026 CapEx revenue to increase throughout the remainder of the year and contribute more meaningfully to our overall growth profile, driven by strong WFE growth and improving fab construction trends, which support not only the latter half of 2026, but also growth expectations in 2027 and beyond. Our overall results reflect the improving demand landscape across our end markets and regions. This includes double-digit Q1 growth in Taiwan and broader Asia, supported by strong plan of record positions as well as improving demand within advanced logic and memory, driven in part by AI-enabled applications. Turning to profitability. Gross margins improved in the first quarter of 2026. The key drivers to the strength in margins on both a year-over-year and sequential basis were productivity and efficiency actions across our manufacturing network and supply chain, favorability from the useful life accounting change in the first quarter and product mix. Jeff will provide more details on this later, but we are pleased with the structural improvement in margins and expect to build on this progress in the future. Additionally, we are continuing our efforts to optimize our manufacturing network. We closed another subscale facility during the quarter in Chandler, Arizona, further advancing our operational initiatives. These actions represent an important proof point in our ongoing efforts to drive scale, optimize our footprint, improve efficiency and better position the business for growth and improved operating leverage as volumes increase. Free cash flow was also a highlight for the quarter. We delivered $144 million of free cash flow, approximately 18% of sales, despite headwinds from normal working capital seasonality. Our strong free cash flow enabled us to accelerate our deleveraging as we repaid approximately $50 million of our term loan in the quarter. We believe this trend will continue, and now expect to reduce net leverage to approximately 3x by the end of 2026. Turning our commentary to the semiconductor market. We now expect mid- to high single-digit industry MSI growth for the remainder of 2026, which correlates to approximately 75% of our business. This contemplates an improved DRAM outlook, a similar unit outlook compared to last quarter in advanced logic and NAND, and a continued mixed outlook within mainstream logic. And the outlook for fab spending is also improving, which correlates to the remaining 25% of our business, both fab construction and WFE. Let me now address the end markets. Advanced logic, which represents approximately 40% of our total revenue, remains well positioned for strong growth in 2026, primarily driven by accelerating demand for leading edge compute. Utilization rates at the most advanced nodes are already operating near effective capacity, and the industry is responding with aggressive capacity investments to support the demand for next-generation nodes. Additionally, as 2 nanometer technology enters a more meaningful production ramp this year, we expect strong growth in 2 nanometer wafer output. Process complexity meaningfully increases with sub-5 nanometer nodes, driving higher Entegris content per wafer and aligning with our strong positions of record. The memory market, which represents approximately 30% of our revenue, is also structurally strong, underpinned by AI workloads and technology road maps that are reshaping DRAM and NAND architectures. In DRAM, demand continues to accelerate, driven by increased AI consumption. Additionally, and as announced, we expect DRAM capital investments to continue at pace, supporting accelerated DRAM MSI growth beyond 2026. NAND demand and MSI are also expected to increase in 2026, though it remains more nuanced than DRAM. This view is supported by both leading-edge technology transitions and AI-driven storage requirements. The key short-term growth driver in NAND for Entegris will be layer scaling and the resulting incremental Entegris content, with wafer start activity expected to improve in the latter half of 2026 and into 2027. Vertical scaling materially increases process complexity, elevating the importance of yield, precision manufacturing and advanced process steps and materials. These technology shifts are expected to result in double-digit increases in content per wafer for Entegris. And lastly, mainstream logic. The recovery and outlook in this end market, which represents approximately 1/3 of our business, remains mixed. We continue to expect tempered MSI growth in mainstream logic through 2026, improving thereafter as new capacity additions, specifically in memory, begin to ease near-term supply concerns, especially with respect to price-sensitive consumer products. As it relates to CapEx, we are incrementally more positive on the portion of our business related to industry CapEx. The return to growth in fab spending is materializing. This is driven by selective but substantial global capacity additions and pull forwards, primarily in leading-edge logic and memory. Additionally, forecast for WFE spending remains strong as these projects advance. Entegris is well positioned to deliver value for our customers and to capture the multiyear growth opportunities we expect will emerge as we progress through 2026 and into 2027. To summarize, there are several industry and operational tailwinds fueling Entegris' growth. The industry outlook remains constructive. Semiconductor fundamentals are favorable and support growth in 2026 and beyond. This is driven by advanced logic and DRAM with a more stable near-term outlook for NAND and mainstream logic. Stronger order patterns and increasing backlog provide increased visibility and confidence across our unit and CapEx-driven businesses. Next, technology transitions will continue to drive upside for Entegris. Materials intensity and process complexity continue to increase. Beyond node transitions, we differentiate by innovating alongside our customers to advance their technology road maps, which is where Entegris creates the most value. And we are driving a stronger operational focus. We are executing with discipline to improve our operational performance, accelerate growth and strengthen our financial profile. Finally, I want to recognize our employees for their focus, discipline and execution. Their dedication enables all of us to deliver upon our commitments. Before turning the call over to Jeff, I'd like to highlight that following a rigorous search process, Sukhi Nagesh has been appointed as our new Chief Financial Officer, effective May 18. Welcome to the team, Sukhi. His engineering background, significant semiconductor industry experience, deep financial expertise and strong operational discipline make him the ideal CFO for Entegris. Having previously worked with Sukhi, I am confident that his leadership will be instrumental as we continue to execute our strategy to unlock Entegris' full potential. With that, let me turn the call over to Jeff to discuss the financials. Jeffrey Schnell: Thanks, Dave. Good morning. Q1 sales were $812 million, an increase of 5% year-over-year and above the midpoint of our guidance range. Gross margin on a GAAP and non-GAAP basis was 46.9%, above the high end of our guidance range. These results included approximately 50 basis points of onetime items, which we do not expect to recur at similar levels in subsequent quarters. The sequential improvement in Q1 was driven by productivity and execution across our network, including more consistent performance and ongoing cost controls, favorable product mix and favorability from the useful life accounting change in the first quarter, which was in line with prior guidance. Operating expenses on a GAAP basis were $239 million in Q1 and were $189 million on a non-GAAP basis. Adjusted EBITDA in Q1 was $226 million or 27.8% of revenue, also above our guidance range. The GAAP tax rate in Q1 was 1% and the non-GAAP tax rate was 8%, which includes an unforecasted release of a tax reserve. GAAP diluted EPS was $0.60 per share in the first quarter and non-GAAP EPS was $0.86 per share, which exceeded our guidance range. Switching to our segments. Material Solutions delivered Q1 sales of $351 million, up approximately 3% year-over-year. Year-over-year growth was led by double-digit increases in advanced deposition materials and selective etch chemistries, along with continued strength in CMP consumables, underscoring the durability of demand for key technologies. Adjusted operating margin was 22%, in line with the prior year period, and increased by approximately 100 basis points sequentially, reflecting improved performance across the manufacturing network. Advanced Purity Solutions delivered Q1 sales of $464 million, representing approximately 7% year-over-year growth. Results were driven by continued strong demand across the portfolio, including the third consecutive record quarter in liquid filtration, a 3-year revenue high in FOUPs and growth in gas filtration. Adjusted operating margin was 29.1% for the quarter, expanding both year-over-year and sequentially, reflecting strong operational execution and productivity, favorable product mix and the majority of the favorability from the useful life change. Switching to cash flow. Free cash flow in the first quarter was strong at $144 million, representing a free cash flow margin of 18%, a continuation of the positive trend from the second half of 2025. The increase in free cash flow compared to the prior year was driven by 3 factors: the improvement in earnings, an increase in cash from operations, primarily due to working capital discipline, and lower CapEx in the period. CapEx is expected to increase as the year progresses, but will remain meaningfully below 2025 levels. We continue to expect strong free cash flow generation in 2026. Turning to our capital structure. During the first quarter, we reduced our term loan by $50 million, building on the $300 million reduction in 2025. We currently have $400 million remaining on our term loan, which is the only variable rate debt in our capital structure. At quarter end, our net debt was $3.3 billion and net leverage was 3.6x. As Dave articulated, we expect to improve our net leverage ratio to approximately 3x by the end of 2026, underscoring our commitment to deleveraging. Moving on to the second quarter outlook. We expect 2Q sales to range from $815 million to $845 million, a year-over-year increase of approximately 5% at the midpoint. Gross margin is expected to be between 46.25% and 47.25%, both on a GAAP and non-GAAP basis, a modest improvement at the midpoint from the underlying gross margin level achieved in Q1, but more than 200 basis points of improvement year-over-year. We expect GAAP operating expenses of approximately $241 million and non-GAAP operating expenses of approximately $194 million, which reflects higher variable comp relative to 2025 and other intentional investments to support the expected growth across our portfolio. EBITDA margin of 27.5% at the midpoint, driven by incremental improvements in gross margins. Net interest expense of approximately $46 million, which accounts for debt paydown to date. We expect our non-GAAP tax rate to return to a more normalized level of approximately 15% in 2Q. We expect GAAP EPS between $0.53 and $0.61 per share and non-GAAP EPS between $0.76 and $0.84 per share. And we expect depreciation to remain largely stable for the balance of 2026 at approximately $35 million per quarter. Looking ahead to our third quarter revenue expectations. Historical industry seasonality supports a sequential improvement in the third quarter. With our current visibility, which we'll refine on our second quarter call, we expect revenue to grow by approximately 5% from the midpoint of the second quarter's guidance range. Finally, I'd like to update a few modeling items for the full year of 2026. We expect net interest expense to be slightly below $190 million, the non-GAAP tax rate to be approximately 15%, diluted share count of approximately 154 million for 2Q and for the full year, CapEx of $250 million, and depreciation of approximately $140 million. Lastly, we have set a date for our Investor Day in New York City in early November 2026, and will share the save-the-date information soon. With that, operator, let's open the line for questions. Operator: [Operator Instructions] Our first question will come from Melissa Weathers with Deutsche Bank. Melissa Weathers: Looking forward to working with Sukhi in the coming months. So I guess for my first question -- thank you for all the color that you gave in the prepared remarks on the market environment that you're seeing. I guess, could you flesh out a little bit more what you're seeing -- it's pretty obvious, AI is very strong. But I think on the consumer electronics side, the demand is -- the jury is still out on where fab utilizations are shaping out for those [indiscernible] products. So is there any more color you can provide on those non-AI markets, would be really helpful. David Reeder: Sure. Melissa, good to speak to you again. Look, we view the mainstream market as mixed, with memory availability and pricing impacting price-sensitive computer products. And then we view that as being offset, however, by power management, data center-related strength and then other ancillary AI-related strength. So on the one hand, you've got potentially some pressure on the consumer products due to the availability and pricing of memory. But yet on the other hand, you have some strengths still associated in mainstream with kind of the broader build-out of AI. So we kind of view that as a put and take. We view capacity utilization right now in mainstream as being somewhere between 75% and 80%. There have been some foundries that have reported that have broken that 80% barrier for the first time in several years since 2022 peak. So we view that as positive. We do think that, that market is improving, but we're looking at it right now with the current view of being mixed. Did you have a follow-up, Melissa? Melissa Weathers: Yes, I did. On the CapEx side, I think the numbers we're hearing from WFE companies, and you can see all the fab announcements coming on. It seems like we're going to have a pretty historic fab build-out cycle coming. So any more color on how we should think about the CapEx portion of your business, whether it's groups or the subfab system than you guys do. I think presenting that ahead of these things have buildouts, would be really helpful. David Reeder: Sure. Let me give you a quick refresher on our CapEx portion of our business. So as a reminder, about 25% of our revenue is CapEx related. And of that 25%, about 1/3 is WFE and about 2/3 is fab construction. So when you think about Entegris, we typically benefit from kind of 3 cycles of demand when the market enters an up cycle and starts building out new fabs. So fab construction-related product lines increased first. Then you typically see revenue approximately 12 months, maybe 9 to 12 months after groundbreaking, that tends to be centered more towards gas purification and fluid management products in our portfolio. Then WFE related product lines and initial filtration during tool qualification start to ramp up. That typically happens somewhere between, call it, 12 and 18 months after groundbreaking. You'll start to see product lines like gas filtration, AMC, LMC bulk filtration start to increase for us. And then finally, you'll start to see the unit-driven product lines, you'll see that demand start to increase, and that's kind of 24 months. So after the fab construction piece, after the tool placement and qualification piece, then you start to get kind of the unit-driven business coming in on the tail end, somewhere around 2 years after groundbreaking. So those are kind of the 3 waves. 75% of our business is unit driven, 25% of our business, CapEx driven. And then from an end market perspective, we would characterize memory probably being in wave 1 of this cycle. And I'm really referring more to DRAM right now. The NAND, the NAND has not announced a lot of incremental fabs or incremental capacity builds at this stage. They've been a bit more focused on driving incremental layers. We're a bit density. So memory though, I would say, is kind of in the wave 1 of this phase really with DRAM at the forefront. And then advanced logic is going through rolling portions of this phase. So probably in the wave 2 and wave 3 portion, but obviously, with some new fabs that have been announced. Operator: Our next question will come from Elizabeth Sun with Citi. Yiling Sun: I guess my first question is on the gross margin side. You -- your Q1 gross margin had a nice improvement quarter-over-quarter and also above your guidance and in Q2, improved a little bit, I guess, more on volume. But I guess, going forward, looking into the second half and maybe in '27, how should we think about gross margin path? Are you going to continue to rationalize some factories and improve [indiscernible] efficiency? David Reeder: Thank you for the question, Elizabeth. I can't tell you how pleased it actually makes me to field some questions about gross margin, particularly because we believe that we're in a period of sustained structural gross margin expansion. And so as we think about gross margin and what we're trying to drive, as I've mentioned previously, we're simplifying and refining our manufacturing network. We're relentlessly driving higher productivity, higher fixed cost absorption, better yields. There is a tremendous amount of work ahead of us, and it will be lumpy, but we are focused on delivering our full gross margin potential, which we think is significantly higher than where we are today. So getting directly to your question on Q1 gross margin. First off, our 46.9% that we posted on a non-GAAP and GAAP basis, we did benefit from about 50 bps of onetime items in the first quarter. So if you normalize for that, that would put first quarter at about 46.4%. That's about 240 bps improvement sequentially. Bridging you from fourth quarter, about 100 bps of that 240 bps improvement was related to the useful life change that we made at the beginning of this year, very much in line with what we guided at the beginning of the quarter and as highlighted in our 10-Q. Productivity and other specific efficiency initiatives, including improved plant performance, comprised the remaining 140 bps. So that kind of bridges you from 44% where we exited fourth quarter of '25 to where we delivered first quarter of '26. And then kind of bridging you for second quarter as well. Again, I'll go back to the fourth quarter simply because that's kind of a fully loaded quarter with respect to KSP as well as Rockrimmon, 2 of our newer facilities. At midpoint for Q2, we guided gross margin at 46.75%. That's about a 275 bps improvement from fourth quarter, which again was 44%. We're expecting about 150 bps to be related to the useful life change, and about 125 bps, driven by improvement in our manufacturing network as well as ongoing productivity and efficiency actions, including the closure of the 2 facilities over the last 2 quarters. Also included in this guidance, I did want to highlight -- included in this guidance is incremental production staffing and related project costs to enable incremental capacity in the future quarters of 2026 as well as into 2027. So embedded in our second quarter guide are some incremental costs that you have to incur ahead to be able to unlock and enable kind of more capacity in the third quarter, fourth quarter and then the first half of 2027 as well. So we're quite pleased with our gross margin trajectory. And did you have another question, Elizabeth? Yiling Sun: Yes. I guess the next one is on the -- congrats on the CFO appointment. I happen to know this, Sukhi has a lot of experience in M&A and corporate development. So I was just wondering, does this signal you guys are ready to do more M&As once your net leverage is below like 3x, as your -- talk about your target? David Reeder: It's probably -- one, we are incredibly happy to announce Sukhi. I'm looking forward to getting him on board. I wish he could have started today, actually, but he will be joining us in mid-May, and I can't wait to work with Sukhi again. Just to kind of recap a little bit about Sukhi, I think many of you probably know him, but to kind of recap Sukhi's background, he started in semiconductors in the mid-90s on the wafer fab equipment side. So we actually started in semis at a similar period in time. He actually started as an engineer, much like myself in semiconductors, he started as an engineer. He actually has a masters in engineering. Unfortunately, it's not in chemical engineering like me, but he does have a strong mechanical engineering degree as a background, and he got to kind of cut his teeth on the WFE side of the business earlier in his career. You followed that up with an MBA, some sell-side analyst experience, a lot of corporate experience, investor relations, corporate development, corporate strategy. He was an interim CFO. And then finally, I got a chance to work with Sukhi at GlobalFoundries. He was there when I joined the company, and he did a phenomenal job of really leading that IPO. So for all those reasons, after a very extensive process, we had a chance to sit down with Sukhi and convince him to join the team of athletes that we're assembling here at Entegris, and couldn't be happier to have him on board. Specific to your question on corporate strategy or corporate development. Right now, we're focused on delivering our leverage reduction, our deleveraging plan. And initially, this year, we told you that we thought we would be under 3.5x of net leverage. We're already at 3.6x of net leverage, and we updated you that we thought we would be closer to 3x of net leverage by the end of the year. Very happy with the profitability that we're driving. Very happy with the free cash flow that we're driving. And so as we progress through the year, while we pay off our term loan, which is something that we're planning this year in 2026 now, we feel like with that as well as with increased profitability, we'll be well positioned in 2027 to at least start to consider other alternatives, whether it's shareholder return or other opportunities in the market. Operator: Our next question will come from Timothy Arcuri with UBS. Timothy Arcuri: Dave, can you talk about just some of the puts and takes on gross margin and how to think about incremental margins from here? I know Taiwan has been sort of a 100 basis point headwind. Is that still the case? And when does that go away? And then can you talk about Colorado? I think that was only going to go away next year. So can you sort of walk through how do you sort of roll off? David Reeder: Sure. So without bridging you again, given the details we've provided, I think the best way to think about gross margin is that as we continue to grow volume from here, we should continue to get gross margin improvement from here. And so that will be both in fixed cost absorption as well as incremental efficiencies that we can drive through our manufacturing network. Now given the strength in order book that we started seeing in the middle of first quarter, we are still looking to optimize our manufacturing network, but we're balancing that rate and pace with respect to make sure that we can still deliver the demand in what looks like a very constructive semiconductor backdrop. So we're taking a bit probably a more measured approach to that as we kind of continue through this year to make sure that we can satisfy our customers with the lead times that they expect and deserve. Specific to KSP, KSP is dilutive to our P&L today, as you know, and as you articulated. We think that by the end of this year, with the ramp that's ongoing, which it's quite a good trajectory, with respect to where we were a couple of quarters ago to where we are now. But it is still a work in process. We will have that facility by the time we get to the end of the year, probably breaking even on a P&L basis, plus/minus. And then we'll start to potentially move it into a less dilutive state, will probably still be dilutive in '27, but less dilutive, significantly less dilutive once we're kind of exiting fourth quarter '26 run rate into '27. Colorado this year is all qualification. And so this year is really -- last year was facilitizing, qualifying the equipment and opening the facility, staffing the facility. This year is further staffing the facility and qualifying products with customers. We're expecting very little revenue out of Colorado Rockrimmon this year, with the hope of ramping Colorado in early 2027. So for that reason, both facilities will be dilutive to us in '26, KSP becoming less so towards the end of the quarter and then improving -- or towards the end of the year, I should say, and then improving in '27; Colorado dilutive -- fully dilutive in '26 and then starting to ramp revenue in '27. Did you have a follow-up, Tim? Timothy Arcuri: I did, Dave. Yes. So can you talk about China and just what's going on in China? Are you seeing any more competition there? We're hearing about some folks trying to do CNP there and becoming a little more -- becoming a little more of a competition for you. So can you talk about that? David Reeder: Sure. I'll actually touch on a couple of regions. Since I know the 10-Q is not out yet. It will be filed later today, where you're going to see the full regional breakdown. I'll just give you a little swing around Asia. Strong growth from Taiwan, up 18% on a year-over-year basis in first quarter. Broader Asia, in general, so including all of Asia, up double digits, slightly more than 10% on a year-over-year basis in first quarter and then migrating specifically into China. China modestly down in the first quarter. So obviously, it does remain a key long-term market for us. But when you look at the first quarter performance, that modest decline was largely driven by some of the CapEx-related businesses that were down double digits, largely reflecting some dislocated order patterns that were in the first half of last year related to tariffs, as Jeff mentioned in his script. And so if you were to exclude those, we feel like it would have been a bit more of a normal quarter in China, but the first half, we do expect to be kind of impacted by some of those order patterns that were pull-ins for the first half of last year related to tariffs. We feel like we have a strong competitive position in our franchise product lines in China: filtration, food, slurries. Yield and performance matter in China, the same way it does in the rest of the world. At this stage, we view China largely as derisked, and we think we're going to have a solid second half, and we think we're going to have a solid 2026 in China. Operator: Our next question will come from Bhavesh Lodaya with BMO. Bhavesh Lodaya: Hi, Dave, and welcome Sukhi. Looking forward to our discussions. Following up on your CapEx -- WFE CapEx side of the business day, as we see higher volumes start moving through your system, I would presume it comes with pretty strong incremental margins, perhaps better than your company average. Maybe if you could provide some color on where margins stand in that business today versus historical peaks? And how should we think about that side as volumes coming in? David Reeder: Sure. Look, let me start with utilization. We articulated in last quarter that we had about $1 billion of incremental upside that we could deliver from our manufacturing network. Now obviously, you have to staff for it. You have to position inventory for it. But that's kind of the physical capacity that we have. And so whether it's unit-driven volume or CapEx-driven volume, incremental volume is tremendously helpful from a fixed cost absorption perspective when you're sitting at the type of utilization rates that we're setting out today. So without getting kind of too far into the details of unit-driven CapEx, our unit-driven margin versus CapEx-driven margin, incremental volume does help us in a pretty meaningful way with respect to fixed cost absorption as it drives our plant utilization higher. And we do expect our plant utilization to grow higher as we progress through the year in the absence -- even in the absence of any other specific initiatives that we have. So from that perspective, we're very much pleased with what kind of the CapEx order book looks like today. We have been booked kind of through the latter half of 2026, if not into '27 on some of these CapEx items. And we do expect gross margin to grow modestly as we deliver that fixed cost absorption with incremental volume. Did you have a follow-up, Bhavesh? Bhavesh Lodaya: Yes, and a different one. So there's been a meaningful amount of inflation in terms of polymers and chemical feedstocks. Are you seeing any challenges in procurement or pricing for your raw materials? And then do your contracts with your customers building just a simple pass-through of these costs? Or is there a lag as you price it through to your customers? David Reeder: What we have seen, some modest inflation. Actually, let me start with the contracts. We do have, for some key suppliers, we do have some contractual terms with respect to price increases as well as our long-term agreements with them to take a certain amount of volumes. So there are key suppliers to us that have relatively fixed contracts, both from a pricing perspective as well as a volume perspective that we have to abide by and as do they. For the vast majority of our supply chain, however, we have agreements, but then we will do certain annual negotiations. We feel like those annual negotiations were pretty productive for us. We feel like we're in a good spot, cost-wise from an inflationary perspective, with perhaps one exception, and I'll just -- I'll touch briefly on it. The Iran Middle East conflict. As you know, it's a fluid situation, one that I'm sure everyone in the industry, including yourselves, are monitoring. It's probably a bit too early to quantify the full cost impact there, but we have seen some early cost pressure on raw materials related to some of the availability coming out of the Middle East. And specifically, that's in the areas of some of the noble gases as well as some of the resins. It looks like right now, at least our position on this right now is that we think it could be temporary. And so we just absorbed those costs. To the extent that this cost pressure kind of persists, either in logistics cost or raw feedstock cost for us, then we would evaluate increasing pricing in the future. But at this point in time, we view the inflationary pressure as -- largely as expected. Some unexpected that I just mentioned related to the conflict in the Middle East, absorbed in our P&L for now and we'll reserve the ride in the future if it becomes too big of a burden to go back and kind of renegotiate some of the pricing with our customers. So from kind of -- as we sit today, I would say, steady as she goes to continue to be reviewed as we progress through 2026. Thanks, Bhavesh. Operator: Our next question will come from Jim Schneider with Goldman Sachs. James Schneider: I was wondering if, David, if you could maybe kind of comment on what you think has changed the most in terms of the wafer start outlook for the year? It sounds like that is mainly DRAM, either increasing utilization rates or pull-ins in terms of capacity. But I was wondering if you could give any color on that? And then maybe if you could explicitly address the analog sector, where it seems like we have the stand to improve the most from a utilization perspective this year. David Reeder: Sure. Thanks, Jim. So what's changed the most from when we spoke to you in February until today, I think in -- at the beginning of February, the forecast for the industry was that fab construction would be up low single digits. And I think when you look at fab construction today, the forecast for the industry is high single digits. So that's a pretty meaningful change. It doesn't mean that we'll get necessarily that revenue in period in '26. As I mentioned earlier in the call, from groundbreaking to kind of first revenue for us is around 12 months. But that's a big change. Fab construction going from kind of low single digits, essentially flat to high single digits, I think that kind of speaks to the state of the industry, the current utilization, particularly for advanced logic and memory, and I think that bodes well for kind of the setup for 2027. So I think that was a meaningful change, not a big change for us, again, in period for '26, but I think the foreshadowing for '27 and the setup is quite good. MSI, we were originally forecasting that MSI would be low to mid-single digits. We did update the forecast for MSI to be kind of mid- to high single digits. So I would say modest change there on units. And I would say that was a little bit of a blend between advanced logic, DRAM as well as some incremental NAND, and then I would say we're still kind of expecting flat from our expectation in February with respect to -- with respect to mainstream. So I think those are kind of like the big puts and takes between our February call and our market commentary in February and where we sit today in April. To get to the second question that you had, which was really around mainstream. And mainstream, I think if you stood back and looked at it objectively, I think you'd say that the first quarter has probably been a little bit better than we originally expected. So I think from that perspective, there were, again, some of our customers that have recently released, not all of them have, but some of them that have released have kind of talked about improving inventory in the channel. They've talked about utilizations. If they're a manufacturer that have broken kind of the 80% level, which for many of them have not been breached since the peak in '22. And then all of them, I think, have kind of highlighted memory availability. So strength in kind of AI-related and data center-related products, but memory availability potentially being a concern. So I think we view that market, as I mentioned earlier, is kind of mixed. We've kind of included a mixed view. Again, this is 30% of our revenue. We've included a mixed view in our guidance for '26 as well as kind of an initial flash that we gave you for third quarter of '26 as well. Operator: Our next question will come from Charles Shi with Needham. Yu Shi: I'll start with the first question around your exposure in advanced packaging. We know this is one of the growth areas for Materials and probably want the variable between you and your closest peer in terms of some of the near-term performance. We know you probably were going to talk a little bit more about that at the Investor Day, but Investor Day probably still 6 months out. So we still would love to hear some thoughts, early thoughts, any new actions undertaking right now at Entegris? We know you talked about the thermal material, you're talking about some of the carrier stuff. Is there anything more than that right now in your thinking that Entegris can get a little bit more exposure in advanced packaging? For one, we do think that CMP seems to be a very important area, especially with the adoption of a more hybrid funding type of advanced packaging and you do have good amount of a CMP slurry path business, but I want to get some thoughts there first. David Reeder: Thanks for your question, Charles. And look, we agree with you, we think the advanced packaging market is an attractive market. Unfortunately, our exposure to advanced packaging right now is limited due to just the prior investments that we didn't make necessarily in advanced packaging. That stated, we do have some products that have performed well in this space and that we did. We were able to launch some more minor, I would say, minor spends of products to be able to address this market. So specifically advanced flow control for thick resist, delivery solutions for copper plating and photoresist CMP, as you mentioned, for high-bandwidth memory and TSVs in particular, and then, of course, the carrier offering. So we do have a portfolio of products that we have been able to penetrate the advanced packaging market with. Our current revenue exceeds $100 million a year run rate. So we're excited about some of the traction that we're getting in this market for the areas where we've been able to kind of make investment and bring products to market. We are excited about some of the products that we have in the pipeline. That's really for the future. However, it's not for today, it's not necessarily for 2026 revenue. The 2026 revenue product, so the areas that I highlighted earlier. But we will have more details for you at Investor Day in November, recognizing the nature of the question that November is still about 6 months away. So -- but that's what I can give you today. And we're excited about the $100 million plus that we're driving from the business. Did you have a follow-up, Charles? Yu Shi: Yes. Dave, since your 10-K came out intra-quarter over the last couple of months, we looked at some of the customer-specific financials. So we did notice that the largest foundry, which is the #1 customer for you, the revenue from that particular customer last year, I would call probably flat to modestly up, and there was a little bit maybe trailing what I consider as their own growth. Was wondering if you can give us some stuff? What happened last year? Why the growth wasn't keeping up very well with the leading foundry? And any -- about this year, are you able to catch up to their growth? And obviously, we heard you talking about 2 nanometer production ramp that is actually happening later this year, but I want to get some thoughts around that. David Reeder: Sure. Speaking first to last year, to 2025, there is a pretty significant build-out in '24 that from a CapEx perspective, was meaningful, and that puts some pressure on year-over-year comps. We actually felt pretty good about the unit volume for 2025. But obviously, we had some year-over-year dynamics in '25 versus '24 from a CapEx perspective. Early results here in 2026, which we'll get in our 10-Q later today. And while I won't talk about specific customers, we can certainly talk about regions. Taiwan was up 18% on a year-over-year basis in the first quarter. A lot of strength across the portfolio there, strength that we're anticipating will continue. So good results from Taiwan, again, up 18% year-over-year in Q1. And really some good results across -- broadly across Asia. Asia as a whole, was up a little north of 10% on a year-over-year basis. Obviously, that includes Taiwan that was up 18%. It also includes China that was down modestly. So the other regions in Asia performed well as well. And as you know, we have key customers in Korea, we have key customers in Singapore, we have key customers in Japan. So good to see that kind of broad region performed well as well as good to see Taiwan perform well. Operator: Our next question comes from John Roberts with Mizuho. Unknown Analyst: Welcome, Sukhi. Back to China, are you through with your requalification of sourcing into China? And I think you're actually going to rationalize some products just not requalify, and maybe, is that any headwind to the China sales? David Reeder: Yes. China, we're -- I think in Q1, I think about 85% of our revenue for China, it was in that ZIP code, was from in region for China. That's about where we exited in terms of regional qualification in 2025. We'll probably pick up another 5% of the product portfolio that we sell there in '26. So we'll probably take that 85% number up to 90% by the end of this year. I don't anticipate that we'll ever get to 100%. I think there'll be some products that just given the volume of sales, it won't justify the expense of relocating their production route. But I do think that we'll go from kind of 85% where we are today to probably more than 90%, but we do expect to get to 90% throughout the course of '26 and then above 90%, we'll work on in '27, just with this kind of upper limit of it, it will probably never get to 100%. So there will always be some amount of products that will be impacted either geopolitically or by tariffs. Did you have a follow-up, John? Unknown Analyst: Yes, in Materials Solutions, so are the constraints in the memory market driving any product shifts within the Materials Solutions segment? David Reeder: Not really product shifts. I think -- if you look at memory total, sorry, let me -- maybe it's best to break it down and be more specific. NAND, there are some shifts in the market with NAND. NAND is very much focused on driving bit density, and bit density is driven by layer count. And as layer count moves from low 200s to 300 or 300-plus layers, it does introduce new materials, for example, moly, which the company has spoken about. So we do like that trend. Incremental bit density, while it does consume capacity, so you don't get more wafers, you don't get more MSI, but it does consume process steps and capacity. And we feel like that's where the focus on NAND is right now is on driving bit density at least in the first half with potentially incremental wafer starts in the second half. Incremental bit density drives incremental materials for Entegris, particularly in areas like moly and selective etch. And so that's a trend that we would like to see continue. And we'd also like to see them continue to fully utilize those fabs to 100% capacity. So both drive bit density and drive more MSI, but I think first half is more of a bit density story. For DRAM, DRAM is operating really near capacity at this stage. So even with being fully utilized or near full utilization and even with potentially some technology changes in DRAM, there's not a significant change in the materials there. I think the most significant change was just simply the HBM wants a lot of DRAM kind of migrated into HBM. That is incremental processing. We do have some slurries and some other products in that incremental advanced packaging process steps or in those advanced packaging process steps. And so that's a trend we'd like to see continue as well. Operator: Our next question comes from Chris Parkinson with Wolfe Research. Harris Fein: This is Harris Fein on for Chris. Just given the geopolitical environment, there are some fears about energy availability. You mentioned Noble Gas has some key inputs like helium for fabs located in Asia. Just as you run the business and you have conversations with your customers, how would you characterize the degree of concern around that? David Reeder: We haven't -- there haven't been kind of semiconductor specific concerns around energy. I think in general, there's concerns around just energy consumption and availability, especially as you think about data centers tapping big parts of the grid. But we haven't really seen anything specific to semiconductors or semiconductor fabs. Obviously, it's a key consideration when you think about building a fab, but most of those fabs secure that energy in advance for -- usually for some pretty long periods of time. Did you have a follow-up, Chris? Harris Fein: Yes. The other one. On the third quarter -- on the third quarter directional framework, I think you mentioned historical seasonality supporting a sequential improvement. I just want to clarify, does that third quarter guide contemplate any cyclical recovery on the mainstream logic side? Or is this just contemplating normal seasonality and any cyclical recovery would be upside to what you're communicating? David Reeder: Yes. Our third quarter guide today, we just tried to give you a little bit more visibility based on what we're seeing kind of in our order book. So third quarter includes a little bit of seasonality. It also includes some of the visibility that we've received in our order book, particularly with respect to CapEx. And so we wanted to give you a flash of what we thought that looks like. Now that 5% sequential guide from second quarter to third quarter from our second quarter midpoint, that would be about 8% year-over-year growth if you were to do that math and then look at third quarter kind of guide '26 versus third quarter '25 actuals. So we feel like that's a pretty good guide at this stage given where we are in 2026. So we're pretty happy about that, and it's really just including some seasonality, some of the current order book that we currently have visibility to, and it really doesn't include anything -- any meaningful recovery with respect to mainstream. Thanks, Harris. Operator: Our next question will come from Edward Yang with Oppenheimer. Edward Yang: Dave, I appreciate the time and good to see the improvement. First question is on R&D, and that's been ticking down every quarter for the last several quarters now. I'm just wondering what's driving that? And related to your R&D engine, how does the pipeline look for POR wins that you could leverage above and beyond cyclical recovery? David Reeder: Sure. Thanks, Edward. There's certainly no intention to kind of tick down R&D. Obviously, if revenue is growing kind of faster than we originally expect, then you tend to get this phenomenon where you kind of set a budget for about 10% of revenue to be invested back into R&D., and so you get kind of these, let's call them, period gaps. But we do feel good about roughly this 10% level of revenue being reinvested back into R&D. We feel like that's a pretty good benchmark. Again, plus minus, and it's very different by business and where different businesses are in their growth cycle and maturity cycle as well as R&D intensity cycle. But from that perspective, we feel like our model of roughly 10% of revenue invested in R&D is, for a bunch of reasons, is the right one. Pipeline for PORs. We actually feel pretty good about both our current plans of record, our current market share as well as the PORs that are currently in our pipeline that we are competing for. So as manufacturing becomes more complex, as you move to higher layer counts and memory, as you move to more advanced packaging for DRAM that requires incremental slurries, incremental pads, incremental filtration. And then, of course, as you move advanced logic from kind of 2 nanometer to sub-2 nanometer, the landscape and the precision required and the contamination and material purity required, those requirements all get orders of magnitude harder. And we feel like that plays very well, both to our development cycle as well as to our current product line. So I feel very good about our innovation engine. It's something that we're looking forward to showcase a little bit at our Investor Day in November. So some more to come. Thanks, Edward. Operator: And this does conclude the Q&A portion of today's call. So I'd like to turn it back over to Jeffrey Schnell for any additional or closing remarks. Jeffrey Schnell: Yes. Thanks, everybody, for joining our call today, and we look forward to discussing more with you in the coming quarters. Operator: Thank you, ladies and gentlemen. This concludes today's Entegris' First Quarter 2026 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.
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: 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: Good afternoon, and welcome to Asure Software's First Quarter 2026 Earnings Conference Call. Joining us today's call are Chairman and CEO, Pat Goepel; Chief Financial Officer, John Pence; and Vice President of Investor Relations, Patrick McKillop. Following their prepared remarks, there will be a question-and-answer session for analysts and investors. I would now like to turn the call over to Patrick McKillop for introductory remarks. Please go ahead. Patrick McKillop: Thank you, operator. Good afternoon, everyone, and thank you for joining us for Asure Software's First Quarter 2026 Earnings Results Call. Following the close of the market, we released our financial results. The earnings release is available on the SEC's website and our Investor Relations website at investor.asuresoftware.com, where you can also find our investor presentation. During our call today we will reference non-GAAP financial measures, which we believe to be useful to investors and exclude the impact of certain items. The description and timing of these items, along with a reconciliation of non-GAAP measures to their most comparable GAAP measures can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and as such, involve some risks. We use words such as expects, believes and may to indicate forward-looking statements, and we encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. I'll hand the call over to Pat in a moment, but I just wanted to take a moment to remind people of our upcoming Investor Relations activities. On May 13, we are attending the 21st Annual Needham TMT Conference in New York. And on May 14, the ONE Houlihan Lokey Conference also in New York. On May 28, we will attend the Craig-Hallum Conference in Minneapolis. On June 23, we will participate in the Northland Capital Markets Conference, which is being held virtually. We also are in the process of scheduling some nondeal roadshows. Investor outreach is very important to Asure, and I would like to thank all of those that assist us in our efforts to connect with investors. Finally, I would like to remind everyone that this call is being recorded, and it will be made available for replay via a link available on the Investor Relations section of our website. With that, I would like to -- now I'll turn the call over to Pat Goepel, Chairman and CEO. Pat? Patrick Goepel: Thank you, Patrick, and welcome, everyone, to Asure Software's First Quarter 2026 Earnings Results Call. I'm joined on this call by our CFO, John Pence, and we will provide a business update for quarter 1 2026 results as well as our updated outlook for the remainder of the year. We are very pleased to report a strong start in 2026. First quarter revenues came in at $42.8 million, representing growth of 23% compared to Q1 of 2025. This performance reflects continued momentum across our core business lines and validate the investments we've made in our platform, sales force and AI capabilities over the past year. Our organic growth rate for quarter 1 2026 was 7% compared with 3% in quarter 1 2025, and 3.5% in quarter 1 2024. This is a significant acceleration in a quarter, which historically has shown some seasonality. We're encouraged by the drivers behind it, increasing attach rates with our existing client base as well as continued new logo wins. Given global uncertainty, we're taking a conservative stance on operating the business. However, we remain very bullish on the customer response to our platform improvements, and we believe we can deliver double-digit organic growth as we move through the remainder of 2026. Since the launch of Asure Central in October 2025, adoption has continued at a rapid pace, and we believe that by the end of the second quarter of 2026, the majority of our approximately 30,000 direct clients will be on the platform. With the majority of our direct client base now on a single unified platform, we believe we are increasingly well positioned to accelerate cross-sell and attach rates throughout the remainder of 2026. Our multiproduct attach rates continue to improve. The number of clients purchasing multiple products in our payroll business grew by 15% in quarter 1 compared to quarter 1 of 2025. We continue to work toward our internal goal of moving clients from an average to 2 products to 4 or more products per relationship. Earlier this year, at our sales kickoff, we introduced AsureWorks, which is our administrative services outsourcing or ASO model, which allows clients to delegate key payroll and HR compliance processes to Asure. We are scaling AsureWorks thoughtfully building sales, implementation and support capacity based on early results, it's still early days. However, the reception has been very positive. Our pipeline is growing and we've started to win new clients. We're seeing interest across multiple types of buyers, small hotel chains, restaurants. HVAC companies are among the early adopters, which is consistent with our broader client base of Main Street businesses that need payroll and HR compliance support, but lack the internal resources to manage it themselves. We currently have 6 sales reps dedicated to AsureWorks in the pilot effort and plan to add a few more in the near term. This offering is strategically important. Clients who adopt managed payroll and compliance services typically represent 2x to 3x the revenue of a payroll-only client. Importantly, AsureWorks is not a PEO model. We're not taking on co-employment risk. So for clients constrained by the costs or rigidity of a traditional PEO, we believe AsureWorks is a compelling flexible alternative. We are on track toward our full year target of 150 sales reps and continue to invest in training and enablement. Sales leadership upon our President and Chief Revenue Officer, Eyal Goldstein, is driving focus on both new logo acquisition and multiproduct cross-sell within our existing base with the goal of transitioning our mix over time towards approximately 35% new logos and 65% base expansion. Our new bookings in our core human capital management payroll continued at a strong pace in quarter 1 up 13% versus last year, and our contracted backlog remains healthy at approximately $85.6 million. We expect to convert approximately 38% of that backlog over the next 12 months. Our client base, primarily small and midsized businesses in payroll intensive, compliance-driven industries remains resilient. We have not observed meaningful changes in sales cycle dynamics or competitive behavior in quarter 1. I want to take a moment to reiterate our thoughts on AI and what it means for our business. Much of the disruption narrative applies to productivity and workflow software, tools where AI can replicate or replace the core function of a software that the software performs. Payroll and HR compliance is not in that category. We move approximately $20 billion annually on behalf of our clients. And to do so, we hold money transmitter licenses in every states and requires them a regulatory infrastructure that takes years to build. It represents a significant barrier to entry. We interface directly with the IRS, state and local tax agencies and banking institutions. Our clients carry 7 or more years of employment history, complex multi-jurisdictional tax obligations and real-time compliance requirements where the margin of error is effectively 0. These are not functions that a generic AI layer can absorb. The regulatory complexity does not go away. In fact, it compounds. What makes Asure a system of record rather than a workflow tool is precisely this. We are embedded in the legal and financial infrastructure of our clients' businesses, switching costs are high, our revenue model is consumption based on headcount and payroll runs rather than a seat license and our client base is concentrated in the frontline essential workforce, economy, plumbers, hotel workers, tradespeople. Those work is among the most resilient to automation. At the same time, we believe AI is a meaningful accelerator for us. Luna, our AI agent, has been adopted by greater than 15% of potential users to date without any active marketing or onboarding from Asure. In quarter 1, Luna interactions increased by nearly 50% over the prior quarter. To date, we have transcribed, categorized and scored approximately 80,000 support calls for sentiment and our ticket mining capability analyzes more than 100,000 cases monthly. These numbers reflect AI working across both the client basing and operational sides of the business, deflecting support volume, enabling employees and administrators to self-serve across payroll, benefits and compliance workflows and driving continuous product and service improvements. The result is a smarter, faster and more responsive organization without reducing the compliance expertise and accountability our clients rely on us to provide. On our last call, we told you that Luna could perform over 50 actions live, audible and permission control. Since then, we've proven the model at scale. Our Canadian tax solution is the clearest example. A fully automated Luna AI-powered pipeline that converted a traditionally manual compliance workflow into a proactive, continuous modern system. Our more periodic checks, continuous coverage, that architecture is now a blueprint, and we're systematically replacing it across U.S. payroll, U.S. tax and HR compliance. This is not a feature rollout. It is a platform-wide operating model shift from reactive to proactive, from human check to AI verified, from process dependent to infrastructure-driven. That same shift that makes AsureWorks possible. We can now take on the work itself, not just deliver to software, because the AI layer gives us the efficiency and the audit ability to do it at scale without scaling headcount literally. Through Asure Central, every payroll specialist works from a unified action surface. Discrepancies, missing data, pending filings, require approvals, surfaced in real time, not buried in reports. Luna identifies what needs attention. Central delivers it to the right person at the right moment. Detection, notification, action, close the loop, these capabilities compound. Every compliance workflow we automate strengthens our models across the entire client base. And when you're processing approximately $20 billion in payroll annually, that compounding effect on system-wide intelligence is very meaningful. Internally, the same AI foundation is accelerating product development, sharpening sales intelligence and improving support operations, all of which we expect to continue to expand the margin profile over time. The result, higher accuracy, greater efficiency and a structural lower cost to serve with human accountability preserved for every compliance sensitive decision. In short, we are a system of record business with compounding data gravity operating in a highly regulated compliance critical environment. This is an entirely different category than the SaaS segments where disruption concerns are most valid, and we remain confident in both the durability of our model and the opportunity that AI creates for us going forward. With that, I'd like to turn the call over to John to discuss our quarter 1 financial results in more detail and provide an update on our 2026 guidance. John? John Pence: Thanks, Pat. As Patrick noted, several figures discussed today are on a non-GAAP or adjusted basis. Reconciliations are available in our meeting, in our earnings release and our investor presentation at investor.asuresoftware.com. First quarter total revenues were $42.8 million compared to $34.9 million in Q1 2025, representing growth of 23% year-over-year. Recurring revenue for Q1 2026 was $37.8 million compared to $33.2 million in Q1 2025, an increase of over 14% year-over-year. Recurring revenue represented approximately 88% of total revenue in the quarter. We believe that in 2026 recurring revenue as a percentage of total revenue will be in the low 90% range, and we anticipate that will continue to trend upwards in 2027. Professional services and hardware revenue was $5 million in Q1 2026 compared to $1.7 million in Q1 2025. The increase in nonrecurring revenue was primarily due to hardware sales from our Lathem acquisition, and professional services tied to enterprise tax. Float revenue was relatively flat in Q1 2026 compared to Q1 2025. We have modeled 2 additional rate cuts in 2026, which we anticipate will be partially offset by continued growth in client fund balances. Gross profit for Q1 2026 was $30.5 million compared to $24.6 million in Q1 of 2025. GAAP gross margin for Q1 2026 was 71%, in line with Q1 of 2025. Non-GAAP gross margin for Q1 2026 was 76% compared to 75% in Q1 of 2025. Net income for Q1 2026 was $0.6 million compared to a net loss of $2.4 million in Q1 of 2025. EBITDA for Q1 2026 was $9.4 million compared to $4.1 million in Q1 of 2025. Adjusted EBITDA for Q1 2026 was $12.3 million compared to $7.3 million in Q1 of 2025, an increase of 69% year-over-year. Adjusted EBITDA margin for Q1 2026 was 29% compared to 21% in Q1 of 2025, an increase of approximately 800 basis points. For the full year, we continue to expect to generate positive unlevered free cash flow in the mid- to high teens range, which we calculate by taking adjusted EBITDA at the midpoint of our guidance range, less software capitalization of approximately $15 million to $16 million, and approximately $6 million in cash interest cost. We ended the first quarter with cash and cash equivalents of $19.2 million and debt of $68.8 million as of March 31, 2026. Based on continued positive momentum in our business, we are updating our full year 2026 guidance and also providing Q2 guidance. It's important to keep in mind that the first quarters are seasonally strong as recurring year-end W2/ACA revenue is recognized in this period. Full year 2026 guidance. Revenue of $159 million to $163 million, and adjusted EBITDA margin of 23% to 25%. Q2 2026 guidance. Revenue of $36 million to $38 million, and adjusted EBITDA of $6 million to $8 million. Our cost structure, including CapEx and capitalized R&D is expected to remain relatively stable on a dollar basis. With that, I'll turn the call back to Pat for closing remarks. Patrick Goepel: Thanks, John. Quarter 1 2026 marks continued progress towards the inflection point we've been building towards. With Asure Central now substantially adopted across our direct client base, our Luna AI delivering measurable efficiency gains, AsureWorks gaining early traction, and our sales force growing towards 150 reps, we're executing on the plan we've been sharing with investors. We believe we are at an important inflection point in the business where growth and profitability are advancing together. This combination, top-line momentum, bottom-line discipline at the same time is what we've been working towards. And we're very pleased to be delivering on it. We remain on track toward our medium-term target of $180 million to $200 million in revenues with adjusted EBITDA margins of 30% or better, a level we came within close range of during this quarter and in Quarter 4 2025. And our longer-term vision, which we have discussed with investors, reflects the potential for margins to expand well beyond 30% as we achieve scale. AI continues to reduce our cost to serve while simultaneously expanding our market and revenue opportunities. We're excited about 2026, and remain committed to delivering value to our shareholders, our clients and our stakeholders. Thank you for joining us today. And now I'll send the call back to the operator for the question-and-answer session. Operator? Operator: [Operator Instructions] Our first question comes from Jeff Van Rhee with Craig-Hallum Capital Group. Jeff Van Rhee: Just a couple of quick ones for you. On Asure Central, I'm curious, now that you're getting a little further into it, what are you observing with respect to the path of adoption as people get single sign on capabilities and are getting exposed to more products. Just kind of curious what the paths of adoption are looking like so far? Patrick Goepel: Yes, really, really pleased. Attach rates were up about 15% year-over-year. People are really getting into the flow of it. And I think more important than that, it's 1 of the reasons why we also introduced AsureWorks. The bigger story for us with small and medium-sized businesses is we can go to a small business and say, hey, we'll give you the tools to manage compliance end-to-end across all products in human capital management or we can do the work for you. And because we have the proof point of Asure Central where all the products are under a single pane of glass, the light bulbs are starting to go on. So I think we're early innings yet. But boy, we're really, really pleased. And then our acquisition of Lathem, which we acquired in July, they're undergoing Asure Central and they'll be largely done in the second quarter here. So really, really pleased with our sales motion, our customer service motion. And the other thing that's coming out which is interesting is the prompts or the trigger events. So if you get to 20 employees and -- now by law, you have to offer COBRA, it's almost a no-brainer to say, "Hey, do you want Asure to manage that for you as opposed to try to introduce that somewhere else? Or if you're in a state at 401(k) is a regulatory requirement, hey, we noticed you don't have any 401(k) deductions, would you like us to help you with that plan? It's a real easy conversation. So we're just getting started, but those are some of the things that are popping out quickly. Jeff Van Rhee: Yes. That's helpful. And in the deck, you talk about the expanding PEPM. Can you talk -- I mean, I can see you're taking it from $15 in 2020 to $100 in 2026. But where by your math are you at this point in terms of PEPM, and any thoughts on '27, '28 trend to just get a sense? I know what the potential is, but where are you and where do you think you can be? Patrick Goepel: Yes. What I would say right now is we have kind of an internal goal that we're shooting for 2 products to 4 products because we have a direct model and an indirect model, et cetera. In the investor deck, we have 64% of our business in the small kind of mid business, and it's a focus area for more and more products. We'll have a better kind of RPU, but from an intentionality perspective, we were kind of in the area of $12 to $15 per employee per month. I think what you're going to see is a double here over the next 3 years or so. And you're going to see, I would say, we're pretty optimistic right now. But it is the first quarter. I think we'll have a better answer here when we get Lathem in probably on the second earnings call. But I would be disappointed with the -- that we don't do a double over the next 2 to 3 years here. Jeff Van Rhee: Yes. I mean you've certainly added an incredible amount of breadth to the product set over the last several years. So it makes sense. One last maybe for me on tax season impact. Just what was the seasonal uplift in Q1 from tax season? Patrick Goepel: Are you talking W-2s or are you talking to float... Jeff Van Rhee: No [indiscernible] sorry. Patrick Goepel: We were probably up in the area of 300,000 or so on W-2s and ACA. Some of our employee count, they have PEPM environment where we don't bill separately for W-2s. But for the ones we bill separately, it's about a 6% increase. And I would say anecdotally float balances ended the quarter and double-digit increase in float balances. Operator: Our next question comes from Joshua Reilly with Needham & Co. Joshua Reilly: I just wanted to start off on the last piece you were talking about there with the forms growth. The 7% organic growth is pretty impressive versus what, 3.5% the last couple of years in the first quarter. How much of a headwind or a tailwind, I guess, was the forms growth in this March quarter versus the last couple of years? Because I know it's been a headwind the last couple of years and I know you just threw out the 6% number. What was that referencing exactly? Was that the forms growth for the quarter? Patrick Goepel: That was the forms growth. So really, Josh, there was no headwind in forms growth. Maybe it's 1%. Joshua Reilly: Got it. And in the prior 2 years, there was somewhat of a -- more of a headwind. Is that the right way to think about it [indiscernible] in this year? Patrick Goepel: Yes. If you think that you had the great resignation and that you had have the great stay, during a couple of those periods, turnover was really heavy which would add more to W-2s and then when you stay, it's a little bit less. So there was a headwind, a couple of percentage points in that area. Joshua Reilly: Got it. And then on the Lathem transition -- the business model transition, how is that going? Because the hardware revenue was a little bit above my estimates here for the March quarter. And just curious, is that still on track with your expectations entering the year? John Pence: Yes, I think so. I'm not sure that the hardware was that much up. I think we also had some pretty healthy professional services, Josh, with regard to some of the larger tax implementations. So I think from my perspective, [ hardware ] was kind of in line with last year and nothing too crazy. In terms of the integration and the plan, I would say we're going to be in earnest in the back half of this year and into next converting to that HaaS model. So early stages and we haven't started to see that transition, which will, again, obviously be really good for the mix of revenue, right, turn it into recurring, but it will put some pressure on the nonrecurring side, right? So on the compares, we're going to be adding a lot more recurring revenue in a couple of quarters, and you're going to see a decrease in nonrecurring. Again, good for the health of the business, but it will be a little bit of a transition in terms of the mix. And that's what we expect to happen kind of over the next, I would say, 18 months to 2 years. Patrick Goepel: Yes. And Josh, I would say really, really pleased with the Lathem acquisition overall. It was absolutely the right acquisition for us. Our customers love it. And anecdotally, the install times and the coordination around multiproduct implementations has gone really, really well. Joshua Reilly: Last point for me is on the enterprise payroll tax deals, can you just give us -- we've seen some kind of mixed feedback in the market about ERP migrations. How important is the cloud ERP migration for you or just any type of key migration for you to win business there? And can you still win some deals even if ERP migrations are in a period that's a little bit slower? Patrick Goepel: Yes. First of all, Josh, and I hope you appreciate this. In addition to analysts and investors, we have people from Team Red on the call, who is our primary competitor. So I can't go too much into detail like I used to be able to because they've noticed us. But anyway, what I'd like to talk about here is, first of all, the market for tax is really compelling. We have -- we think we're miles ahead of the competition. I think we have a really good offering there, and we're going to continue to grow in that area. As far as ERP migrations or implementations, first of all, we do a lot of times, we are the tail not the dog in the sense that when somebody goes to an Oracle or UKG or an SAP or Workday, what happens is we are -- the timing of some of those deals are when they do implement with ERP. So sometimes that can lengthen an install center but -- install cycle -- but it absolutely -- actually, it's -- the market right now for compliance and tax services, especially with how we go about it with AI is very strong. And then Eyal Goldstein is here -- real quick, Josh, Eyal Goldstein is here. We're lucky to have him today. Eyal, I don't know if you want to comment on that, please. Eyal Goldstein: Yes, Josh. So we also have a really big opportunity not only on the greenfield, new ERP deployments, but also the current installed base. And we're doing quite a bit of work within the current base, and we've got such a long runway there as well. So we're not seeing any impact from what might be happening with the broader group around ERP in general. Operator: Our next question comes from Bryan Bergin with TD Cowen. Jared Levine: It's actually Jared Levine for Bryan tonight. To start, can you talk about your managed service offerings, the recent announcements there? What do you see in terms of the revenue opportunity, including the PEPM uplift specifically from those managed service offerings? Patrick Goepel: Yes. I mean, first of all AsureWorks, we're really excited about it. The fact that we could do it all for them or a customer doesn't necessarily have to hire a full-time either payroll or HR professional and they can help us -- they can use us to help them. [ For some metrics ], we see an opportunity of about $50 or so per employee per month where we're doing the work for them. Now some of that can change based on the size and scale of the customer and the breadth of what we're doing. But that's the kind of opportunity we see with AsureWorks. We have had this in motion for quite some time. We had 1 of our resellers kind of pilot the program and we -- since acquired that reseller. And then we're rolling that model all across the country. I would say it's more of a '27, '28 initiative, but I do think you'll see somewhere around kind of $3 million to $5 million in opportunity in this year's revenue. But over time, it's going to continue to grow. And that's what's exciting for us. And not only that, but when you can go to a customer, they don't need to go to a PEO or employee leasing to get all their kind of compliance and all their offering done where we can do it for them or the same software that we're doing it for them, they can use internally. We think that's a real compelling message. And even if we don't get the entire business, we're going to get a good majority of the business. So many times, we'll pitch that, if you will, and they'd say, well, maybe we'll start with HR compliance, and we'll start with benefits or we'll start with payroll tax in time. So we think we're just getting started. We had 6 people offering. We're selling it today. But clearly, we've exposed the sales organization and we have a set of learning and development training going on to roll this out. So we're pretty bullish on this. Jared Levine: Great. And then a follow-up here in terms of the guidance. So it looks like you didn't pass through all of the quarterly revenue and adjusted EBITDA beat. Anything to call out there? And just also want to confirm there was no kind of incremental M&A since the last earnings here. John Pence: Yes. No M&A since the last earnings. And again, we tried to kind of get you where we think we need to be for the rest of the year. Operator: Our next question comes from Eric Martinuzzi with Lake Street. Eric Martinuzzi: Yes. I wanted to ask about the -- when the Lathem folks come on to Asure Central, will that entire base be viewed as kind of a multiproduct adoption customer base? In other words, should we see a spike in the percentage of customers when we have this same conversation... Patrick Goepel: Eric, what I would say it depends. We're -- in our business, what we do is we have some stand-alone channels. We'll do a stand-alone tax channel, for example, where we partner with other payroll companies. We won't cross sell without their permission into those kind of companies that we have relationships with. And then what we do with Lathem is, we have some other payroll companies that use Lathem and are partnered with them, and we'll respect that the same way. But a large majority of the Lathem customers will be in Asure Central. We're still going through kind of that flow, if you will, and those will all be available to cross-sell, et cetera. It hasn't really slowed us down because we prioritize Asure Central and the upgrades with the customers that have already been sold with the cross-sell of Lathem products. So those customers are already on Asure Central. We'll just continue to adopt them through the second quarter. It will, by no question, add velocity to our cross-sell approach and our attachment of those customers. Eric Martinuzzi: Got it. And then you talked about you're still on target for the 150 sales reps by the end of the year. You finished out at 118, I believe, at the end of 2025. Are we talking about kind of a linear progression on our way to 2026? Or -- in other words, I guess a better way to ask the question is, what's the sales headcount now? Patrick Goepel: Yes. We're about 10 under where I really would like to be, and Eyal is with me, and he can comment, but for us, we've been really choosing quality. If you think about where we're going with the Asure Central and where we're going with the AsureWorks, we're looking for people that really have a consultative sell versus, let's say, a product sale. And maybe, Eyal, you could talk a little bit about some of the candidates and the flow there. Eyal Goldstein: Yes. So we've -- historically, we've looked at more small business, transactional sales professionals, and that worked well for us where we had point solutions, and we're really selling more payroll tax deals than anything else. Now that we're selling more of the broader product, the complete product and especially with AsureWorks, it's a much more consultative sale. It's a much more solution sale. Much more disciplined around the sales process and needs analysis and demoing the product and the software, which we're really proud of these days. And so that just is a different caliber and profile of a sales professional. Now the good news is, the folks we're bringing in check all those boxes and they're actually ramping a lot quicker than historically what reps were ramping at. But we're being more disciplined about who we're bringing in, and we feel confident we'll get to that 150 by the end of the year. Operator: Our next question comes from Richard Baldry with ROTH Capital Partners. Richard Baldry: When you talk about accelerating to double-digit organic growth, can you talk maybe about the pieces that get you there? Presumably, some of it's the head count, but -- how much of it's ARPU and maybe how much visibility do you have into that acceleration, whether it's in pipeline, retention rate changes, win rate changes, et cetera? Patrick Goepel: Yes. Rich, thank you. Definitely, the attach rate numbers are really positive and we have pretty good retention on that. Candidly, in the fourth quarter and first quarter, we did a lot of professional services work. And I would say that one time probably is the only thing that's noise in the numbers sometimes because we have been a little one-time heavy. Now that ultimately will be a very strong indicator for us. But short term, sometimes you have to grow over bigger compares on a one time. But what I would tell you is the ARPU, the attach rate, the number of reps, the rollout of Asure Central, the rollout of AsureWorks, AsurePay, we're right down the -- we're early days, but I would tell you, really good pipeline development, real good underpinning of the pipeline, real good focus on attach rates. I can see from our deal alerts, we've had a really exciting not only first quarter, but second quarter and I can see it just based on our hiring profile in our learning and development as people get up to speed. So we have pretty good visibility, but we're also want to be conservative in an environment that has a lot of global uncertainty. We, for that matter, really haven't pressed same-store sales or we haven't pressed a ton of employment growth or interest rate increases, right? So what we have tried to do is be conservative in our forecast. And hopefully we can upside and produce an outsized income or outsized goals in the second half. Richard Baldry: And for a follow-up. Can you talk about the internal sort of use deployment of newer AI efficiency tools. How much do you feel that, that can help you either hold the line on costs in some areas, maybe cut costs to sort of bolster your EBITDA growth maybe in excess of what organic growth might otherwise argue? John Pence: Yes. Rich, we're seeing it used all throughout the organization. I mean there's really not an area that's not started to investigate and start to deploy it. We're using it in the financial organization just basic stuff like doing variance analysis and helping on the forecasting. The operations team is using it to again interact with customers and make things more efficient in those interactions with the processing the payrolls, sales team is doing a lot of work with the front end of analyzing customers and getting a lot more effective and a lot more throughput. So I think we're seeing it throughout the organization. And I think it's really, really early days. It's pretty interesting. But you're exactly right. I think it's going to help. I don't think we're going to necessarily want to exit a bunch of people. But what we're going to do is we're going to kind of change the profile of what they're doing, right? So if somebody was more on the data entry side, interaction with the customer, that's going to go away or that's going to be much more diminished. They're going to be much more involved with making that customer happy, trying to solve their problems. And that goes back to the AsureWorks concept, right? We're really going to be a lot closer and tighter with the people we've got servicing the customers and less on the data manipulation side of the business. So I think we can do that and not really change the cost structure, add to the top line. And ultimately, you're right, it's going to fall through to the bottom on EBITDA. Patrick Goepel: Eyal, maybe if you could talk about sales and marketing with AI. Eyal Goldstein: Yes, Rich. So on the front end, we're using it quite a bit as well. And we're doing a lot on the marketing side around content creation and around being able to put out much more thought leadership much quicker. That's helped quite a bit for us. And then on the sales side, we're looking at quite a bit of tools, but what we've implemented already is some AI tools around the needs analysis and discovery. And again, as we do more of these larger deals in that 20 to 100 space, we're doing much more quicker research. We're able to get output much quicker around certain company and maybe who they're competing with or their peers and help drive more of the front end of the sales process and making sure our reps are well versed and knowledgeable when they engage with the prospect as well as taking all of the data that they learn from an actual discovery or needs analysis and being able to put a pretty quick deliverable and output with all of our services tied to that, and then the ROI and value from it. All of that now for us is done through different AI tools. It's helped speed up quite a bit of the process for us on the front end. And frankly, now we're leaning into some more technology around the actual outbound motion that we have around the demand gen. And we actually think that, that will have quite a big impact on how many people were able to reach and having really good bespoke conversations with thousands more companies than we would normally have, leveraging more human motion around the business development side. Patrick Goepel: And then finally, Rich, just operationally we quoted last quarter about 80,000 transactions that Luna assisted with and over 100,000 this quarter. And so that obviously helps us with scale. It helps the customer experience where they're changing their W-4 withholding with Luna assisting and that. So I think what you're going to see is more velocity in the model, the financial model. I know in our long-term model we had 40%. We believe over time we can achieve 50%, and that's all AI-assisted. Operator: Our next question comes from Greg Gibas with Northland Securities. Gregory Gibas: Could you discuss the pace of organic growth implied by your guidance through the balance of the year? And maybe what your updated expectations perhaps are the same for professional services and hardware on a go-forward basis? John Pence: Yes. So real quick at the midpoint of the guide, I think it puts us at kind of roughly around 15% full year, year-over-year in terms of growth. I think it's going to be kind of split evenly. It will be a second half between the organic and inorganic based on the guide. So I think they're obviously the upside. We don't have any acquisitions plan. So the upside to the numbers would be on the organic side right now as we're sitting today. Gregory Gibas: Just professional services and hardware considering it was a little higher than expected, but I know some of that is seasonal. John Pence: Yes. I think it will normalize back down to -- we're going to be in the kind of high 90% recurring for the full year. I do think this quarter was a little heavier than the rest of the quarters. Gregory Gibas: Got it. And you maybe beat me through this one a little bit, but just on the outlook for reseller acquisitions, and you mentioned nothing since the last earnings. Could you remind us on what's been done year-to-date? And curious to hear your stance on incremental strategic platform acquisitions? Or is the focus right now, just more integration, expanding the sales force and cross-sell opportunities and then even the Lathem model transition? Patrick Goepel: Yes. Just really quick, I really feel pretty good about the components of our solution. We've pointed in an area where we strengthened the products around payroll and have done a really good job there. And then with the integration of Asure Central, the development of AsurePay, we just announced AsureWorks here, but we've been working on that for a quarter. I really think we got our product kind of set, if you will. Now to me, it's attachment rates, ARPU, revenue per unit, we're really going to try to cross-sell, et cetera. As a reminder, I thought Eyal did a wonderful job leading the sales organization. Historically, we're close to 70% new logo, now we're closer to 50-50, and we're not dropping down new logos, right? So it really speaks to kind of broadening out the revenue. Now that being said, we do have a reseller kind of network, if you will, and we'll continue to add that. You see and we published some of the cost takeouts in that model, but also now that we have the products and services to cross-sell and attach based on the reseller network, we think it's even more compelling to go that way. So I think you'll see a series of small acquisitions. I don't think you'll see anything major, but that will be our focus here. John Pence: And to answer your question, yes, the only acquisition we talked about on the last earnings call was done kind of in the January time frame. Operator: Our next question comes from Vincent Colicchio with Barrington Research. Vincent Colicchio: Yes. Pat, could you talk to the health of your client base? Is it expanding? And are clients hiring in this environment? Patrick Goepel: It's a great question, Vince. I would say, in general, it's -- I think people are cautiously optimistic. I think in some cases depending where you sit, maybe oil prices has kind of swooped them a little bit or what have you, they definitely see a very strong opportunity in the business environment. In some cases, they have a stable employment workforce, which is great. They're trying to figure out kind of -- and separate what they're seeing is good cash register versus if they listen to a war or listen to all the kind of news, sometimes it is a cause for pause, right? And so I don't see employment growth growing a ton here. And some of it's just demographic where you have a little bit of an aging population, you have as many people retiring as coming into the workforce. But I would certainly -- I see a lot of opportunities. I think Eyal, who's on the front line here would agree to that, I think. And for me, it's a very stable thriving small business workplace. Vincent Colicchio: And how should we think about the organic growth this quarter? Would you say it was broadly distributed across your core categories? John Pence: Yes. I'd say so. I think -- we're trying to get to a point where we describe the business and it's in the IR deck, there's a pie chart. I would say, in general, most of the growth this quarter was probably on the HR -- HCM platform side of the business as opposed to enterprise tax. So that's the way I would think about it, Vince. I mean, I really think about -- that's the kind of the buckets that we're trying to describe the business. And so that's where the majority of the growth was this quarter. Patrick Goepel: And as far as through the year, I think attach rates and RPU growth in small business is going to carry today. I think you're -- we've had some really good milestones of getting customers live and we see good prospects in the tax business and continue to grow. I think we have some professional services and hardware that in some cases, we'll continue professional services as we implement, but as far as hardware, I think you'll see a moving of the mix from 1 time to reoccurring over a period of time, but we'll still have some onetime. And then we have some nonstrategic businesses that will, over time, not be as focused, but we'll continue to be with it. But really AsureWorks, Asure Central, AsurePay, we're going to lean in there. And then we're going to absolutely grow our -- continue to grow our money movement and compliance offerings up and down the HR stack. Operator: We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Pat Goepel for closing comments. Patrick Goepel: Yes. I appreciate each and every one of you from an investor perspective and an analyst. We have a great analyst community, and they do a good job representing Asure Software. And then as far as if you've been an investor with us here a while, we continue to make progress. I think we're pretty consistent. We have the investor deck on the customer website. I would say we've done some non-deal roadshows. And with Patrick coming on board, we're going to have some conferences here throughout the year. And definitely I'm coming to New York here soon on some investor conferences. So we look forward to meeting you and seeing you soon, and we're very thankful for you and just keep following our progress because we're pretty confident in our growth. Thank you. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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.
Operator: Good day and thank you for standing by. Welcome to Kirby Corporation 2026 First Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Matt Kerin. Please go ahead. Matthew Kerin: Good morning and thank you for joining the Kirby Corporation 2026 First Quarter Earnings Call. With me today are David Grzebinski, Kirby's Chief Executive Officer; Christian O'Neil, Kirby's President and Chief Operating Officer; and Raj Kumar, Kirby's Executive Vice President and Chief Financial Officer. A slide presentation for today's conference call as well as the earnings release, which was issued earlier today, can be found on our website. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings press release and are also available in our website in the Investor Relations section under Financials. As a reminder, statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties, and our actual results could differ materially from those anticipated as a result of various factors. A list of these risk factors can be found in Kirby's latest Form 10-K filing and in our other filings made with the SEC from time to time. I will now turn the call over to David. David W. Grzebinski: Thank you, Matt, and good morning, everyone. Earlier today, we announced first quarter earnings per share of $1.50, a 13% year-over-year increase compared to 2025's first quarter earnings per share of $1.33. Our first quarter results reflected improving market fundamentals in marine transportation with utilization and pricing strengthening as the quarter progressed, alongside continued strength in underlying demand for Power Generation in Distribution and Services. While results were partially impacted by weather-related disruptions and navigational delays in our inland marine transportation operations and ongoing OEM-related supply constraints in Distribution and Services, underlying demand conditions remained strong across both segments. Overall, our combined businesses executed well and generated positive momentum entering into the second quarter. In inland marine, market fundamentals improved throughout the quarter as customer demand strengthened, refinery utilization increased and barge availability remained limited. As expected, operations were impacted by typical seasonal weather, lock delays and other navigational disruptions. However, market conditions became increasingly constructive with barge utilization strengthening as the quarter progressed and averaged in the low 90% range for the full quarter. Spot pricing improved in the low single digits sequentially. Term contract renewals were flat to slightly up year-over-year and pricing momentum continued to build during the quarter. Overall, the inland business delivered strong operating margins in the high-teens range for the quarter, driven by improved pricing and disciplined execution. Entering the second quarter, demand visibility has continued to improve, supported by strong refinery utilization and improving conditions across petrochemical markets, contributing to strong utilization and improved pricing. Coastal marine transportation fundamentals remained strong throughout the first quarter with barge utilization averaging in the mid-to-high 90% range, which was supported by steady customer demand and limited supply of large capacity vessels. This favorable supply-demand dynamic continued to drive pricing gains with term contract renewal rates rising in the 20% range year-over-year. Our team delivered strong operational execution and maintained a disciplined focus on cost and efficiency, and this resulted in operating margins in the high teens range. Turning to the Distribution and Services segment results reflected mixed conditions across our end markets with Power Generation remaining a key growth driver. Segment revenues increased 12% year-over-year, but declined sequentially due to OEM engine availability and continued softness in conventional Oil and Gas activity. Operating income increased modestly year-over-year, though declined sequentially as margin performance varied across our businesses. In Power Generation, revenues grew 45% year-over-year from solid backlog execution and significant demand for behind-the-meter power solutions. However, revenues declined sequentially as OEM engine deliveries were lower in the quarter. Operating income increased year-over-year with margins remaining in the mid-single-digit range. In Commercial and Industrial, revenues increased 8% sequentially and operating margins were in the high single-digit range, supported by strong marine repair activity and disciplined execution. In Oil and Gas, revenues improved 13% sequentially, though results continue to be pressured by softness in conventional oil and gas markets and resulted in margins in the mid-single-digit range. Overall, the segment remains well positioned with steady execution across a diverse portfolio of end markets. In summary, Kirby continues to operate from a position of strength. Marine transportation fundamentals remain constructive with high utilization and improved pricing across both inland and coastal markets. In Distribution and Services, strong activity in Power Generation and Commercial and Industrial markets continued to offset softness in our conventional Oil and Gas business. With this backdrop, combined with solid execution and ongoing cost discipline, we announced in this morning's press release that we are increasing our EPS guidance range for the year to up 5% to up 15%, which is up from flat to up 12% previously. I will discuss our outlook in more detail on the call. But first, I will turn it over to Raj to discuss the first quarter segment results, balance sheet and capital allocation in more detail. Raj Kumar: Thank you, David, and good morning, everyone. In the first quarter of 2026, Marine Transportation segment revenues were $497.2 million and operating income was $89.7 million with an operating margin of 18%. Compared to the first quarter of 2025, total marine transportation revenues increased $21 million or 4% and operating income increased $3 million or 4%. When compared to the fourth quarter of 2025, total marine revenues increased 3% and operating income decreased 11%. As David mentioned, typical seasonal winter weather produced a 25% sequential increase in delay days and negatively impacted operations and efficiency in the first quarter. Looking at the Inland business in more detail. The Inland business contributed approximately 79% of segment revenue. Average barge utilization was in the low 90% range for the quarter, which was an improvement over the fourth quarter of 2025 and in line with the first quarter of 2025. Long-term inland marine transportation contracts or those contracts with a term of one year or longer contributed approximately 65% of revenue, with 56% from time charters and 44% from contracts of affreightment. Improved market conditions resulted in spot market rates moving up in the low single digits sequentially but were down in the mid-single-digit range from a year ago. Our term contracts that renewed during the first quarter were flat to slightly up. Compared to the first quarter of 2025, inland revenues were flat but increased 4% compared to the fourth quarter of 2025 due to improved market conditions. Inland operating margins were in the high-teens range. Now moving to the Coastal business. Coastal revenues increased 23% year-over-year, driven by strong customer demand and limited availability of large capacity equipment. Overall, Coastal had an operating margin in the high-teens range, benefiting from higher pricing and effective cost management. The coastal business represented 21% of revenues for the Marine Transportation segment. Average coastal barge utilization was in the mid-to-high 90% range, which was in line with both the first quarter of 2025 and the fourth quarter of 2025. During the quarter, the percentage of coastal revenue under term contracts was approximately 92%. Renewals of term contracts were on average approximately 20% higher year-over-year. With respect to our tank barge fleet for both the inland and coastal businesses, we have provided a reconciliation of the changes in the first quarter as well as projections for the full year. This is included in our earnings call presentation posted on our website. At the end of the first quarter, the inland fleet had 1,124 barges, representing 25.1 million barrels of capacity and is expected to be slightly up in 2026. Coastal Marine is expected to remain unchanged from the first quarter of 2026. Now I will review the performance of the Distribution and Services segment. Revenues for the first quarter of 2026 were $347 million with operating income of $23.3 million and an operating margin of 6.7%. Compared to the first quarter of 2025, the Distribution and Services segment revenue increased by $37.4 million or 12%, with operating income increasing by approximately $1 million or 3%. This growth was primarily driven by Power Generation and strong marine repair activity. When compared to the fourth quarter of 2025, revenues decreased by $23.2 million or 6% and operating income decreased by $7 million or 22% as a result of lower power generation shipments due to OEM engine availability, weakness from on-highway repair and continued softness in the conventional frac market. Moving through the segment in more detail. In Power Generation, we continue to see meaningful order activity for the behind-the-meter prime power and backup power solutions for data centers and other industrial applications. This has resulted in continued growth in our backlog. However, engine availability from OEMs is limiting how quickly some of that demand converts to revenue. Overall, total Power Generation revenues were up 45% year-over-year with operating margins in the mid-single digits. Power generation represented 44% of total segment revenues. On the Commercial and Industrial side, activity was strong in marine repair. And as a result, commercial and industrial revenues increased 1% year-over-year and 8% sequentially. Commercial and industrial made up 46% of segment revenues and had operating margins in the high single digits. In the Oil and Gas market, we continue to see softness in conventional frac-related equipment as lower rig counts and fracking activity softened demand for new engines, transmissions, service and parts throughout the quarter. Revenue in oil and gas was down 25% year-over-year, but increased 13% sequentially, while operating income was down 53% year-over-year and down 28% sequentially. Oil and Gas had operating margins in the mid-single digits in the first quarter and represented 10% of segment revenue. I will now move to the balance sheet. As of quarter end, we had $58 million of cash with total debt of $983.4 million, and our debt to capitalization ratio was 22.3%. We ended the first quarter with $635.4 million of available liquidity. During the first quarter, we entered into an amended and restated credit agreement that extended the facility maturity date to March 26, 2031, and increased the revolving credit facility commitments to $750 million, and eliminated the term loan credit facility. During the quarter, net cash provided by operating activities was $97.7 million and capital expenditures were $48.3 million, resulting in free cash flow of $49.4 million. In the first quarter of 2026, Kirby returned $52.7 million of capital to shareholders through share repurchase at an average price of $123.18. We continue to execute on our focused and disciplined acquisition strategy by agreeing to acquire 23 barges and three high horsepower boats from an undisclosed seller in the Inland Marine business for $95.8 million, of which $81.4 million was paid during the first quarter. With respect to CapEx, we continue to expect capital spending to range between $220 million and $260 million for the year. Approximately $170 million to $210 million is associated with marine maintenance capital and improvements to existing inland and coastal marine equipment and for facility improvements. Approximately $65 million is associated with growth capital spending in both our businesses. We remain on track to generate cash flow from operations of $575 million to $675 million for the year, resulting in expectations for another year of very strong free cash flow generation. As always, we remain committed to a balanced capital allocation approach using free cash flow to return capital to shareholders while pursuing long-term value-creating investment and acquisition opportunities. I will now turn the call back to David to discuss our full 2026 outlook. David W. Grzebinski: Thank you, Raj. We are off to a solid start in 2026. Global macro and geopolitical developments, including the Iran conflict, the Venezuelan oil situation and the broader geopolitical uncertainty continue to create near-term variability. That said, the current conditions are proving somewhat supportive for our operations. In Inland Marine, we anticipate positive market dynamics driven by limited new barge construction and strong demand from refining and petrochemical customers. Barge utilization is expected to be in the low 90% range as we move through the year. This is supported by strong -- strong refinery utilization and improving chemicals activity. However, we do expect near-term cost headwinds in our inland marine operations during the second quarter due to rising fuel, particularly diesel costs. We currently expect the cost escalators and rate recovery mechanisms in our contracts will lag the near-term fuel cost increases during the second quarter, but will ultimately be realized in the following quarters in the second half. As most of you are aware, there is generally a 30- to 120-day delay or lag before term contracts adjust for fuel. We anticipate this timing issue could result in approximately $0.05 to $0.10 of earnings per share impact in the second quarter. Overall, we expect inland revenues to grow in the low to mid-single digits on a year-over-year basis with margins averaging in the high-teens to low 20% range for the full year. In Coastal Marine, market conditions remain favorable with balanced supply and demand across the fleet. Steady customer demand is expected to continue through the balance of the year with barge utilization in the mid-90% range. While we anticipate elevated shipyard activity in the second quarter, we continue to expect mid-single-digit revenue growth year-over-year and operating margins in the high-teens, driven by gradual pricing improvements as term contracts renew. In Distribution and Services segment, ongoing demand in power gen and marine repair activity is expected to help offset softness in on-highway service and repair and low levels of Oil and Gas activity with results remaining mixed overall. In Power gen, underlying demand fundamentals remain strong. Results, however, continue to be impacted by engine availability. Delayed OEM engine deliveries continue to contribute to variability. And as a result, we expect approximately $0.10 to $0.15 of earnings per share impact in the second quarter as certain projects shift into the second half of the year due to delayed engine deliveries from OEMs. As we have discussed in the past, engine availability rather than end market demand continues to be the primary constraint in this business. Within Commercial and Industrial, marine repair demand remains healthy, while on-highway service and repair demand continues to be constrained. In Oil and Gas, results continue to be pressured by lower overall activity as the shift away from conventional frac continues and customers maintain a disciplined approach to capital spend. However, the current Oil and Gas ecosystem may become a potential upside if it persists much longer. Overall, the Distribution and Services segment continues to benefit from its diversified end market exposure and in particular, the power gen ecosystem. Overall, the company expects segment revenues to be flat to slightly up for the full year with operating margins in the mid-to-high single digits. To conclude, we're off to a solid start in 2026 and have a favorable outlook for the remainder of the year. With a strong balance sheet and solid free cash flow, we continue to allocate capital in a disciplined manner, balancing share repurchases with opportunistic investments and acquisitions. Overall, we expect solid financial performance this year as is reflected in our decision to increase full year EPS guidance, and we see supportive fundamentals driving continued earnings growth beyond 2026 and well into '27 and '28. Operator, this concludes our prepared remarks. Christian, Raj and I are now prepared to take questions. Operator: [Operator Instructions] Our first question comes from the line of Greg Lewis from BTIG. Gregory Lewis: Congrats on a good quarter. Question around the inland barge business. Clearly, it seems like things are strengthening. Like I guess what I'm kind of curious about is what is kind of driving that incremental tightness? Is it those -- it looks like Venezuelan barrels are up over the last couple of months. Crack spreads are obviously higher, so refiners are making more money. Is it -- are we seeing actual incremental volumes? Or is it just everybody else is making more money? David W. Grzebinski: Yes. Greg, thanks for the question. Yes. No, throughout the quarter, we started January kind of a continuation of what we were seeing in the fourth quarter. the Venezuelan crude was starting to come in. We started to see that as a positive impact. So we started in January pretty strong. And then crack spreads started to gap out and refinery volumes just got really tight. So it built throughout the quarter. And so it's actually more volumes moving. Also, we're very pleased to see some more chemical activity. Some of the chemical companies' supply chains were disrupted in the Middle East, and there's more volumes moving here in the U.S. because of that. It's been very constructive. We were happy to see it. And the good news is it's continued. We're seeing momentum actually build a little bit right now. Gregory Lewis: Okay. Great. And then I did have a question, and you kind of called it out about engine availability to kind of keep driving the power gen market higher. Is there any kind of way to think about like Kirby's or KDS' visibility around, like what kind of lead times do you get from the OEMs about engine availability? Is it yes, I'm just trying to understand like clearly, we've raised guidance. We're confident we're going to be getting them. But I'm just kind of curious about that visibility around being able to get engines and turn around and put them in customer hands. David W. Grzebinski: Yes. We have good visibility through '27. And I would tell you, in certain OEMs we're sold out through '27. So we have a good idea. A lot of it's in the backlog. Some of it we know we've got sales for. The good news here is the engine OEMs are flat out. They're running hard. They're all trying to increase capacity. They're sold out to '29, most of them. So we feel really good about our allocation. We're considered one of the premier system integrators out there, and we continue to get good allocation. It's just really tight. And that's the good news. They're very tight. Everybody wants the engines. The fun thing for us is it's not just standby diesel applications anymore. It's behind-the-meter. And we love the behind-the-meter stuff. It's more sophisticated. It's highly engineered. We have a great offering in it. We stemmed. It started really with our e-frac offering, but we have a good set of engineering capabilities in behind-the-meter 24/7 power. And the great thing about that is it's going to run -- the equipment is going to run is going to have a repair and parts replacement cycle that's going to come in the outer years. So it's all about good demand that's shifting engine deliveries, and we see that lasting for quite some time. These behind-the-meter contracts that some of our customers are having, some of them go for seven to, in one case, we know of a 15-year contract. So the co-locators and hyperscalers are not using behind-the-meter power as bridging anymore. This is becoming prime. So we're pretty excited about the way it looks. And when we look at our backlog, behind-the-meter is now eclipsing just standby diesel generation. Gregory Lewis: Which means a lot more service. Raj Kumar: I was just going to add, Greg, with the behind-the-meter, as we've always talked about it, the margins are better than the backup stuff, right? And David referenced the service revenue, that's going to be even better margins. Gregory Lewis: And Raj, I mean, not to paint you in a corner, but any kind of sense you can disclose about -- I mean, when we say better, is it single basis points or tens of basis points? Raj Kumar: So it's -- this is how I'll describe it. On the behind-the-meter on the prime side, you're probably looking at low double-digit margins. And when I talked about the service revenue, that's -- you're looking at about a couple of years out, that's probably going to be north of that. Operator: Our next question comes from the line of Ben Mohr from Citi. Benjamin Mohr Mok: Congrats on the great results and also the raise. Just wanted to piggyback on Greg's first question there, looking at the drivers from crack spread widening, petchem exports, Venezuela heavy crude imports that you mentioned and possibly the Valero fire, bypass moves. Just wanted to get a sense of those contributors. Can you tell us how is it that you're able to raise your EPS target range but maintain your revenue and margin targets? And maybe talk to some of those contributors on what's driving the guide raise, but maintaining the revenue and margin. David W. Grzebinski: Yes. I mean the revenue and margin -- Ben, thanks for the question. The revenue and margin guidance is a range, and this just moved it up to the higher end of that range, in my opinion. We'll see. The good thing about pricing on the inland side is it does fall through the bottom line. So the margin side is where we'll see it. Anyway, I think the more important thing on the inland is the supply and demand dynamic. I'm going to let Christian give you some color there because that's really what's driving this, the raise and also it portends really well for '27 and '28. Christian, why don't you give them some color on supply and demand? Christian O'Neil: Yes, you bet. Thank you, David. Yes, what we see right now is a tremendous amount of momentum that started building in March. We've already referred to the conflict in the Middle East and what that's done to crack spreads and to an awakening in petrochemical margins and activity. Beyond that, the supply side is still in great shape. There were only 66 barges built last year. It's an inexact science. We think maybe 70 on the books for this year. That's replacement capacity. We don't see anybody measurably growing the fleet. And some of that building is for a shipper, their own internal moves, and they're going to retire some older equipment. So we feel really good about the supply setup. Barges are still very expensive. It's still $4.5 million to build a typical plain vanilla clean 30,000-barrel tank barge. We see capital discipline in the market. And so supply is in a great spot. Beyond the petchem momentum and the refining margins, we see some other nuanced things like on the horizon, the Calcasieu lock will shut down daytime hours only in May. And that's going to be another tailwind for us. That will unfortunately cause some congestion on the Intercoastal Canal, but that is the most highest traffic lock in the inland waterway system, and we'll add a day transit either East or West when that goes down. So it's a very constructive setup for inland as well as coastal, and we're feeling really good about the momentum we have right now. Benjamin Mohr Mok: That sounds great. And you mentioned that it portends well for '27, '28. And maybe if I could just ask where could you see your inland and coastal roughly 20% margins and your power gen roughly 5% to 10% margins. Where could they go in a strong market? David W. Grzebinski: Yes. Look, last really up cycle before people started building, we got to, I'd say, 27% margins for a quarter or so. I think it will be slow and steady. We won't pop there next year. It will take a couple of years, but I certainly believe that we'll go above the last cycle peaks margin on the inland side. I think on the coastal side, it probably won't get that high. The cost structure is a little different, but it certainly can move into the mid-20s in terms of margin. As Christian referenced, there's just no building. It doesn't make sense to build right now. The cost of new barges and the cost of new boats is very expensive. Rates need to be -- if you have good capital discipline, rates need to be a good 40% above where they are right now to justify new builds. So we look at a slow and steady ramp into '27 and '28. It's hard to predict exactly when we'll get to peak margins. I would just add, in the last couple of years, we had a maintenance bubble. These barges have a 5-year maintenance cycle. So starting at the end of '27, the beginning of '28, we're going to have another maintenance cycle. So things could get pretty sporty in '28. We'll see. On the power gen margins, as Raj talked a little bit about, behind-the-meter power systems have a higher margin than just standby diesel. So I'd like to see our KDS business get to high single digits and ultimately into the low double digits. But that's going to take some time. It is very mix sensitive. As you've seen, our margins were down a little bit sequentially because of mix. But it should be building. And then when you get to out years, as Raj said, there's the service component that's going to start kicking in. These behind-the-meter running 24/7 engines, they're going to need serious maintenance after about 3, 4 years of running heavy. So that's a long-winded answer, Ben. I hope it gives you some color. Benjamin Mohr Mok: Really appreciate that. Long-winded is always great. Maybe if I can squeeze one last one in. Last quarter, you gave that your power gen backlog grew 30% year-over-year. And then you guided to power gen revenue growing 10% to 20% with the bottleneck coming from the OEMs. Could you give us an update on that? Any changes up or down on both those numbers, the 30% backlog growth and the 10% to 20% revenue guide? David W. Grzebinski: Yes. I think I gave -- I mentioned backlog. We don't want to get into the backlog announcing backlog every quarter, but I gave a range you could drive a truck through, I said $500 million to $1 billion backlog. We may have to update that because we're going to go at the top end of that range, but we're not just ready to do that just yet. But it continues to grow is what I would say. Book-to-bill is well above 1. Things look really positive in the space. Operator: Our next question comes from the line of Ken Hoexter from Bank of America. Adam Roszkowski on for Ken Hoexter. Adam Roszkowski: Adam Roszkowski on for Ken Hoexter. I guess to start, maybe just remind us what portion of the inland book is going to reprice in 2Q, 3Q, 4Q? And anything that you're seeing on early renewals, so flat to slightly up, trending better? Any thoughts there? David W. Grzebinski: Yes. Sure, Adam. Christian and I'll tag team this a bit. As we've indicated in the past, term renewals are very fourth quarter heavy. About 40% of the term portfolio reprices in the fourth quarter. Just to give you some quick numbers, term contracts are about 65% of our revenue right now with the other spot. Christian, do you want to talk some more about the pricing dynamic and how term and spot roll? Christian O'Neil: Yes. You asked about what the flow is through Q2 and Q3. Excuse as far as renewals. David W. Grzebinski: Christian got choked up. You choked them up. So sorry, he's got a frog in his throat. Yes, the term contracts, as I said, 40% in the fourth quarter. So the remaining 60% kind of gets spread between the other three quarters. As you would expect, the third quarter is probably heavier than the first and second quarter. In our prepared remarks, we said the term pricing so far was flat to up just slightly. The good news is that spot pricing is a good 10% above term pricing, maybe even more. And that's a healthy market when the spot usually leads term, both on the way up and on the way down. So we're very constructive about how term contracts should renew throughout the remainder of the year. But the fourth quarter is the bigger piece. I think Christian has got his voice back. Anything you want to add? Christian O'Neil: No, I think you covered it. Adam Roszkowski: Glad to have you back, Christian. Maybe just on the recent strength, you mentioned improved conditions in petrochem markets, stronger refinery utilization. Clearly, you called out a Venezuela kind of incremental impact. It sounds like some Middle Eastern activity or flow-through is favoring this as well. So is there any sense of what is being driven by which or how much is being driven maybe by incremental Venezuela impacts or Middle Eastern activity? Any broad thoughts there? Christian O'Neil: It's hard to exactly kind of put a number on it. I will say we do see moves that we know of from refineries that are chomping through a lot of Venezuelan crude, creating more intermediates and more heavies. We have seen some refiners term up some equipment that has thermal capability, the ability to move the heavier residual barrel. So we definitely have seen the impact, but it's hard to sort of peg the exact amount of crude oil that's going through -- Venezuelan crude oil that's going through any refinery on any given day. So it's just sort of more of a nuance. We see more volumes. We see more intermediates, we see more heavies. A couple of other interesting demand anecdotes. With the release of the SPR and the Venezuelan crude coming into the Gulf of Mexico, we have seen the traditional crude pipeline capacity that moves crude around the Gulf of Mexico get sort of overwhelmed. So we have seen incremental crude oil barge movements as a result of the pipeline capacity being oversubscribed at this point. Probably not something that goes on in perpetuity, but just thought I would mention it as an interesting demand driver that's sort of tied to Venezuelan crude in your question. David W. Grzebinski: Yes. I mean shale crude, if you look at WTI, Brent, the spread has opened back up. And generally, when that -- when the spread between WTI and Brent starts to gap out, we start to see some incremental U.S. crude moves. So we watch that. I mean if you're looking for crude moves for us on the inland waterways, just look at that spread and you can pretty much get a feel for where -- what direction it's headed. Adam Roszkowski: That's helpful. And just one last follow-up. Jones Act waiver was recently extended for another 90 days. It seems like this isn't impacting fundamentals in a major way or at all at this time. But just any thoughts on near or medium-term impacts if this is extended further? David W. Grzebinski: Yes. I mean the near-term impacts are almost nonexistent, as you would expect, Adam, on the inland side, there's really no foreign tonnage that can come into the inland waterways. So we feel pretty good about that. And as you know, inland is about 80% of our Marine segment. The blue water side is a little different. MR tankers and foreign tonnage can come in and trade. And we have seen it come in a bit. But as you know, we're booked up. Our fleet is essentially 100% contracted on the blue water side. Those contracts run about a year. If waivers go beyond that, we could start to see some impact. We have seen a number of non-Jones Act moves in the market. I would characterize -- well, let me back up. We know what the administration is trying to do. They're trying to deal with the war. They're worried about national security and military readiness and getting fuel where it needs to be to support their efforts, and we're all for that. But I would say the blanket waivers that are out there, we'd rather see it be a specific waiver. So we have seen some Jones Act moves that I would call arbitrage related where traders are making some money rather than actually serving military readiness. So we watch it. We're not concerned about it if it's short term, but if it starts to extend past a year, it could have some impact. And I think Christian has some anecdotes about some mariners asking about it. Why don't you hear that? Christian O'Neil: Yes. No, I think the "elephant in the room", I know I personally have seen no impact on the price of gasoline or I fill up my car as a result of the waiver of the Jones Act. But I have 40 captains in today that I'm going to have lunch with and looking forward to that. I caught up with one this morning, had a cup of coffee. And unintended consequences, I'm sure, is the administration has been a strong advocate for the blue-collar worker, but this captain was worried about the Jones Act Waiver, was worried about his job, was worried about his son that wants to get into the industry. So these type of things can have a chilling effect on the merchant mariner, which is a real strength of this country and a chilling effect on our ability to recruit and retain. So I think the administration has good intentions, but we certainly don't want to do anything to disincentivize our hardworking merchant mariners. And there's units out there on the West Coast and some other places that have lost jobs to foreign flag tonnage. And I don't -- let's get back to targeted waivers, as David mentioned, if anything, rather than this blanket waiver. Sorry, I can get on a soapbox on this topic. I'm going to get off and get back to the call. Operator: Our next question comes from the line of Scott Group from Wolfe Research. Scott Group: So helpful color on spot. I just have a couple of follow-ups. So where is spot trending on a year-over-year basis? And that 10-point spread of spot over contract, I'm just curious, like where did that trough last -- middle of last year when things were challenging. When -- like when a couple of years ago, when things were really, really good in terms of pricing, where was that spread? I just want to put some context around this sort of double-digit spread. David W. Grzebinski: We'll try and give you some color here. Scott, 10% is a healthy gap above spot. I think when it really gets sporty, it's more like 10% to 15%. Obviously, when it's going down, spots below term. Last year, we -- as you know, we -- third and fourth quarter were a little tighter. And I would say that, that gap was more like 5% to 10%, maybe 7.5% on average, if I had to pick a number. But right now, we're at least 10% and probably growing a bit. And I think Christian can add some more color. Christian O'Neil: Yes. I think the recent momentum as of March and what we're seeing, the pace at which we're pushing spot rates and achieving that is clipping pretty good, and David pegged it right at 10% and it's probably headed to 15% in the not-too-distant future. Scott Group: Okay. That's helpful. And then maybe just a little bit of an update on the M&A environment. So we did some tuck-in barge -- acquired some barges. Do you think that's going to continue? Is that more likely than doing something larger? Just any sort of overall thoughts on barge acquisition? David W. Grzebinski: Yes. Well, Scott, as you know, we love acquisitions in our core businesses, particularly in the inland space. Our ability to integrate them is really powerful. I think Christian had this latest little tuck-in integrated within four hours. Raj Kumar: That's right. David W. Grzebinski: All the barges were working within four hours of the closing. So we love those inland transactions. We're always looking at them. We still have 25 or so competitors out there. We'd be happy to buy any one of them. But we remain very capital disciplined. And so there's always a bid-offer spread. Predicting a larger one is difficult at best. We certainly have the balance sheet capacity for it. You'll -- you'll see like our debt-to-EBITDA is probably 1.1, 1.2. So we have plenty of balance sheet capacity. Raj upped our revolver from $500 million to $750 million. We'd certainly -- well, we're always looking at acquisitions. We're certainly open-minded to them. But I would just add on capital deployment, as Raj mentioned in his prepared remarks, we -- as we generate free cash flow, if we can't put it to work in a good acquisition, you'll see us buy back our stock. We like our stock where it's at, and we're happy to deploy our free cash flow back that way. That said, we always do prefer acquisitions, particularly in the inland space, but any of our core businesses, we are always looking. It's just hard to predict though, Scott. Scott Group: Okay. And then one last thing. I apologize if I missed this during the prepared comments. So I know you said there's going to be some pressure on coastal margins in Q2, but any sort of color around like the magnitude of that or maybe just overall sort of margin expectations for the quarter? David W. Grzebinski: Yes. We just have a -- actually, we got -- our margins in the first quarter were a little better in coastal. One of the big units moved from first quarter into second quarter. And as you know, these big units can run $60,000 a day. So when they're out, they can be impacted. I don't have good guidance for coastal on the margin. I think maybe Raj and Matt can give you some color there. Raj Kumar: Yes. I think, Scott, I mean, it depends on the shipyard, right? How long the shipyard is going to last for. And as David mentioned, this could be quite long. What we do well is we try and manage the duration of the shipyard, working very closely with them, and we do a very good job. We had some good progress last year. I think we talked about it the last time where in the Q2, Q3 time frame, we were able to get out of the shipyard quicker than what we expected. We'll see how it goes in Q2, but that's what we're going to do. We control what we can control. Operator: Thank you. This concludes the question-and-answer session. I would now like to turn it back to Matt Kerin for closing remarks. Matthew Kerin: Thank you, James, and everyone on the call for participating in our call today. If you have any additional questions or comments, please feel free to contact me. Thank you, and have a good day. Operator: Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.