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Operator: Good day, and welcome to the Hanover Insurance Group's First Quarter Earnings Conference Call. My name is Betsy, and I'll be your operator for today's call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Oksana Lukasheva. Please go ahead. Oksana Lukasheva: Thank you, operator. Good morning, and thank you for joining us for our quarterly conference call. We will begin today's call with prepared remarks from Jack Roche, our President and Chief Executive Officer; and Jeff Farber, our Chief Financial Officer. Available to answer your questions after our prepared remarks are Dick Lavey, Chief Operating Officer and President of Agency Markets; and Bryan Salvatore, President of Specialty Lines. Before I turn the call over to Jack, let me note that our earnings press release, financial supplement and a complete slide presentation for today's call are available in the Investors section of our website at hanover.com. After the presentation, we will answer questions in the Q&A session. Our prepared remarks and responses to your questions today other than statements of historical fact, include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements can relate to, among other things, our outlook, profitability growth and strategic initiatives, the impact of recently revised policy terms and conditions and targeted property actions, economic and geopolitical conditions and related effects, including economic and social inflation, tariffs as well as other risks and uncertainties such as severe weather and catastrophes that could impact the company's performance and/or cause actual results to differ materially from those anticipated. We caution you with respect to reliance on forward-looking statements, and in this respect, refer you to the forward-looking statements section in our press release the presentation deck and our filings with the SEC. Today's discussion will also reference certain non-GAAP financial measures such as operating income and accident year loss and combined ratios, excluding catastrophes, among others. A reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can found in the press release, the slide presentation or the financial supplement, which are posted on our website. With those comments, I will turn the call over to Jack. John "Jack" C. Roche: Thank you, Oksana, and good morning, everyone. We're off to a very strong start in 2026, posting excellent first quarter results and setting the stage for continued success. Our performance in the quarter highlights consistently tight execution across the enterprise as well as the durability of a portfolio that has been deliberately shaped for resilience flexibility and strong performance across varying market cycles. Underlying margins across the book continued to trend favorably due in large measure to recent pricing and targeted underwriting actions. At the same time, we continue to benefit from our strong balance sheet and our high-quality investment portfolio, which once again generated attractive turns through disciplined asset allocation and investment management. We achieved record first quarter performance, including operating return on equity of 20.3% and operating earnings per share of $5.25. Our all-in combined ratio improved nearly 2.5 points to 91.7%, while our ex cat combined ratio improved by a similar margin to 85.4%, both first quarter records. While weather activity was elevated in our footprint, our results demonstrate that our underlying earnings engine is performing exceptionally well. Additionally, we are encouraged by the better-than-expected impact of enhanced terms and conditions and targeted property actions, which we believe the meaningful favorable development on prior year catastrophe losses demonstrates. We generated balanced net written premium growth of 3.2% in the first quarter. We are executing thoughtfully in areas where property conditions are softening. This approach is enabling us to preserve margin integrity while positioning us for enhanced growth opportunities. Our 2026 plan assumed first quarter growth would represent the low point for the year. Turning now to our segment results, beginning with Personal Lines. Our performance in the quarter reflects a business that is tracking well, even as external conditions remain fluid. We increased Personal Lines net written premiums by 2.7% and reflecting the effectiveness of our state-specific growth strategies. We continue to prioritize profitable growth in our underpenetrated states while carefully managing our exposure in the Midwest to align with our strategic diversification priorities. As the quarter progressed, we saw positive new business momentum, reinforcing our confidence in the trajectory of our Personal Lines business. Importantly, pricing levels for the total Personal Lines book continue to exceed loss cost trends, and we remain confident in our ability to preserve margin integrity. Quoting activity, close rates and conversion metrics also remain healthy, reflecting strong alignment between price, risk selection and customer value. And we maintained excellent profitability in the quarter as evidenced by a year-over-year improvement of more than 1 point in our underlying loss ratio. Overall, our Personal Lines business is well positioned with our preferred full account strategy, disciplined pricing and stable customer behavior despite the increased competitiveness in personal auto in many states. Moving to Core Commercial. We delivered solid growth of 4.3% in the quarter led by a strong resume growth in small commercial and building momentum in middle market. Our results reflect an improved execution and are well aligned with our profitability objectives. Small commercial net written premiums accelerated sequentially from the prior quarter, driven by double-digit growth in new business. Transactional flow, digital engagement and consolidation activity all made positive contributions and are tracking to expectations. And we believe we are extremely well positioned with our small account customer base and strong agency position as evidenced by improved retention. Looking ahead, we expect our growth initiatives will enable us to continue to drive our top line while maintaining underwriting discipline. Middle market growth was positive in the first quarter, reflecting improved momentum, which we expect to build on going forward. Against the backdrop of softening property conditions, we are maintaining underwriting discipline where pricing pressure is evident with a continued focus on margin preservation. At the same time, we are implementing pricing and underwriting actions across commercial auto and umbrella to address continued industry loss ratio pressure while segmentation efforts are enabling us to refine our portfolio towards more attractive risk profiles. Overall, we are pleased with the solid growth we delivered in core commercial, supported by strategic positioning of our portfolio and strong momentum in Small Commercial. Turning to Specialty. Our performance continues to validate the inherent strengths of our specialty business, our clear focus on pricing for risk and returns and our ability to generate strong profitability ahead of expectations. Growth of 2.3% reflects our measured posture in areas characterized by heightened competition, particularly in property exposed lines like Hanover Specialty Property. Top line pressure also reflects our strategy to keep our powder dry, protecting higher-tiered accounts and selectively pulling back from underpriced lower quality business where returns are less attractive. As an example, net written premiums declined in our programs business during the first quarter. And while profitability in our book of business is quite good today, we are taking a cautious approach relative to the MGA environment and remaining very selective in our distribution relationships. At the same time, we have seen double-digit momentum in management liability, surety and specialty GL, upper single-digit growth in E&S and positive growth in Professional Lines and marine. Pricing discipline remains a cornerstone of specialty execution. Loss costs and margin focus continue to guide our pricing decisions, particularly as competition intensifies in a softening property environment. Looking at Specialty subsegment highlights for the first quarter. Professional and executive lines are taking advantage of a new operating model to enhance execution across underwriting capacity planning and workflow modernization. Cross-selling and pipeline discipline are further improving mix quality, supported by closer coordination with our core Commercial Lines team. E&S grew 8.1%, supported by liability focused offerings with property growth tempered in response to competitive market conditions. Our team remains focused on expanding our presence in the small E&S market, where we continue to see attractive opportunities. In marine, quarterly growth was expected to be a low point for the year, and results actually came in slightly above expectations. We continue to benefit from our leadership in the marine market today, and we expect growth to return to upper single digits for the rest of the year. Our marine team remains focused on selectively allocating capacity and pursuing opportunities that help maintain margin quality and agency relevancy. As we think about the year, we expect overall specialty growth to ramp up from here. We remain confident in our ability to drive top line growth across our highly diversified specialty book, while we continue to deliver very strong profitability through disciplined execution and targeted investments. Stepping back from the segment results, the impact of our technology investments is increasingly visible across the organization. We are advancing everyday innovation alongside operating model transformation by accelerating our quoting processes, improving speed to answer and in strengthening claims execution, we are delivering better outcomes for customers, agents and employees. We are intentionally building reusable AI capabilities for the most common enterprise task to reduce complexity, strengthen execution and enable scale. For example, risk scoring and AI-enabled triage are helping underwriters prioritize submissions and streamline intake and decision-making built on an enterprise ingestion foundation now used across many underwriting customer service and claims operations, these capabilities continue to scale. All in, this represents a disciplined transformation across the organization, grounded in robust data, modern technology and responsible AI. And positions the company to operate more efficiently and scale with confidence. We will continue to refine our strategy and business model in ways that enhance the alignment between risk, price and capital provide our agents and customers with the most innovative and responsive products and services possible and drive top-tier results. While volatility, particularly from catastrophe activity will always be a factor in our industry, our underlying performance continues to demonstrate the effectiveness of our past exposure management actions and stability across a range of conditions. We plan to continue emphasizing disciplined underwriting as we pursue selective growth where returns are compelling, deploy capital efficiently and further invest in the capabilities needed to navigate an evolving P&C market. Most importantly, we remain confident in our ability to deliver sustainable, profitable growth and attractive long-term value through a consistent execution-driven approach. Our unique selective distribution partnership model with the best independent agents in the country continues to boost this confidence. In fact, this month, we held our annual President's Club conference which includes the top 5% of our agents. During the conference, we had many excellent conversations with our agent partners about our business strategies, operational tactics and ways we could best work together in this complex marketplace. Feedback from our agents has been very positive, particularly with respect to our underwriting and claims transformation efforts. We have successfully navigated dynamic industry environments before, remaining sharply focused, acting decisively and executing with discipline, and we are committed to doing so going forward. With agility, alignment and performance at the core of our strategy, we are confident in our ability to deliver on our goals for 2026 and in years ahead, delivering value for our shareholders and many other stakeholders. With that, I'll turn the call over to Jeff. Jeffrey Farber: Thank you, Jack, and good morning, everyone. We are very pleased with the strong results we delivered in the first quarter, which are a testament to the outstanding execution of our team and the diversification of our businesses. Each part of the business contributed to our impressive results with personal lines remaining at outstanding margins, specialty profitability outperforming our expectations and core commercial posting solid healthy margins, all bolstered by our investment portfolio, which continues to provide very strong returns. Catastrophe losses were 6.3 points of the combined ratio. We recognized 3.1 points of favorable prior year catastrophe development largely from lower severity on 2025 events. We believe this reflects stronger than originally estimated benefits from terms and conditions changes and other property management and risk prevention actions. As an example, on hail events, we have observed lower severity as a result of increased policy deductibles in both personal and commercial lines. We are very encouraged by what we are seeing reinforcing our optimism that these actions will drive better stability in our underwriting results going forward. Current accident year catastrophe losses were primarily driven by an unusually severe hail and wind event in the beginning of March, with the heaviest impact in Illinois and Michigan and to a lower extent, winter storm firm in January, which impacted many states across the country. Together, these 2 events made up over half of current year cat losses. As claims develop and mature, we will be in a good position to assess the favorable impact that our underwriting actions achieve. Excluding catastrophes, our combined ratio was extremely strong at 85.4% and reflecting a 2.4 point improvement over the prior year quarter with loss ratio improvements in each segment. The expense ratio for the quarter was 30.7%, in line with our expectations. We continue to take a diligent approach to expenses, aligning costs with strategic priorities while making targeted investments to support future profitable growth. For the full year, we continue to expect an expense ratio of 30.3% as the benefit of growth leverage skews towards the latter part of the year. First quarter favorable ex-cat prior year reserve development of $25 million included favorability across each segment. In specialty, favorable prior year reserve development was $14.2 million or 3.9 points with widespread favorability across multiple coverages. In personal lines, favorable prior year reserve development was $9.2 million or 1.4 points with favorability in home and to a lesser extent, in auto driven by property coverages. And in core commercial, favorable prior year reserve development was $1.6 million or 0.3 points with minor adjustments by line. Our reserve position remains strong and aligned to the current uncertain environment. Now I'll further discuss each segment's current accident year results, starting with personal lines. This business generated an excellent current accident year ex-cat combined ratio of 83.8% for the first quarter, a 0.7 point improvement from the prior year period. The benefit of earned pricing in both auto and home and favorable frequency helped drive a 1.1 point improvement in the underlying loss ratio driven by homeowners. In this line, we delivered an outstanding ex-cat current accident year loss ratio of 46.7%, improving 2 points from the prior year quarter and favorable to our expectations helped by the benefit of strong earned pricing. We also continued to observe lower attritional loss frequency and partially attribute the benefit to deductible changes leading to fewer smaller claims in both cat and ex cat results. Our personal auto ex-cat current accident year loss ratio was 66.7%, an improvement of 0.2 points compared to the prior year quarter. we are seeing continued stability in collision frequency aside from the impact of severe winter weather. Personal Lines grew 2.7% in the first quarter with PIF flat sequentially, which is an improvement from the fourth quarter of 2025. We continue to expect PIF growth in 2026. Both auto and home achieved strong pricing increases in the first quarter with auto up 6.7% and home up 10.8%. And umbrella pricing increases also continued to be strong at approximately 19%. Now turning to our core commercial segment. We delivered a current accident year ex cat combined ratio of 91.5%, a 3.6 point improvement from the prior year quarter. The current accident year loss ratio, excluding catastrophes, of 58.8% was 2.9 points better than the prior year quarter. The first quarter of 2025 included some elevated property large losses while large loss performance was within expectations in the first quarter of 2026. Core commercial net written premiums grew 4.3% in the quarter propelled by increased momentum in both Small Commercial and middle market. Small Commercial grew 6.4%, improving over 1.5 points compared to the fourth quarter of 2025. Middle market net written premiums increased 1.5%. Price levels remain healthy and elevated, particularly in commercial auto and umbrella. Moving on to specialty. This business continued to perform very well with a current accident year ex-cat combined ratio of 85.4%. The current accident year loss ratio, excluding catastrophes, was 49% in the quarter. coming in better than our expectations and our low 50s target for this segment, driven by property favorability, while liability remained within expectations. The continued exceptional performance and profitability of this segment highlight the quality and positioning of our specialty business. While growth was pressured in the quarter, it reflects our prudent approach and focus on protecting the strong profitability of the business. We are working tirelessly to ramp up premium growth. Turning to our recent investment performance. Net investment income increased an impressive 19.6% in the quarter, driven by growth in our asset base from strong earnings, the benefit of higher reinvestment yields and improved partnership income. Our investment portfolio continues to provide steady returns, helped by disciplined positioning and broad diversification. Roughly 88% of our total invested assets are in cash and investment-grade fixed income, highlighting the high-quality composition of our portfolio and the relatively modest size of our other exposures. Our fixed maturity portfolio weighted average rating is AA- with 95% of Holdings investment grade. Earned yields on the fixed maturity portfolio were 4.42% in the first quarter up from 4.08% a year ago, and we continue to reinvest at higher yields than what is maturing. Portfolio duration, excluding cash, remained relatively stable at approximately 4.4 years consistent with our long-term asset liability alignment approach. Moving on to our equity and capital position. Our book value per share increased 1% sequentially to $101.8 driven by strong earnings in the quarter, partially offset by an increase in the unrealized loss position, share repurchases and the quarterly dividend. Excluding unrealized book value per share increased 2.8% sequentially. We continue to actively participate in share buybacks, repurchasing approximately 503,000 shares totaling $87 million in the first quarter. Additionally, we repurchased approximately $14 million worth of shares through April 28. We remain dedicated to responsible capital management and prioritizing shareholder value. Our second quarter cat load is expected to be 7.9%. To wrap up, we had an exceptionally strong start to 2026 and are confident in our strong market position headed into the rest of the year. The company continues to perform well across the board, helped by our diversified business and earnings stream as well as our extremely talented team. With that, we are ready to open the line for questions. Operator? Operator: [Operator Instructions] The first question today comes from Michael Phillips with Oppenheimer. Michael Phillips: I want to start, Jack, I guess, with what I think is immediately a generic topic but an important one that I think could separate Hanover from here over the next couple of years. That is where the market specifically commercial market is headed I'll start with an answer here, hopefully not the answer, but I'm going to sound too familiar. We don't follow the market down. We're laser-focused on margin says everybody. Obviously, I guess it's a matter of degree. But can -- Jack, can you talk about any structural things within Hanover that if we are a fast forward the next year, give us confidence that, that commercial renewal rate deceleration for Hanover won't be as dramatic as your peers. John "Jack" C. Roche: Yes, Mike, thanks for the question. I would start off with the fact that we have the most diversified business and earnings stream in the history of the company. And that is essential as we face off on a market that is, I think, going to be showcasing many cycles as opposed to on total cycle that affects all businesses in all geographies the same way. So to be in a position where all of our major business units and most of our geographies are contributing to our profitable growth. That is powerful in itself. Within Commercial Lines, having a pretty diversified portfolio across small commercial, middle market, 9 specialty businesses, again, is an extension of that enterprise view. We work, as you know, in the small to lower end of the middle market. We have a good balance between property and casualty. We have a strong alignment with our agency plant I think we're particularly well served by leveraging those profit margins into appropriate pricing that doesn't generate a lot of marketing activity in this dynamic marketplace. So I think the secret sauce for us is we've figured out how to make money in a lot of different places, and we can navigate and pull different levers across the way without being kind of stuck in one business segment that's in a down cycle. Michael Phillips: I think it's a good story. I appreciate the thoughts. I guess sticking just specifically with small commercial, or one could maybe argue that there might be more pressure longer term from advances in tech, at least from a distribution angle. Is that something at all you feel you have to think about? John "Jack" C. Roche: Well, we constantly think about not only how we navigate the contemporary challenges and opportunities, but also where the longer-term view is going to be. I think like some of our better competitors have articulated Small Commercial is much more complex than I think people fully appreciate in terms of how fragmented it is across the distribution system and how you have to both have a kind of point of sale or portfolio approach to some parts of small commercial and how you have to have a separate operating model that gets out the appropriate level of underwriting for kind of the upper end of small commercial. And then furthermore, you look at small specialty and how much business really extends into that more specialized line. So I wouldn't say that there's a moat necessarily around it. But you have to have made a lot of investment. You have to have a lot of history and data around where the profitability is by line of business, by geography and by business segment. And if you do that well, I think you can manage through at least the short-term pressures, the longer-term view, we are very optimistic about because Dick can share with you, we are heavily invested and excited about some of the transformational opportunities that will take what we do today and, frankly, make ourselves more efficient and more competitive into the future. Operator: The next question comes from Paul Newsome with Piper Sandler. Jon Paul Newsome: I was hoping you could touch a little bit more on your comments you made around the program business. And I always kind [indiscernible] of you tell exactly what's in there. And if the sort of specific areas within those areas -- within programs, market-wise, geography, whatever you think is interesting that where you might see unusual more than what we'd expect pricing concerns as well as in terms of condition changes? John "Jack" C. Roche: Yes, Paul, this is Jack. I'll make a couple of comments here broadly and then let Bryan speak to Hanover programs. But I'll remind you and others that we write program and programmatic business across many business units in our enterprise. As a matter of fact, I don't think there's a single business that doesn't have at least some programmatic business with individual distributors across the various lines and businesses. And frankly, our Hanover Programs business in total is smaller than the program business that we write across the enterprise and other specialized businesses. So what we articulated in our prepared remarks is that programs in the Hanover programs area that we've been working on to improve its profitability. We've achieved that profitability that we were seeking and have greatly improved it. But on the margin, we're trying to keep our powder dry for what we think is the next round of opportunities and so I would say we shrunk a little bit following through on that discipline that we have and not taking in any material new programs but we're quite optimistic about how we can translate that into eventually stronger growth in the future. Bryan, do you want to build on that? Bryan Salvatore: Yes. I mean, first of all, I think you said a lot of that quite well, right? So I think what I would add, I'll just call it out, right, the program business that I think you're referring to is the smaller part of our total program portfolio, which actually performed very well. And as Jack pointed out, we have worked very diligently on that Hanover programs booked is actually performing well. And frankly, the pricing in that part of the portfolio is actually quite strong. So we feel very good about that. And then what I think what I would add is I really do think it's important this notion of keeping our powder dry, right? So we finished -- we're finishing up some of that cleanup work. And I would tell you what we see our agents doing is increasingly leading towards this. this area, right, to be able to work their portfolio. And so all the work that we've done, I would say we feel really well positioned to support them across multiple lines in programs outside of programs, I think we're well positioned, and this is an important space to our agents. Jon Paul Newsome: That's great. And then maybe some thoughts on the comments that you made about commercial auto and some of the other severity hotspots, some of your peers this quarter and in the past have really gotten behind the ball here in terms of what's going on. Just from your perspective, are we seeing an acceleration of some of the severity issues? Or just -- is it just continuing at sort of the high levels that we've seen in the recent past? John "Jack" C. Roche: Yes. I think I would kind of echo what I said on the last quarter call was that there is a maturation of the trends in my mind, but at a very high level. So we know that the severity of liability cases, whether they're commercial auto or slip trip and fall or other types of liability claims are dramatically higher than they were historically. But as we've gotten further away from the COVID kind of court closures and we've started to see how those litigation trends come through and some of the jury and judge awards, it is clearly starting to mature. But I wouldn't say that I think what you're going to see is different carriers are in different places with their book mix, with the reserve position with how they've actuarially addressed the loss trend analysis and we feel really good about the way we've managed through this. But we get up every single day, paying attention to these liability trends because they are elevated. Paul, this particular quarter, our commercial auto results were fairly benign in both the current year and prior year. There's not all that much informational content in that statement because I think that commercial auto the industry has reached a plateau of fairly high severity that we're all dealing with in terms of managing through that and making sure we get substantial rate. Operator: The next question comes from Mike Zaremski with BMO. Michael Zaremski: Great. Switching gears to personal lines. Just looking at the continued excellent results. for you all, especially, but also on the industry basis. Should we expect pricing power to moderate more materially kind of towards peers? Or are you guys -- since you have a more differentiated portfolio, especially regional as well, do you expect to kind of keep pricing well above the industry average. Maybe you could throw in how to think about retention there as well. John "Jack" C. Roche: Yes, Mike, I'll let Dick obviously speak to some specifics about the personal lines business. But I think your articulation of our where we play and how we're different is an important part of the answer. We are the best account writer in the 20 states we choose to do business in, in the IA channel, and that gives us some real, I think, staying power. That said, we live in a competitive business. I think our account strategy itself is now really paying huge dividends because there's no doubt that in the direct channel and even in the captive channel, there is real pricing pressure coming, particularly on auto. But having home as part of our proposition is a meaningful part of the way in which we differentiate ourselves, but also keep ourselves out of that pure auto pricing market. Richard Lavey: Yes. So a lot of great points there, Jack. I just reemphasize sticking to our strategy, right? Both geography and customer segment is what we believe will help us continue to kind of outperform and I think stands up better in a competitive market, the full account, 90%. The other fact that we have 76% of a common effective date, so that brings efficiencies to having both policies or multiple policies renew on the same date. But I'll just add, we have an amazing state management capability kind of working as a co-CEO, if you will, with a field leader in each state, driving those agency relationships at the desk level and the analytic tools and practices that we've built over the years is just allow us to stay on top of the trends and kind of be laser-like in how we outperform in the marketplace. Looking at new business through the comp raters and adjusting quickly our dials, the studying intensely the customer behavior on renewals, specifically price elasticity and making sure that we're doing the right kind of renewal pricing to maintain and keep our best accounts. So we just honed and finetuned our capabilities. And we just -- we know who we are, we stick to our strategy, and we're not immune, but we think we can outperform particularly as we continue to push ourselves up market with higher [indiscernible] Prestige product is having tremendous success, and that gives us confidence about the future. Michael Zaremski: Okay. Great. Maybe just shifting gears to the also excellent results in specialty, if we focus on the core loss ratio continues to usually track below the low 50s, which is great. Just curious, has there been any items you want to call out that kind of have been better than expected, we should just continue to keep in mind? Bryan Salvatore: Yes. John "Jack" C. Roche: Go ahead, Bryan. Bryan Salvatore: Yes. So I'm actually quite pleased with the performance of almost all of our portfolio, as I say, pretty much all of our portfolio, right? The core loss ratios across our lines of business are really strong. the profitability that we delivered was broad-based. So I don't know that I would call it a single area. I would probably highlight that property continues to be very strong from a profit perspective. Again, really good profitability across this portfolio. Some of that was from hard work in parts of portfolio, a lot of discipline in our pricing and our portfolio management. But beyond that, I wouldn't say [indiscernible] area. I just a really good blood-based product. John "Jack" C. Roche: Mike, I would just add that one of the strengths of being able to play primarily in the retail agency side of that business across multiple businesses, it gives us the ability to based on the way the market cycles are changing. And I think we used the example of management liability last quarter where we faced several quarters of some pricing pressure, and we held on to our book of business, but we lowered some of our growth trajectory. And as we finished up 2025 and headed into we were able to re-elevate our growth because we maintain that profitability and the pricing discipline started to come back into the business. So I believe that's the secret to being in the more specialized businesses do you have that core profitability? Do you have multiple areas that you can bob and weave so that you're not trapped into one business that is going to be too cyclical. Bryan Salvatore: And just to really quickly add that you mentioned before, our focus on that small to middle market space definitely benefits us, especially [indiscernible] Michael Zaremski: And just a quick follow-up, just for maybe education. You continue to highlight Marine. Maybe you can just -- I think when a lot of us think about marine, we think of kind of the more syndicated large account marketplace kind of Lloyd's of London type business. Maybe you can just give us a quick flavor of what the typical marine account looks like. Bryan Salvatore: Yes. So there is quite a bit to Marine. Quite a number of lines of products there, right? I'll go back to what I said before. Even there, we focus on the middle market to smaller space. the vast portion of our business in terms of pit in smaller accounts. And a lot of that is builders risk, contractor's equipment, what you would call inland marine. And then the other thing I would say relative to what people often refer to as Ocean Marine, our book, I don't think it looks like a lot of others that you might be thinking of, right? We do not write a lot of haul coverage we write marinas. We write brown water stuff, things that are traditionally better performing. So we're very fortunate because I think of our agent relationships that we've really built one of the larger marine practices in this inland marine space and what I think of as lower severity ocean marine. Operator: The next question comes from Meyer Shields with KBW. Unknown Analyst: This is [indiscernible].My first question is on specialty. Just a follow-up on that -- we see that there's a pricing slow down this quarter. I'm just curious what's driving that? And also you mentioned that you'll see specialty growth ramp up in here. What areas are you focusing on given the kind of slowdown in the overall specialty pricing? Bryan Salvatore: Yes. Thank you. So I think the first thing I would call to your attention is that we are very deliberate about our pricing, right? And I think worthwhile to consider. And I think it ties a little bit into your Part B of your question, right? This is a very diversified portfolio. Nine businesses, 19 separate product areas focused on the small to middle market space all traveling on that same path, right? So we did feel some -- we felt pricing pressure in the property space, one of our most profitable areas and we're managing that in a very disciplined way. I'll go back to something Jack pointed out before about management liability, we have a track record in our businesses of appreciating the profit margin, understanding that we have to compete with doing that in a measured and deliberate way, sometimes sacrificing near-term growth so that we're well positioned to grow going forward. . And so that's the way we're thinking about pricing in this environment. And I do see the ability to continue to drive growth in the areas we had success. I think that was the other part of your question. So management liability, surety, E&S, our specialty general liability. And then I would add that we see an increase in growth in areas like marine and perpetual liability as well. Jeffrey Farber: Jane, we had planned for the first quarter of 2026 to be the lowest growth quarter of the year. And that, combined with the optimism that Bryan has for the various areas gives us confidence that we can ramp up the growth from here in specialty. Unknown Analyst: Got you. Very helpful. My second question -- just a quick one. Is there any underlying reserve movements on the casualty lines? Jeffrey Farber: I'm not exactly sure how to answer that, Jane. We do every single quarter we look at our entire book. And so we're always making adjustments in terms of our overall reserves. If your question is about prior year development, specifically in core casualty, there were essentially no -- almost no movements in individual lines of business. Operator: The next question comes from Rowland Mayor with RBC Capital Markets. Rowland Mayor: I wanted to quickly ask on the Cat PYD. Was that a result of a specific review of how you had booked the business? Or are you continuing to hold some conservatism around kind of the underwriting changes in Personal Lines? Jeffrey Farber: So we look at our cat reserves every single month. And as we did at the end of March -- in April, we looked at '24 and '25 reserves. And we certainly don't want to get short. So we look at those in a prudent way. But we were really surprised that the level of severity and to a lesser extent, frequency on both personal lines and commercial lines, particularly from 2025 events had rolled off more favorably than we had originally estimated. So it was lower large losses in commercial lines. And in Personal Lines, it was less severity of the terms and conditions are having a very meaningful impact across both personal and commercial lines. With respect to conservatism, we always try to be conservative, but I would not anticipate the level of favorable development that we had this particular quarter to be repeating. Rowland Mayor: That's super helpful. And I'm just wondering on that with the terms and conditions coming in better than you had previously thought. Does that change how quickly you want to grow the homeowners business or the Personal Lines PIF? John "Jack" C. Roche: This is Jack. I hope eventually, the answer is yes. We're going to remain cautious, but the silver lining of having some cat activity, particularly in some of our more penetrated footprint is that we really get to sharpen our analysis about the effectiveness of the terms and conditions and how we're pricing those and the impact it's having on our property aggregations. So for right now, as we said in our prepared remarks, we're not making major changes, but I would be disappointed if eventually all of that didn't translate into the appropriate level of earnings volatility and the ability to grow the business more than we've been willing to do over the last couple of years. Operator: The next question comes from Bob Huang with Morgan Stanley. Jian Huang: So I think most of my questions were addressed. But one thing I want to unpack a little bit is as we think about the broader innovations in technology, a lot of companies have their willingness and their aspiration for AI and innovation. Just curious in that increasingly tech-driven environment where do you think you fit in from a competitive perspective? And how do you think the competitive environment will evolve because of technology? John "Jack" C. Roche: Bob, thanks for the question. Super important time for us to address that with our investment community. I'm really excited about the way the organization is leaning into the opportunities that technology and AI are presenting I think you saw that a few quarters ago, we asked Dick Lavey to take on some additional responsibility in this area to make sure that we -- the innovations were business led in conjunction with the technology teams. We're making a ton of progress. And we look forward to updating you further about the impact that we believe we can make with those like we'll do that later in the year when we update our 5-year forecast as our current 5-year forecast comes to a conclusion at the end of '26, but if you want to highlight kind of your view of the momentum we're building. Richard Lavey: Yes. Great. And I thought Jack's prepared remarks did a really nice job highlighting what we're doing. I'll just maybe make a couple of overarching comments, and they give you a couple of examples, perhaps to make it come alive and then end with, I think, a specific response to your question about the impact on competitive. But yes, so it's been over a year since I stepped into the role of COO and I took the responsibility of just helping our organization frame our strategy overall transformation to kind of tackle the highest order of priorities that we believe are going to bring us some benefit realization, doing that in partnership with Willie, our CIO. But with a keen focus on scaling our company, right, to bring more growth and efficiency and have been working intensely with the business leaders and functional leaders and also spending time externally to your question, understanding technology vendors, competitor actions. And I can say on balance as [indiscernible] of that, is that we -- we feel terrific about our progress. We are right in the game with what others are tackling. And as Jack pointed out, and you've heard me say this before, too, we're tackling really the common activities across our value chain, in underwriting, claims and operations. So 2 very quick examples. This idea of -- in the underwriting space, probably the most impactful, and that claims but this ingestion and triage agent that will help us receive codify and synthesize submissions and get it to the right person with the right scale as fast as possible with a running start on insights frankly, is be the biggest benefits that come out of this transformation effort. E&S is our first business that is going to benefit from that ingestion and triage agent, which is really very ripe for this -- for efficiency. We had 70,000 submissions in E&S last year, a portion of which is frankly missed opportunity because of underwriter capacity. So these tools bring us underwrite capacity and effectiveness in helping them sort through the piles of submissions and then triaging focusing on the more promising activities. So other businesses also underway, middle market, small commercial marine. In the claims side, an AI agent, we have 8 agents that are built to help us synthesize really complex contracts, medical records, claims files, searching for and summarizing specific answers to [indiscernible] question about indemnity clauses, name parties, limits, risk transfer provisions, things like that. And these documents will be 100 to 300 pages long. So what used to take out now takes minutes. So you can imagine the benefit of the adjusters on that. Lots of work on medical records, looking for severity, fraud, settlement insights, that kind of thing. So speed, accuracy, effectiveness. So I just -- we're so bullish about the benefits that this brings, really importantly, we're doing all of this in kind of a LEGO block modular architecture to make sure that we can reuse these agents as we build them across multiple places. So when you step back from all that, how you frame this question, is it going to increase the competitiveness I think if you don't -- if you're not investing in these, you're going to miss out. So yes, those that have invested are going to be more competitive because they're going to be able to get after the more promising opportunities more quickly with more precision. And so I think if you're not in that game, you're going to miss out. So we're confident and comfortable that we're right there with it. Operator: The next question comes from Mike Zaremski with BMO. Michael Zaremski: Just a quick follow-up on the competitive environment, maybe trying to tease out some pricing power trends. I think, Jack, you mentioned the pricing remains healthy and elevated in the social inflation lines. I think we saw a bit of -- we saw the acceleration stopping in terms of higher increasing pricing in some of those lines late last year and maybe coming down a little bit from healthy levels and some of your competitors have talked about pricing kind of reaccelerating a tiny bit. Just curious what you're seeing in those lines? Is it kind of steady upward bias downward? John "Jack" C. Roche: Yes. I would say in general, and I think Jeff addressed this to some degree that we're having real discipline and success we're showing real discipline and having success in the liability lines that are most susceptible and seeing kind of legal system abuse impact. Commercial auto, we continue to be very, very disciplined -- the general liability lines that are most suitable to slip, trip and fall type of activity. And I would say umbrella, not just in commercial lines but also in Personal Lines. We're getting really robust pricing. So I think the market is behaving pretty rational. And while some of the pricing pressure that the industry is feeling in property, feels like it's intensifying. Our belief is that, that is most susceptible to the larger end of the property cycle. And we're, for the most part, a property or an account writer in the small and middle market space. So we have the ability to think about account pricing and not get too hung up on pricing by individual line of business. So hopefully, that answers your question. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Oksana Lukasheva for any closing remarks. Oksana Lukasheva: Thank you, everyone, for participating on our call today, and we look forward to talking to you next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Silicom First Quarter 2026 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact Silicom's Investor Relations team at EK Global Investor Relations at 1 (212) 378-8040 or view it on the News section of the company's website, www.silicom-usa.com. I would now like to hand over the call to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin, please? Kenny Green: Thank you, operator. I would like to welcome all of you to Silicom's quarterly results conference call. Before we start, I would like to draw your attention to the following safe harbor statement, during this call, we may make forward-looking statements within the meaning of applicable securities laws. These statements may include, among other things, statements regarding the company's strategy, market opportunities, customer demand, product development initiatives, industry trends, expected deployments of the company's solutions, financial outlook, revenue expectations, margins, operating expenses, profitability and future growth opportunities. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such statements. These risks include, among others, those described in the company's press release issued today in its filings with the U.S. Securities and Exchange Commission, including its annual report, Form 20-F. The company undertakes no obligation to update any forward-looking statements. With us on the call today are Mr. Liron Eizenman, President and CEO; and Mr. Eran Gilad, CFO. Liron will begin with an overview of the results, followed by Eran will provide the analysis of the financials. We will then turn the call over to the question-and-answer session. And with that, I would now like hand the call over to Liron. Liron, please go ahead. Liron Eizenman: Thank you, Kenny, and good day, everyone. I'm exceptionally pleased to share a truly excellent set of quarterly results well ahead of our expectations. Over the next few minutes, I look forward to discussing why we are more excited than ever about Silicom's momentum and trajectory ahead. . The first quarter of 2026 has been an excellent one for Silicom. Our core business has now reached a clear inflection point with extraordinary momentum in financial performance well ahead of the expectations we shared with you only a few months ago. The highly successful implementation of our strategic plan is clear and our business is decisively outperforming on all fronts. Revenues this quarter came in at $19.1 million, representing a year-over-year growth of 33%, significantly ahead of our guidance range, which had originally expected an 18% year-over-year growth at the midpoint. This is the second quarter in a row of very strong improvement with both quarters well ahead of our original expectations. This quarter, even more so, we have seen a powerful upward inflection with the year-over-year growth accelerating significantly and essentially doubling from 17% last quarter to 33% now. Not only did we surpass our revenue expectations this quarter, but our momentum continues to accelerate, and looking ahead, we anticipate even greater achievement for the second quarter. We expect second quarter revenues to range from $20 million to $21 million representing accelerated 40% growth on a year-over-year basis at the upper end of the guidance. Given the strong improvement in visibility, we now have into the remainder of the year, we expect full year 2026 revenues to be in the range of $82 million to $83 million, representing an approximate 33% year-over-year growth. This exceptional performance is the direct result of the design wins achieved in previous years and the ongoing disciplined execution of our strategic plan. As those design wins ramp, we are seeing strongly expanding revenue contribution and materially improved visibility for the remainder of the year. We are seeing equally impressive traction on the design win front. As you recall, we set ourselves a target of between 7 and 9 design wins for 2026. We are only a third way through the year, and we have already achieved 4, halfway towards our target, which puts us on track to meet and partially exceed the upper end of this target. Design wins we achieved today will be the foundation for continued strong growth into 2027 and beyond. I want to spend a few minutes focusing on some of the recent design wins we have achieved since the start of the year. At the start of the year, the global networking and security-as-a-service leader expanded its deployment of Silicom Edge devices into multiple additional use cases, more than doubling our expected annual revenue from this customer, from around $4 million to between $8 million and $10 million, we found the incremental revenues already flowing through this quarter. This achievement highlights both the strength of our blue chip customer relationships and our strategy of growing by expanding existing engagements alongside winning new ones. In February, a Tier 1 cybersecurity customer a long-standing partner, selected one of our Edge systems as the platform for their next-generation high-end product lines. To date, we have received initial orders of over $1 million for 2026 and we expect this engagement to ramp to double that. We are in discussions for additional product lines at this customer. This design win is another great example of our long-term customer relationships generate additive revenue contributions across our product portfolio over time. In March, we announced the design win with one of the world's largest streaming service providers, which selected our high-speed networking adapter for deployment across its proprietary streaming infrastructure. We've already received an initial order for over $1 million with total purchases over 5 years expected at $12 million. In parallel, we are in active discussions with the customer about the customized special form factor network adapter for the same infrastructure. If this materializes, it would more than double our networking related revenues from this customer in the region of $25 million to $30 million. . In April, we announced a $3 million per year design win with a European leader in advanced encryption and secure communication solutions. After a successful evaluation, they selected an FPGA SmartNIC for deployment that includes post-quantum cryptography among its use cases, marking our third post-quantum cryptography design win to date and a key expansion of our PQC customer base. We have initial commitment of $1 million and beyond this, we are in active discussions about the next-generation higher-speed FPGA SmartNIC as well as a potential full system solution, combining a server with an FPGA SmartNIC opportunities that could meaningfully expand the partnership. Those 4 design wins demonstrate the breadth and the quality of our momentum across all our core product lines. Beyond the design wins already secured, our pipeline of opportunities is broader and deeper than it has ever been. It spans all our core product lines, Edge systems, SmartNIC and FPGA-based solutions and includes leading as well as fast-growing names across cybersecurity service providers, networking and other key verticals. We expect part of this pipeline to continue to convert into design wins over the coming quarters, providing the foundation for accelerated growth in 2027 and beyond. While the return to strong growth within our core business is the main story, we continue to invest in 3 venture style upside opportunities we spoke about last quarter. AI inference, post-quantum cyptography and white-label switching. I stress that we are not pursuing those opportunities to replace legacy core business, quite the opposite. Those growth opportunities are additive. It's precisely because our stable growing core business is performing so well that we have the platform, the relationships and the balance sheet strength to invest in those new growth engines. All of which leverage our IP and the same engineering talent that drive our core today. As I discussed last quarter, AI infrastructure investments are undergoing a fundamental shift from training models to querying the models at scale known as inference. This shift is being dramatically accelerated by the rise of agentic AI, where autonomous agents generate continuous high volume inference or growth on behalf of users rather than the occasional single query of traditional chatbot interactions. A single agent completing a test can trigger hundreds or thousands of inference calls and enterprises are deploying those agents across every function. The result is that the inference is rapidly overtaking training as the dominant driver of AI infrastructure spend, creating massive networking and interconnect bottlenecks at unprecedented scale and that's exactly the problem that Silicom excels in solving. We are making significant progress with 2 of the world's most promising contenders in the high-stakes race to architect the future of AI computing. Furthermore, we recently started in cooperation with the customer the development of a new inference specific product. We will share more data with those engagement progress. We view our rapid progress in expanding footprint in this high-growth sector as a potential game changer for Silicom. In summary, this is an exceptionally exciting and transformative time at Silicom. Our core business is accelerating at a remarkable pace, delivering 33% growth in the first quarter with the potential for even stronger growth in the second quarter, positioning us surely on track for a very strong full year performance. Our design win engine is firing on all cylinders with 4 already achieved out of our 7 to 9 targets for 2026, putting us well ahead of our plan and giving us increased confidence in our ability to meet and potentially exceed our targets. Our pipeline of core Edge systems, SmartNIC and FPGA solution is the strongest and most expansive we have ever seen. Combined with our robust balance sheet, this gives us exceptional flexibility to invest aggressively in both our core growth and our high potential venture style opportunities, all while maintaining a disciplined and conservative financial profile. . We are very excited about Silicom's strong and accelerating momentum in 2026 and are moving aggressively and with confidence to fully capture the opportunities ahead. We are highly optimistic about the significant value we are building and look forward to delivering strong and accelerating returns for our shareholders in the quarters ahead and over the long term. With that, I will now hand over the call to Eran for a detailed review of the quarterly results. Eran, please go ahead. Eran Gilad: Thank you, Liron, and good day to everyone. I will review the financial results and business performance for the first quarter of 2026. Before beginning the financial overview, I would like to remind you that unless otherwise indicated, all financial results are non-GAAP. A full reconciliation of our results on a GAAP to non-GAAP basis is available in the press release issued earlier today. Revenues for the first quarter of 2026 were $19.1 million, 33% above the $14.4 million reported in the first quarter of last year. The geographical revenue breakdown over the last 12 months was as follows: North America, 76%; Europe and Israel, 14%; Far East and rest of the world, 10%. During the last 12 months, we had won 10% plus customers, which accounted for about 10% of our revenues. Gross profit for the first quarter of 2026 was $5.7 million, representing a gross margin of 30% compared to a gross profit of $4.4 million or gross margin of 30.3% in the first quarter of 2025. Operating expenses in the first quarter of 2026 were $7.6 million compared with $6.7 million reported in the first quarter of 2025. Operating loss for the first quarter of 2026 was $1.9 million, an improvement from the operating loss of $2.4 million reported in the first quarter of 2025. The narrowing of the operating loss reflects the operating leverage we are beginning to see as our revenues return to strong growth and is a clear indication of the improving profitability profile we expect to deliver as our growth accelerates. We are very pleased with this positive trajectory, which has been tracking ahead of our expectations. Net loss for the quarter was $1.5 million compared to a net loss of $2.1 million in the first quarter of 2025. Loss per share in the quarter was $0.25. This is compared with a loss per share of $0.37 as reported in the first quarter of last year. Now, turning to the balance sheet. Our balance sheet remains very strong. As of March 31, 2026, our working capital and marketable securities amounted to and $109 million, including $63 million in high-quality inventory and $63 million in cash, cash equivalents and high-rated marketable securities with no debt. I would like to add a few words on the increase in inventory. We are intentionally building our inventory both to support our strong revenue trajectory and to safeguard our ability to ensure uninterrupted product delivery to our customers. This is a deliberate proactive step that we are taking and leveraging our balance sheet strength to do so, which effectively mitigates the impact of the current extending lead times for memory chips and positions us well to continue to capitalize on the growth opportunities ahead. That ends my summary. I would like to hand back to the operator for a question-and-answer session. Operator? Operator: [Operator Instructions] The first question is from Ryan Koontz of Needham & Company. Ryan Koontz: Really nice quarter. Congrats on the results and terrific outlook. I wanted to ask you a little more detail on how we should think about timing. I'm just trying to dumb this down a little bit for me, and folks maybe aren't that familiar with the story. But can you maybe break down like what's going well with the business here in the near term? And how these new design wins layer in? Is the improved momentum in the quarter, for example, is that due to your core business or are new design wins contributing yet? Can you just kind of give us a time view of what's going on here, would be really helpful. Liron Eizenman: So I think as we explained in the past, design wins usually take time until they materialize. So what we're seeing right now is not the design wins that we announced this quarter and maybe not even a design win that we announced, I don't know, 2 or 3 quarters, but it takes time until things materialize, until we see full ramp-up, and so some of the additive revenue that we're seeing right now is actually coming from design wins that we've done maybe even in '24 or '25, early '25, and it's building up. It's more and more momentum, more customers actually ramping up fully and some of them even better than what we anticipated. And this is what's leading us to the situation that we're now seeing this very nice increase. Ryan Koontz: And maybe in terms of the core business in the quarter, it sounds like there was some upside. Can you attribute that to different market verticals, maybe in both the print and the second quarter outlook. What's happening with the kind of current base of business that's driving the acceleration? Liron Eizenman: So it's maybe the core business. So everything, all the new stuff we're talking about, there's no significant revenue coming from that, so everything we're seeing, this is the core business. So we will see significant improvements or significant advantages, I would say, with the new stuff that the 3 pillars that we talked about, this will be on top of everything that we're seeing right now. But as for the core itself, it's across everything. It's across our SG&A. We see strong momentum there. We see it also with our Edge devices. We see it with our SmartNIC. It's across regions. It's just we see very strong momentum everywhere. Ryan Koontz: So it's not -- there's not one particular customer driving that. And maybe shifting to more of a forward-looking view on the -- both the encryption side as well as AI. Can you maybe go into some explanation of what your competitive advantage is here that allow you to get some of these new wins around AI in price and encryption? Liron Eizenman: Yes. So I'll start with encryption. So we've been building encryption products for years. This is not a new area for us. It's just that the post-quantum encryption is something relatively new to the world, not for us, those algorithms are just coming out in the last 12, 18 months, and since we are already a leader in encryption, we know who are the customers, it's our existing customers. We know the type of additional customers we can onboard. We know how to sell to those guys, we know the technology they need, so it was kind of a straightforward next step for us [indiscernible] something we needed to invest in order to be ready with the right product at the right time in order to be there. So this is for encryption. For AI, the problem that we are solving is basically a networking -- I would say, 2 problems we're starting. One problem is a networking problem. And this is what we've been doing for many, many years. So basically taking the same IP, the same R&D talent that we have and just building the right products for that or repurposing existing products to solve those problems. . And the other one is basically being the inference engine itself, what we call the auto monopoly basically instead of building an ASIC now for 3 years, the pace of improvement in running models is so quickly, we see advantages and new stuff coming every week, so if you freeze yourself now to an ASIC, you're basically losing everything new that will come in the next 3 years. If you're doing it on an FPGA that you can update in the field, you can actually, every week come with new things that will pop up, new strategies and new ways to do stuff, and we'll just accelerate what you did a week ago. Now we can do it 10%, 20%, 50% quicker. So this is why we think the auto monopoly is another key element. Ryan Koontz: So the faster innovation of FPGAs just gives you a big advantage. Back on the networking comment you made around AI, I assume that's delivered in the form of NICs typically on the AI infrastructure networking. Liron Eizenman: It's part of it, but I would say it's not necessarily simple NICs, it's our SmartNICs and some of them are -- would be new SmartNICs to develop. Some of them are existing SmartNICs. I would say most of them, yes, in the form of SmartNICs. Ryan Koontz: And then lastly, you touched on memory and inventory. It's obviously becoming a big concern industry-wide. It's been building, and we've been hearing lately about a lot of inventory builds and long-term purchase commitments from a number of networking peers of yours this quarter. Can you maybe give us a little more detail on your supply agreements and how you're thinking about the risks of memory supply and memory costs and how you pass those costs on to customers? Liron Eizenman: Yes. I mean it's -- as you noted, inventory is going up, there's no other way to work around it. If you want to be ready to supply products, especially when we are a company that is growing dramatically, there's no other way, you have to secure the inventory, you have to work very, very closely with the DRAM vendors and with the storage vendors, and that's what we're doing. We're qualifying additional sources all the time, trying to balance between the different vendors because not all of them are able to deliver everything that we need. I mean they are saying it publicly that they cannot deliver all the demand that their customers have, so we have to balance between different vendors. So a lot of work, a lot of work here, and yes, it's a challenge with the supplies, a challenge for the customers but we're navigating it very, very closely with the customers, explaining the situation to them for months now. This is not something new. Everyone understands the situation. We're trying to solve a situation, sometimes even in creative ways like changing specs of the product or exploring with the customer exactly what would make them happy and allow them to keep selling the product in the best way for them, and it's definitely something that takes effort from us, but we think it's going to be something that will allow us to build a relationship for many, many more years with those customers. Ryan Koontz: And you're able to pass those increased costs of memory on your customers as part of your contracts with your customers? Liron Eizenman: Most of it, yes. Ryan Koontz: Most of it, okay. But you're not anticipating major gross margin hit in the -- or at least like in the coming quarters? Liron Eizenman: No, absolutely not. Operator: [Operator Instructions] Next question is from Greg Weaver of the Invicta Capital. Gregory Weaver: Just a couple of quick ones on the inference side of things. What's your best guess in terms of revenue timing there? You mentioned the ramp that you're seeing in fiscal '26 isn't these new products? Liron Eizenman: Yes. I think probably more 2027, rather than 2026 in terms of significant revenue for inference. But we may see some this year definitely making some good progress, as I've said before. We -- hopefully, we can share more in future, but as we meet more milestones, but I'd say significant probably in 2027. Gregory Weaver: And you stated you were creating a new inference specific product with a key customer. Now is that 1 of the 2 guys you've referenced? Or is this a new player? Liron Eizenman: Yes. It's 1 of those 2 guys. Operator: There are no further questions at this time. Before I ask Mr. Eizenman to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available by tomorrow on Silicom's website, www.silicom-usa.com. Mr. Eizenman, would you like to make a concluding statement? Liron Eizenman: Thank you, operator. Thank you, everybody, for joining the call and your interest in Silicom. We look forward to hosting you on our next call in 3 months. Good day. Operator: Thank you. This concludes Silicom's First Quarter 2026 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.
Operator: Good morning, and welcome to Tenet Healthcare's First Quarter 2026 Earnings Conference Call. [Operator Instructions] I'll now turn the call over to your host, Mr. Will McDowell, Vice President of Investor Relations. Mr. McDowell, you may begin. William McDowell: Good morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We're pleased to have you join us for a discussion of Tenet's first quarter 2026 results as well as a discussion of our financial outlook. Tenet's senior management participating in today's call will be Dr. Saum Sutaria, Chairman and Chief Executive Officer; and Sun Park, Executive Vice President and Chief Financial Officer. Our webcast this morning includes a slide presentation, which has been posted to the Investor Relations section of our website, tenethealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represent management's expectations based on currently available information. Actual results and plans could differ materially. Tenet is under no obligation to update any forward-looking statements based on subsequent information. Investors should take note of the cautionary statement slide included in today's presentation as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. And with that, I'll turn the call over to Saum. Saumya Sutaria: All right. Thank you, Will, and good morning, everyone. In the first quarter, we reported net operating revenues of $5.4 billion and consolidated adjusted EBITDA of $1.16 billion, which represents an adjusted EBITDA margin of 21.6%. We are pleased with the start to the year, performing above our previously provided expectations. As anticipated towards the end of last year, the operating environment is dynamic. There are payer mix shifts, seasonal effects and insurance enrollment uncertainty in the exchanges and Medicaid that impact demand. Despite these challenges, we delivered a clean quarter characterized by disciplined operations, benefits from execution on our previously described expense opportunities, stable volumes despite headwinds and as a result, significant free cash flow generation. USPI generated $484 million in adjusted EBITDA, which represents 6% growth over the first quarter of 2025 and a robust 22% of our full year 2026 adjusted EBITDA guidance. We are pleased with USPI's start to the year as we set an aggressive EBITDA target as a percent of the full year for the first quarter that we were able to exceed. We have seen a pattern over the last few years with a modest shift towards an increased distribution of cases and, therefore, earnings into the first quarter. Given our focus on acuity, same-facility revenues grew 5.3% at USPI, highlighted by double-digit same-store volume growth in total joint replacements in the ASCs over prior year. Our operations in the first quarter were somewhat impacted by two major winter storms and uncertainty from vendor cyber attacks, however, our operating teams managed through them and were able to reschedule many of the procedures lessening the overall impact in the quarter. We have a robust pipeline of assets interested in joining USPI this year. As such, we've had a particularly strong start to the year investing $125 million in the first quarter to acquire 7 ASCs. Additionally, we have commenced patient care at 3 de novo centers. This represents half of our targeted full year spend already completed in the first quarter. Turning to our Hospital segment. First quarter 2026 adjusted EBITDA was $678 million, which was nicely above our expectations and represented 27.5% of our full year 2026 adjusted EBITDA guidance. We reported 16.7% EBITDA margins in the quarter, which were driven by disciplined expense management and growth initiatives, which offset the expected impacts of unfavorable payer mix and reductions in exchange enrollment. The results in the quarter reflect no significant changes in supplemental Medicaid program revenues compared to our original expectations. We have seen declines in exchange coverage with same-store exchange admissions down about 10% compared to first quarter 2025, but not yet at the level we assumed as the average for the full year. We continue to assess the overall environment for effectuation rates and the impact on future exchange volumes, but we believe we have the tools to manage this impact under a variety of scenarios. We continue to make investments in technology to enable growth and streamline operations. We are executing on the expense initiatives that we discussed on our fourth quarter 2025 earnings call and are recognizing the benefits. These initiatives include engagement tools, which are improving recruitment and retention efforts, process automation to address length of stay and capacity controls, which improve our clinical throughput. Among these things, we are executing on AI-related capabilities in our hospitals, physician practices and the global business center to drive further efficiencies, most of which have been useful for supporting extending the productivity metrics of our team. Importantly, we have learned that while all of these tools will not work in a pilot state, setting up a governance that either green lights for rapid scaling up or red lights for shutdown help us remain focused. We have included third-party EMR integrated solutions with -- which will increase our clinician productivity, decrease administrative burden and improve patient access through programs such as ambient scribe, automated discharge summaries and autonomous professional fee coding in various pilot programs. Additionally, we have increased back-office AI automation, which is improving productivity and consolidating third-party spend to reduce costs. For example, we have almost doubled or more the productivity of our Conifer analytics team. As we look forward, we are actively identifying and piloting agentic workflows to transform further business processes. So far, our work has enabled us to more than offset the expected and unexpected headwinds that arose in the quarter. Regarding full year 2026 guidance, as in prior years, at this time, we are not addressing the underlying outperformance in our business units during the first quarter. We're pleased with our year-to-date performance, we're reaffirming our full year guidance, and we'll address our expectations for the full year in the future. As a reminder, after normalizing for the non-recurring items that were reported in 2025 in the first quarter of '26 and excluding the headwind from the expiration of the premium tax credits, our 2026 adjusted EBITDA is expected to grow at 10% at the midpoint of our range. And finally, we continue to see significant opportunity to utilize share repurchase at our current valuations. We repurchased 1.35 million shares for $318 million in the first quarter of 2026 and expect to continue to deploy capital for share repurchase over the balance of the year. In conclusion, we adapt to the environment, focus on strong clinical quality recommit to helping our doctors have an easier environment to operate in and focus on delivering reliable earnings in this transitionary period. Our balance sheet is strong, and our diversified asset mix with a focus on ambulatory care gives us a significant strategic advantage in the market as we look ahead. And with that, I will turn it over to Sun for more details. Sun? Sun Park: Thank you, Saum, and good morning, everyone. We had a nice start to the year in the first quarter of 2026, generating total net operating revenues of $5.4 billion and consolidated adjusted EBITDA of $1.162 billion. First quarter adjusted EBITDA margin was 21.6%, driven by disciplined operating expense management, including good progress on the expense initiatives that we outlined last quarter. I would now like to highlight some key items for both of our segments, beginning with USPI. In the first quarter, USPI's adjusted EBITDA was $484 million, with adjusted EBITDA margin at 36.7%. USPI delivered a 5.3% increase in same-facility system-wide revenues with net revenue per case up 5.6%, and same facility case volumes down 0.3%. As Saum noted, volumes were impacted by the winter storms early in the quarter, and while we were able to reschedule many of the procedures, there was an overall impact. Turning to our Hospital segment. First quarter 2026 adjusted EBITDA was $678 million, resulting in an adjusted EBITDA margin of 16.7%. This represents 27.5% of our expected full year '26 adjusted EBITDA. Same-hospital inpatient adjusted admissions rose 0.6% in the quarter and were impacted by a decline in respiratory admissions of 41% compared to first quarter '25. This driver represented a 90 basis point reduction in admissions growth in the quarter. Revenue per adjusted admissions declined 1.5% year-over-year in the first quarter '26 due to the impact of reduced exchange volumes within our overall payer mix and the year-over-year impact of the $40 million favorable out-of-period supplemental Medicaid revenues that we reported in the first quarter of 2025. Exchange revenues represented about 6% of consolidated revenues in the first quarter of '26, a 9% decline from first quarter of '25. Our consolidated salary, wages and benefits was 40.5% of net revenues in the quarter, consistent with our performance from the prior year despite the net revenue headwinds, demonstrating our ability to flex our operating model. Overall, operating expenses per adjusted admissions were also favorable to our expectations, which contributed to our outperformance in the quarter. In the first quarter of '26, we recognized a onetime approximate $40 million favorable revenue adjustment as a result of the completed Conifer transaction. This amount was included in our original guidance. And I would also note that this adjustment is not included in our revenue per adjusted admission calculations. We recorded supplemental Medicaid revenues of $304 million in the first quarter of '26, consistent with what we assumed in our guidance. Importantly, we did not benefit from out-of-period supplemental Medicaid revenues related to prior years in this quarter. We're pleased with our ability to manage through the various dynamics throughout our first quarter and feel we have the ability to deliver on our commitments over the balance of the year. Next, we will discuss our cash flow, balance sheet and capital structure. We generated $978 million of adjusted free cash flow in the first quarter. And as of March 31, 2026, we had $2.97 billion of cash on hand with no borrowings outstanding under our line of credit facility. Additionally, we have no significant debt maturities until late 2027. And finally, during the first quarter, we repurchased 1.35 million shares of our stock for $318 million. Our leverage ratio as of March 31, '26, was 2.24x EBITDA or 2.83x EBITDA less NCI, driven by our strong operational performance and financial discipline. We remain committed to maintaining a deleveraged balance sheet and believe that we have significant financial flexibility to support our capital deployment priorities and drive shareholder value. Let me now turn to our outlook for 2026. As Saum noted, we are not making any adjustments to our full year 2016 outlook at this time. While we had strong fundamental outperformance in the first quarter, have continued confidence in our ability to achieve our full year targets, it is early in the year, and we will plan to revisit our full year guidance as needed in subsequent quarters. As such, we are reaffirming the full year '26 guidance that we initially provided in February. Our outlook continues to exclude any contributions from potential increases in supplemental Medicaid programs that have not yet been approved and finalized by CMS. For second quarter '26, we expect consolidated adjusted EBITDA to be 24% to 25% of our full year consolidated adjusted EBITDA at the midpoint. We expect that USPI's EBITDA in the second quarter will also be 24% to 25% of our full year '26 USPI EBITDA at the midpoint. Turning to our cash flows for '26, we continue to expect adjusted free cash flow after NCI in the range of $1.6 billion to $1.83 billion. This range includes the payment of about $150 million in tax payments for the Conifer transaction this year. Excluding these tax payments, this would represent $1.865 billion of adjusted free cash flow after NCI at the midpoint of our '26 outlook. We remain focused on strong free cash flow conversion from our EBITDA performance, including the continued outstanding cash collection performance of Conifer, while continuing to invest in high-priority areas of our businesses. Turning to our capital deployment priorities. We are well positioned to create value for shareholders through the effective deployment of free cash flow. First, we will continue to prioritize capital investments to grow USPI through M&A. And as Saum noted, we have had a strong start to the year and have a number of future opportunities to support our $250 million annual target for USPI M&A. Second, we expect to continue investing in key hospital growth opportunities to fuel organic growth, including our focus on higher acuity service offerings. Third, we'll continue to be active in share repurchases. We continue to see significant opportunity at our currently compressed valuation multiple. And finally, we will continue to evaluate opportunities to retire and/or refinance debt. We are pleased with our strong start to the year and remain confident in our ability to deliver on our outlook for 2026. We continue to execute our strategy across our transformed portfolio of businesses resulting in a more predictable, more capital-efficient company that is well positioned to drive value through effective capital deployment. And with that, we're ready to begin the Q&A. Operator? Operator: [Operator Instructions] Our first question comes from Ryan Langston with TD Cowen. Ryan Langston: Payer denials this year appear to be broadly accelerating across the industry. Are you seeing this activity increase in your business? And maybe is it more MA versus commercial? And is the rise in uninsured -- or uncompensated care you're seeing primarily related to the exchange subsidy expiration, or is there anything else you could call out there? Saumya Sutaria: Yes. Thanks for the question. Payer -- I mean, denials, I would say, payer disputes, many of which can result in denials and back and forth are are high. They have been high, as I've said before, they're too high for what is appropriate, especially when comparing back to kind of pre-pandemic periods just as a marker. I don't think that in our business, we have seen a net impact of disputes and denials changing in this quarter relative to before, so meaning last year. So look, they're high, they have been too high, but we don't see a meaningful trend this quarter that's different. We can only guess obviously with the slight increase in uncompensated care that some of it has to do with the expiration of the exchange subsidies. Operator: Our next question comes from A.J. Rice with UBS. Albert Rice: If I look at the last number of quarters, there's been consistency of outperformance in the hospital segment overall. I wonder if you could talk maybe broadly because we haven't talked about markets in a general sense. Is there -- are there some markets where you've implemented strategies that you'd call out that have been particularly successful. And as you look across the portfolio, maybe discuss some markets that still have an opportunity for significant improvement as you deploy new strategies to improve their performance. Saumya Sutaria: Thanks, A.J., and I appreciate you calling out the strength of the hospital business over the last few years. We have been focused on a broad strategy of obviously increasing acuity focusing on our ability to succeed with our transfer centers, adding new surgical programs and increasing our emergency-related services, especially trauma programs and other things. And in a combined sense, that is a -- it's a global strategy. I mean, implemented locally, but we have opportunities and are implementing in every market that we have. As you're aware, based upon the portfolio shifts that we made, we remained in markets in which we thought the execution of our overall strategy would be successful. No, look, there are things like, for example, enrollment in the exchanges that differ state to state and what the impact will be. So there are some differences there in terms of what's happening, in terms of throughput and other things that it may impact even the uninsured piece. But if you step back and now sort of with my commentary today, which is that we're in this transitionary period, where there's some coverage changes that are occurring. We'll see how all that settles out. But when you look at the opportunity to find efficiencies, you look at the support services for the hospitals, and you look at some of the automation opportunities that I described. Once again, those are available in each market. Of course, some markets are bigger than other markets. So at a dollar level, you might get more impact in one market than another, but they're scaled appropriately and are available in each of the markets. So if you look at our earnings in the first quarter this year, they were driven by consistency across our markets in terms of the efficiency opportunities. Look, the other thing I would point out is just good old fashion discipline around flexing our cost structure. We kind of knew early in the year by the time we had given guidance that one of the winter storms that already come through, and we were able to maintain our SWB as a percentage of our top line by flexing even though the revenues were going to be a little bit more challenged. So some of this is just continuing to maintain the old-fashioned -- "old fashion" discipline of anticipating and flexing intraorder, which, of course, is also an opportunity available in all markets. I hope that helps. Operator: Our next question comes from Jason Cassorla with Guggenheim Partners. Jason Cassorla: I wanted to go back to your prepared remarks around your efforts around length of stay and throughput improvements you're clearly seeing the benefits there given length of stay has been down about 3% in each of the past 6 quarters by our math, but that improvement is coming despite your high acuity service line focus, which would naturally carry a higher length of stay. I guess could you just double a little bit more on the length of stay opportunity for you and what that run rate looks like as you move through the rest of the year and beyond? Saumya Sutaria: Yes. No, I appreciate the question. And you're right that the two are actually coupled in an interesting way, which is in order to maintain available capacity to always service the high acuity needs that arise in the community, whether from direct arrival at our hospitals or for outlying hospitals that might need help or support, which we always try to say yes to you have to make sure that your throughput and capacity management is good enough to have the availability of beds to be able to say yes, for those things. And so we see the two being very intricately linked in terms of a requirement to succeed in the high acuity strategy. Now look, you're right that as the acuity goes up, there's a length of stay headwind that does come with it because the cases are more complex and and longer. But look, we're pleased with the fact that we are managing that overall length of stay to something better than even breakeven in terms of our reported length of stay because that's creating capacity in our hospitals. And I would remind everybody that part of the strategy, of course, is capital avoidance on additional capacity that's really not necessary when you can improve productivity that way. So again, for us, all these things are intricately linked and look, we're pleased that some of these new tools that we're trying out are helping to add to our more traditional length of stay management that we've talked about over the last 4 or 5 years. Operator: Our next question comes from Brian Tanquilut with Jefferies. Brian Tanquilut: This is a tough quarter, so congrats on beating that [indiscernible] line. Maybe just on the Medicaid side. A lot of your peers have spoken about Medicaid trends, whether that's immigrants not land paperwork. And just curious, what are you seeing in the Medicaid book? And as we've seen uncompensated care step up here, which was across the space, right? How much of that is Medicaid versus maybe exchange members versus other dynamics? Saumya Sutaria: Yes. No, I appreciate it. And obviously, it's somewhat speculation. But I guess we sort of speculate based on our markets. So I'll be a little bit careful of how sure I am in my answers, but I would say that, look, Medicaid is down a little bit, and we see a little bit more of that in places like California, that does suggest that some of what's happened is either disenrollment or lack of renewal of enrollment with populations that may not have been qualified to begin with based upon at least federal regulations, so that's one fact point that we see. The second question that has been out there, especially because we are in a lot of important border communities where we do a lot of work for the broader communities that are there. Look, we do see a little bit of hesitation at times with those populations. We partner a lot with the important FQHCs in those markets. And there's just kind of this tone of hesitation. The impact at the end of the day has been on the hospitals minimal because obviously, we're there taking care of people who are sick and have needs. But on the outpatient side, for people who are doing more primary care and other things in the community, we're hearing about a little bit more impact and certainly hesitation from coming into consumer care. Operator: Our next question comes from Scott Fidel with Goldman Sachs. Scott Fidel: I think my question probably ties to the last two. But I wanted to ask it from just the -- from the acuity and case mix perspective, overall for the -- for both the hospital and the USPI, how those rates look year-over-year? And maybe you could layer in on the tailwind side, the proactive service line expansions and investments that you've made on higher acuity and then on the headwind side, obviously, some of these dynamics or dynamics relating to the dynamic environment that we saw in some of the end markets in the first quarter. Saumya Sutaria: Sure. Well, let's start with USPI. I mean there's no question there about the increase in acuity. I mean, I called out -- I mean, we've had -- we obviously are on the outpatient side, probably the largest single provider of outpatient joint replacements when you collectively look at almost 570 assets at USPI, many of which do orthopedics. And we're still posting double-digit growth in total joint replacement surgeries within the ASCs and off of a pretty high base. So it just suggests that demand is out there, right? If you create the right operating environment for these surgeons and give them an efficient safe way to do the work, the demand is out there. And so we continue pushing in our high acuity strategy. I mean you can see it in the revenues, and when you add to that as you asked for other service lines, the types of things we're doing in urology, the types of things we're doing in robotics, we're probably up to over 150 robotic surgery programs in the ASCs that are general surgery based. Those types of things are growing quickly. I mean the only services that are declining are the high-volume, low acuity areas, which is, as we've said, we're less focused on in this diversification path. So again, in summary, on the USPI side, the acuity is growing. The case mix is improving in the direction we want to. We have a good number of service line starts and physician additions. The assets that we're acquiring are also supportive more of the service line strategies that we're interested in. And our de novos that we open will also have the opportunity to do this type of higher acuity work. So I would say that, that looks very good. On the hospital side, the journey that we've been on is obviously -- I mean, we made this decision in the very early part of the pandemic. It's been 5 years that we've been really pushing this high acuity strategy. And you see it in the CMI, the margins, the net revenue per case, all of that. This quarter obviously has some differences that Sun can go into in terms of the comp to the first quarter last time with a bunch of onetime items. And look, the CMI for the first time, was down a little bit, but this is temporary, right? We had some weather-related issues. We had some -- we certainly had a decline in the intensity and volume of the respiratory business. But as I said, we made up for that significantly by flexing and also by focusing more on some of our other type of work in the hospitals. And I think the quarter ended up fine. Like I don't think anything changes going forward just because there was one quarter with significant respiratory impact. Operator: Our next question comes from Craig Hettenbach with Morgan Stanley. Craig Hettenbach: On the back of the $125 million invested in USPI in Q1, really strong starts to the year. Saum, can you just talk about the M&A engine what's working and also just context of why a tenant might be a preferred acquirer of choice out there in the marketplace? Saumya Sutaria: Yes. Well, I mean, I think what's working fundamentally what's working is that USPI has just got a multiyear track record of acquiring assets, adding value to them, both clinically our quality performance is consistent. Our ability to bring these facilities in network and do well is consistent our broad-based an ongoing supply chain and purchased services agenda helps to reduce costs and create efficiencies. And then our business development team is terrific in helping these centers oftentimes go from single specialty to multispecialty or help them design their OR operations if they're already multi-specialty to be able to do those more efficiently, as I've always talked about, right, the ability to do kind of "dirty and clean surgery" in the same center with the right protocols and the right scheduling. I mean all of these things are things that we work on consistently, but we're just ahead in the market when it comes to executing on these things. And I think physicians know that, I think many of the MSOs that we partner with know that, the health systems that we partner with not only know that, but because of the expertise of some of these health systems, they contribute actively to our quality improvement agenda and other things, I mean Baylor, Memorial Herman. I mean these guys are experts in many of these areas, and they contribute actively to the partnership in USPI to make those improvements. So look, I think all of those things has created a nice virtuous cycle of reputation enhancement as we do these things, and we deliver on what we say we're going to do. So we're still very selective. Our diligence processes are robust. We still say no to more centers than we say yes to. And that's fine because we still think that the opportunity for high-quality ASCs supports USPI's growth algorithm. Operator: Our next question is from Justin Lake with Wolfe Research. Justin Lake: Just a couple of numbers questions for me. First, your guidance assumes $250 million of exchange impact for the year. I apologize if I missed it, but do you have a number for the quarter maybe relative to what we would have thought maybe is a $60 million, $65 million run rate? And then on DPP, in your slides, you talked about $22 million to the DPP down $22 million for the year. I'm curious, does this include the $40 million decline because of that period so that you were actually up [ $18 ] million excess. Saumya Sutaria: Good question. Sun, do you want to take those maybe in reverse order. Sun Park: Yes. Justin, it's Sun. Yes, you're right on the DPP question. That includes the $40 million. So if you normalize for that for '25 out of period, then it would be a slight increase. So you're correct. On the [ HICS, ] we mentioned that exchange revenues in Q1 were about 6% of our consolidated revenues as a comparator in Q1 of '25, it was about 6.5% of our consolidated revenues. So if you kind of do the [indiscernible] a 9% to 10% decrease in revenues versus Q1. So I would say it's roughly at half of kind of the overall 1 year kind of 20% reduction in volumes that we kind of talked about in February. And we do expect with all the dynamics around kind of the first quarter and the grace period with some of the enrollees or re-enrollees that I think our guidance range of kind of 20% reduction and $250 million overall impact is still pretty consistent. Operator: Our next question comes from Kevin Fischbeck with Bank of America. Kevin Fischbeck: Yes. I guess two questions. One, maybe following up on that one. So the Q1 impact is lower. Is that how -- is it lower but in line with what you thought Q1 would be because you always assumed it would ramp? Or was that potential area of the outperformance? And then you talked a little bit earlier about flu. I know one of your competitors had a pretty high margin decremental margin on lost volume in Q1. It sounds like you did a better job flexing costs. Any way to kind of size what you think the EBITDA impact was to both USPI and the hospitals from the flu and the weather disruption. Saumya Sutaria: Yes, it's Saum. I can take the latter part of it. I mean I don't know about flu specifically, but just I mean we look at respiratory ER traffic, admissions and other things. And similar to what we've heard, for example, respiratory admissions were down like 40% in the quarter. and it had an earlier effect. I mean, if I look at the quarter, January to February to March, things improved steadily month-over-month, week-over-week almost. So that by the time we were in March, in the early to middle part of March, we had a keen sense that the revenue and admission and volume intensity was increasing, but because we had kind of anticipated the impact early in the quarter, we had already done some of our cost flexing. And then, of course, as we talked about, previewed on our fourth quarter call, we had developed a more systematic type of cost agenda in the second half of 2025 that we executed that added to our savings. And so just -- it created a situation in which the anticipation of the need to flex plus other cost improvements plus the month-over-month improvement during the quarter, allowed us to outperform in the hospital segment, what our expectations were despite some of these headwinds. I -- in terms of what our expectations were. I mean we had sort of made a simple linear assumption. I would say that the outperformance in the quarter in the segment is a combination of the two things, one being the cost management and efficiencies; and two, being that the first quarter exchange impact was probably a little bit less than at least a simple linear assumption for the full year. Operator: Our next question comes from Ann Hynes with Mizuho. Ann Hynes: Maybe we can shift to the Washington outlook. Is there anything that you're paying attention to on the regulatory and legislative outlook, especially on the regulatory with the upcoming outpatient rule. Is there anything that we -- that is on your radar screen that we should be aware of? Saumya Sutaria: Sure. I mean, obviously, the -- we're keenly awaiting the outpatient rule, especially given the type of policy commentary that's been coming out of CMS, HHS, broadly and CMS supporting care in lower cost settings. And one of the ways to help that, of course, is to provide robust or more robust outpatient rate support relative to what was sort of as expected, but nothing incredibly positive on the IPPS side. So we're looking forward to seeing that. I would tell you, other than the commentary they're making, I don't have any proprietary insight to share. We, of course, have been following all of the discussion and commentary about the various parts of the sector. And look, from our perspective, we're just trying to stay on the right side of the value equation, having efficient health systems being accessible at all times, efficient in what we're doing and obviously providing surgical care at scale at half the cost sometimes of what it is to do the same work in a hospital. So with USPI, I mean. So look, I think all of those things we feel like we're well positioned as we look ahead. I mean I -- if you really look at USPI, and I know this question was asked maybe as a sub-question earlier by Kevin, USPI had an even cleaner quarter despite all the noise because it's the weather impact was there, but you don't really see that much of an impact from the exchanges or Medicaid in that business, as we've pointed out before. Operator: Our next question comes from Pito Chickering with Deutsche Bank. Pito Chickering: Looking at -- back to hospitals at your first quarter, I understand that there's $22 million of loan payments, offset by recoveries of $40 million this quarter. But when we normalize sort of the margins, sort of get to, I guess, the 15% range is generally where your guidance is. And if I think about margins for hospitals, generally, they the year is better than just the first quarter because of the strong fourth quarter. So I guess, can you just walk me through how we should think about the hospital margins with 1Q, excluding the $40 million as a bridge into the rest of the year? Saumya Sutaria: Well, I'll start on, if you want to add that. I mean, look, I think that if you come back, step back to our guidance for the year, which is in the Hospital segment, a 10% normalized year-over-year growth which there was obviously some discussion and dialogue about when we put it out there. We feel very confident that we're on track to that. Now some of that's going to be margin improvement. Some of that is because we had visibility from our work in the second half of 2025, which was going to be expense management, execution of expense management initiatives that we were designing this year that we would see benefit this year from and obviously a enhancing. So I don't know that the algorithm is exactly like it would be in a normal year. The respiratory volume impact in Q1 is a headwind to margins because those tend to be capacity filling and margin accretive, we overcame that, and as we sort of return to normal operations, plus have a year where we are executing on a broader efficiency strategy. I would say that we think that this year's performance will support margin growth in the Hospital segment. I don't know if you want to add to that. But like we feel very confident about the balance of the year. Sun Park: Yes, I think that's right. The only thing I would add, Pito, is if you kind of just look at our Q1 hospital margin of 16.7%, you're right, we should normalize for the onetime [indiscernible] for $40 million. And then the only other thing I would mention is, like we said, the exchange impact likely sort of grows over the rest of the year from what we had in Q1. So that probably damps down margin a little bit on a run rate basis. But when it's all said and done, as Saum said, kind of a year guidance, of sort of 15% implied margins, I think that's still right on our expectations. Pito Chickering: I mean on the impact, I get the guidance that you've given virtual in the first quarter, but the uninsured payer mix declined year-over-year in the first quarter, I thought that would have been increasing. So I guess, how does that fit within that [ HICS ] guidance you guys have provided. Saumya Sutaria: Well, I mean, look, I think we should watch and wait, right? I mean effectuation rates and other things are important to track the first quarter often is a relief valve for payment premiums and other things. So I would say we watch and wait. From our perspective, the way we think about this year is anticipate that the challenge could increase and plan accordingly in a disciplined way to manage to the earnings guidance that we have given. I mean, if -- obviously, if the impact is less or if the uninsured impact doesn't increase as much. Those are all opportunities for outperformance for us. I mean, I would just reiterate, we're not spending a lot of time thinking about downside risks right now. We're spending our time thinking about how the strategy in both segments plus our expense opportunities plus how this exchange uninsured Medicaid market plays out could create upside opportunities for us. That's where our mindset is right now after this quarter. Operator: Our next question comes from Whit Mayo with Leerink Partners. Benjamin Mayo: I just wanted to hear more about the reserving and revenue recognition for the exchange patients, what the underlying estimates are for attrition and maybe what the exit rate on the decline in volumes was within March. Sun Park: Hey, it's Sun. Listen, I think on a -- on your first question, we obviously pay through Conifer, very close attention, patient by patient, if we can, on their ex coverage status, premium payment status, all those details that you would imagine. And I think, again, we'll review this as the year develops and we get more data. But I think we're very appropriately reserved on our overall patient population, right, including [ HICS. ] And that sort of speaks to kind of the numbers that we shared in Q1, where admissions were down, as we said, 9% and if you do the algebra, I think revenues from [ HICS ] is down probably 9% to 10% as well. So it's sort of 1:1 is where we're sitting. So I think we're in a very reasonable situation there. And then like we said, we'll continue to observe the sales go. From a month-over-month trend perspective, I mean, our overall volumes, not just fix but overall, improved through the course of Q1 coming into March, which, again, I think, gives us some confidence into our rest of your guidance. On [ HICS, ] I don't know that there's any trends that we would point out. I think in January being sort of a great period for a lot of the enrollees, I mean I think that did help January numbers somewhat. But again, I think it's too early to kind of have any trend discussions. Operator: Our next question comes from Stephen Baxter with Wells Fargo. Stephen Baxter: I wanted to ask about the same-store revenue per admission decline of 1.5 points in the first quarter. I guess we do have a lot of moving parts with some of the Medicaid changes you discussed and also the exchanges. But on the other hand, you also have less flu, which I think would trend to push up some of those metrics. I hope to just get a better sense of some of the moving parts that impacted that metric? And then maybe a direct comment on what you're seeing on commercial and whether that's a headwind in the quarter that assume gets better through the balance of the year. Saumya Sutaria: Yes. I mean, why don't we should probably just start with the comp from the prior year and then the math because it's -- for us, it really wasn't that worrisome so. I don't know if you want to just walk through that perhaps. Sun Park: Yes. I think just on a popular [indiscernible] basis, I mean, we said NRAA was down 1.5% in the Hospital segment. A lot of that between the $40 million of [indiscernible] Medicaid, we run out in Q1 that we didn't have in Q1 of '26, and then the reduction in [ HICS ] that, as we talked about, presumably moved volume into uncompensated or other payer classes. Those two combined, I think, was worth 2% to 2.5% of NRAA headwind. So once you normalize for that, we're sort of at 50 bps to 1%. Then I think there are some other moving parts that we talked about. Tom, I don't know if you want to comment directly on flu. But yes, I think flu impacted our emissions, but in the scheme of our total adjusted admissions base and our net revenue base, it's a relatively small component. So whether or not flu was there not, I don't know that impacts NRAA that much. Saumya Sutaria: Yes. I mean the only other thing I would add is clarifying point, but also the onetime Conifer $40 million that we announced, even though it was part of the hospital segment, we excluded that in looking at the NRAA because that's appropriate. It wasn't related to the case volume. But just in case anybody is looking at the math that way. So I mean, in summary, look, I would say the biggest driver was the [indiscernible] period thing, and we had a very high NRAA in 2025 back to what my overall commentary. The acuity strategy is working very, very well, and we're not worried about it. And obviously, it did not have an impact. In fact, it was the opposite, we outperformed on the earnings despite the revenue, which is just right now, a marker of the flexibility and operating discipline, I think, that's required in this environment as things settle out. I suspect in the coming months and when we talk again, we'll probably have a lot more insight into how I sense that the desire for predictability, how the exchange market and uninsured at Medicaid will settle out for this year, which will give us a much better opportunity to kind of update our guidance for the year based upon the outperformance so far. Operator: Our final question is from Andrew Mok with Barclays Bank. Andrew Mok: You mentioned that 8 volumes were down 10%, and you had expected unfavorable payer mix. But when I look at the managed care mix disclosure, it actually looks relatively stable year-over-year. So can you help us understand what you saw on payer mix inside of that, including the moving parts on the government side. Sun Park: Hey, Andrew, it's Sun. -- sorry, go ahead, Saum. Saumya Sutaria: No, you go ahead, please. Sorry. Sun Park: Yes. Sorry. I was going to say, Andrew, yes, we did see the 10% reduction as we talked about. But I think your question on the rest of managed care sorbent that. One reminder, when we report managed care, we also include managed Medicaid and managed Medicare in that component. So I think we saw a reasonable strength in so the payer mix is, to your point, it remains to be stable as a percent of total revenues. So I think that did offset the [ HICS ] impact a little bit. Again, we'll see. I think Q1 in terms of payer mix trends, we were happy with, but I think there's some more trending and data that we need to see into Q2 before we can make some more detailed comments. Saumya Sutaria: And the only qualitative thing I was going to add there was just -- look, I think that as people come off the exchanges, they find different employment and other things, especially those that need health care have family they need to cover. We do think there's going to be some percentage of them that obviously pick up commercial coverage, and we've talked about that before. That's good. And then we did have strength in Medicare. I mean, we do a lot of work on appropriate utilization, appropriate admission rates from the ER appropriateness of interfacing with these plans on Medicare Advantage. And we have strength in the Medicare side in addition, which, again, is consistent with our acuity strategy given what these patients need. So I appreciate what you're seeing in those metrics. It does look better than I would have expected based upon the theory of the case of what could have happened with the exchanges. And again, it's just -- for us, it just all goes to the point that the trend line in Q1 of the type of headwinds was more mitigated than the simple straight-line assumption for the year. And again, we're pleased that it helped drive outperformance rather than a headwind we couldn't catch up to. Operator: We have reached the end of the question-and-answer session, and this concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Thank you for standing by. My name is Liz, and I'll be your conference operator today. At this time, I would like to welcome everyone to the DTE Energy First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Matt Krupinski, Director of Investor Relations. Matt Krupinski: Thank you, and good morning, everyone. Before we get started, I'd like to remind you to read the safe harbor statement on Page 2 of the presentation, including the reference to forward-looking statements. Our presentation also includes references to operating earnings, which is a non-GAAP financial measure. Please refer to the reconciliation of GAAP earnings to operating earnings provided in the appendix. With us this morning are Joi Harris, President and CEO; and Dave Ruud, CFO. Joi Harris: Thanks, Matt. Good morning, everyone, and thank you for joining us. I'm happy to be with you today. I'll start by saying 2026 is off to a strong start, and that momentum gives us confidence in delivering an exceptional year for all of our stakeholders. As we have said before, our success begins with our team. We have a highly engaged organization that's executing extremely well. Our team is focused on doing what's right for customers and communities. And that strong employee engagement really shows up in our performance. A great example is our team's response to a couple of large storms we experienced in the first quarter. During a January weather event, the team restored 100% of impacted customers within 48 hours. And during the March storm, a more significant event, we restored service to over 99% of the customers within 48 hours. This kind of performance reflects the commitment, preparation and pride our employees taken their work. I'm incredibly proud of how our team continues to show up for our customers when it matters most. We continue to execute our customer-focused capital plan that strengthens the grid and improves reliability. These investments are essential to enhance the grid to support our customers and they're being made with a clear focus on customer affordability. That focus is reflected in our recent rate case filing, where we are targeting investments that drive the highest impact while carefully balancing customer affordability. Turning to data centers. We continue to see great progress. The 1.4-gigawatt Oracle data center included in our plan is approved and construction is underway. We've also executed an agreement with Google to serve a 1-gigawatt data center. This project represents incremental upside to our current long-term plan and the contract has been submitted to the MPSC IV approval. Beyond Oracle and Google, we continue to have constructive discussions with other potential customers. As those conversations progress, they represent additional upside to our capital plan over time. It's also important to highlight that this data center growth provides real affordability benefits to our existing customers. These large loans help spread fixed system costs over a broader base. And because these data centers use so much power, they absorb a significant portion of these costs, which will provide meaningful benefits to existing customers as these lows ramp. As I've said, -- we are off to a great start in 2026 and well positioned to achieve the high end of our operating EPS guidance. We are confident in our long-term operating EPS growth rate target of 68% through 2030. We and we remain confident in our ability to reach the high end of our guidance range in each year, driven by R&D tax credits and the flexibility they provide. The Google data center project and other data center opportunities provide upside to this plan. Let me move to Slide 5 to highlight our improvements in reliability. We delivered meaningful reliability improvements in 2025 driven by a combination of strategic infrastructure investments, targeted process improvements and more favorable weather conditions. From 2023 to 2025, we achieved a 90% improvement in outage duration, reflecting both stronger system performance and faster restoration. We recorded our best all-weather SAIDI performance in nearly 20 years, underscoring the impact of our sustained focus on reliability and placing us in the top quartile of utilities nationwide. Last year, we restored 99.9% of impacted customers within 48 hours, demonstrating continued improvement in storm response and operational execution. That momentum has carried into 2026 and as we continue to successfully execute our reliability strategy. Earlier, I mentioned the strong storm response our team delivered during the first quarter. That performance was on full display during the March storm when we experienced wind gust of more than 70 miles per hour for a sustained period. About 300,000 customers were impacted, and thanks to dedication and hard work of our crews, nearly all customers had power restored within 48 hours. When we look back at a similar storm several years ago, the progress is clear. That earlier event which was a little less severe, impacted more than 750,000 customers and restoration took significantly longer. The improvements we're seeing today reflect years of targeted investments, improved processes, and the commitment of our employees. This work continues to make a meaningful difference for our customers through less frequent outages, faster restoration and improved reliability and demonstrates that when we invest, it works. We are continuing our efforts to modernize our electric distribution system, including the installation of smart grid devices to improve outage detection and restoration times. We are also maintaining a disciplined focus on pole-top maintenance, executing a robust treatment program and advancing the ongoing rebuild of the 4.8 kV system, all of which are critical to long-term reliability. And those initiatives are already translating into measurable results. We remain on track to achieve our long-term goals of reducing the number of power outages by 30% and and cutting outage duration in half by 2029, reflecting our commitment to sustained improvement. Let me move to Slide 6 to provide an update on data center development. We continue to make steady progress executing and finalizing contractual agreements needed to support data center growth. The Oracle contracts are approved and construction is underway. -- with load ramping over the next several years. The growth is supported by existing capacity and planned energy storage and the contracts are structured to ensure Oracle will cover the full cost of energy and capacity they need while also providing significant affordability benefits to our existing customers. Our project with Google also continues to advance. The contracts have been filed with the MPSC for approval, and we expect their low to fully ramp by the end of 2028. The low ramp is supported by a balanced mix of resources, including renewable generation, energy storage, demand response and additional longer-term generation that will be identified through the IRP process. As a result, meeting Google's capacity needs could drive roughly $5 billion of incremental generation and storage investment through 2032. The Importantly, these investments are supported by contracts that protect existing customers. We have a 20-year power supply agreement with minimum monthly charges combined with a separate clean capacity acceleration agreement that covers renewable and storage investments. termination provisions, combined with credit and collateral requirements, are designed to protect existing customers and support affordability. This means that Google will cover the full cost of the energy and capacity they need while also providing affordability benefits to our other customers. Beyond these 2 projects, we remain highly engaged with additional data center opportunities. We're in advanced discussions that could represent roughly 2 gigawatts of incremental load with additional projects in our pipeline that could add another 3 to 4 gigawatts over time. Importantly, we also expect additional demand as these customers continue to expand once they are on the system. Collectively, these opportunities require investment in new baseload generation, renewables and related storage with the exact resource mix and timing to be refined through the IRP process. Overall, we see our strong pipeline continue to advance, with disciplined execution that delivers growth while remaining focused on reliability and affordability. Let me move to Slide 7 to describe the benefits these data centers provide and discuss our continued commitment to customer affordability. These data center projects bring on large steady load that helps spread fixed system costs and create meaningful affordability benefits for our existing customers. Once fully ramped, Oracle is expected to drive about $300 million of annual benefits to our existing customers, while the Google data center is expected to generate roughly $1.7 billion of benefits over the life of the contract. These savings strengthen our affordability story, complementing the strong continuous improvement culture that we have developed over the years. Continuous improvement is part of how we operate every day. and it underpins our ability to consistently deliver strong reliability while managing customer affordability. We've executed our investment plan with discipline while remaining highly focused on affordability for our customers. As the chart illustrates, our average annual bill increases over the past 4 years have been well below the national average and the Great Lakes region. One of our biggest sources of customer value is how we're using new technologies. Advanced analytics are driving efficiencies, lowering cost and improving maintenance and storm response. Delivering customer-focused efficiencies through technology remains a top priority for our team. Our transition from coal to natural gas and renewables is also reducing O&M costs and the tax credits available under the Inflation Reduction Act helped to make our clean energy investments more affordable for customers. Today, the typical residential electric bill represents less than 2% of the median household income, and our residential bills are 18% below the national average. We also continue to expand energy assistance for our most vulnerable customers delivering millions of dollars in energy assistance and donating significantly to support nonprofits across Michigan. Overall, we are well positioned to sustain our historical success in managing customer affordability while continuing to invest in the grid and support long-term growth. Let's turn to the next slide and walk through our regulatory strategy and the benefits we are delivering to our customers. Our electric rate case filing is an important step in supporting customer-focused investments in system reliability and grid modernization while continuing to manage affordability.. This rate case filing is predominantly driven by our distribution infrastructure investment plan, which is squarely focused on improving reliability and consistent with the recommendations from an electric distribution audit completed in 2024. This plan is focused on achieving our goal of reducing the frequency of power outages by 30% and and cutting outage duration in half by 2029. As part of this filing, we're requesting nearly $800 million of distribution investments to be incorporated into the IRM by 2030. This would support consistent, predictable infrastructure investments for our customers and could help delay future rate case filings. Our data center agreements are thoughtfully structured to enhance affordability and protect our customers -- as I have already highlighted, these contracts deliver significant affordability benefits with strong safeguards in place. As the loan from these projects ramp -- it creates the potential to extend the timing of our next DTE Electric rate case filing, delivering the benefits to our existing customers from these growth opportunities while we continue to invest in improving reliability. We have proposed a regulatory mechanism in this current case to capture any excess margin from the Oracle load ramp above what we have included in our filing. If the Oracle load ramp comes online by the end of 2027, and we receive other required regulatory approvals, we will refrain from filing another rate request until at least 2028. Looking longer term, our IRP will provide clear visibility into how we will serve growing demand, including the significant data center load. The IRP will lay out our approach meeting long-term generation and capacity needs with the filing expected in the third quarter of 2026. This is a transparent process that allows us to identify the most effective and affordable way to serve customers over time. Taken together, these efforts reflect a coordinated, disciplined approach to growth, combining thoughtful regulatory filings well-structured large load agreements and long-term resource planning to support reliability, affordability and visibility for our customers. So to wrap up, we're off to a strong start in 2026. We're executing our plan, making critical infrastructure investments staying focused on affordability for our customers, delivering reliable, high-quality service to communities we serve and driving continued strong financial performance for our investors. With that, I'll hand it over to Dave. Dave, over to you. David Ruud: Thanks, Joi, and good morning, everyone. As Joi mentioned, 2026 is off to a really strong start, and we remain well positioned to achieve the high end of our operating EPS guidance this year. Let me start on Slide 9 to review our first quarter financial results. Operating earnings for the quarter were $407 million. This translates into $1.95 per share. You can find a detailed breakdown of EPS by segment, including a reconciliation to GAAP reported earnings in the appendix. I'll start the review at the top of the page with our utilities. DTE Electric earnings were $218 million for the quarter. Earnings were $71 million higher than the first quarter of 2025. The main drivers of the variance were timing of taxes, rate implementation and colder weather partially offset by higher rate base and O&M costs. On the timing of taxes, if you remember, we called out a variance of negative $67 million in the first quarter of last year due to the timing of renewal projects being placed in service, which was a key driver of the variance for the quarter. Moving on to DTE Gas. Operating earnings were $210 million, $4 million higher than the first quarter of 2025. The earnings variance was driven by colder weather and IRM revenue, partially offset by higher rate base costs. Let's move to DTE Vantage on the third row. Operating earnings were $48 million for the first quarter of 2026. This is a $9 million increase from 2025, driven by higher custom energy solutions and steel-related earnings, partially offset by lower renewable earnings. On the next row, you can see energy trading earnings were $59 million lower than the first quarter of 2025. This was primarily driven by expected timing in the first quarter in the Power portfolio. We are highly confident in achieving the high end of the full year guidance range in Energy Trading as this timing reverses through contracted and hedge positions over the remainder of the year. Finally, Corporate and Other was unfavorable by $54 million, primarily due to the timing of taxes of $43 million and higher interest expense. Overall, DTE earned $1.95 per share in the first quarter of 2026, which positions us well to achieve the high end of our guidance range in 2026. Let me move to Slide 10 to discuss our balance sheet and equity issuance plan. We continue to focus on maintaining solid balance sheet metrics to support the significant increase to our capital investment plan that we need to execute for our customers. We are still targeting annual equity issuances of $500 million to $600 million in 2026 through 2028 with similar levels through 2030. We will continue to maximize the use of internal mechanisms, planning to issue up to $100 million internally. For our remaining issuances, we've established an equity ATM program to efficiently execute our funding plan. While those shares were issued under the ATM program during the first quarter, we have priced over $350 million of equity through forward sale agreements that we plan to settle later this year, which is about 2/3 of our full year target. Our 5-year plan fully incorporates the equity needs and continues to deliver 6% to 8% operating EPS growth with a bias to the upper end of guidance each year through 2030. Importantly, -- we remain focused on maintaining our strong investment-grade credit rating and solid balance sheet metrics as we target an FFO to debt ratio of approximately 15%. Let me wrap up on Slide 11, and then we'll open the line for questions. DTE continues to consistently deliver for all our stakeholders. Our 2026 guidance reflects operating EPS growth of 6% to 8% over our 2025 guidance midpoint and RNG tax credits give us confidence that we can deliver at the higher end of that range. Our 5-year plan provides high-quality, long-term 6% to 8% operating EPS growth through increased customer-focused utility investments, with utility operating earnings, making up 93% of our overall earnings by 2030. We are confident we will reach the high end of our guidance range each year, driven by RNG tax credits and the flexibility they provide. As we have stated, the Google contract and additional data center opportunities provide upside to our 5-year plan that will be incorporated after the contracts have been approved by the MPSC Overall, we are well positioned to execute our plan to improve reliability for our customers and strengthen the communities we serve. We're doing so with a strong focus on affordability, supported by multiple levers to manage customer rates including the significant benefits that data centers drive for existing customers, and we remain on track to deliver the premium total shareholder returns our investors expect, supported by a strong balance sheet and disciplined execution of our capital investment plan. With that, I thank you for joining us today, and we can open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Shahriar Pourreza with Wells Fargo. Shahriar Pourreza: Joi, I know you talked about the Google deal strengthening the 8% in the next deal, pushing you beyond 8%. I guess, first on Google and the status of the approvals. I mean, Michigan has been noisy. So I guess, how should we think about pushback given it is a contested case? What's been the feedback so far there? And what clarity would you need to put that into plan? Joi Harris: Well, thanks for the question, Shahriar. And the community is welcoming Google. So that makes this a really positive thing for the state. And we are seeing really, I think, positive comments in media about the Google contract. So we feel really good about what was filed. We are expecting to get an order in the September time frame, upturn be by September 10, at least that's what the contract specifies. And if you recall, the commission indicated that they're going to read the order, so there won't be a PFD. So that was a positive signal that puts us on track for that approval by September. So the community is welcoming. The narrative has been really good on the ground, and we feel good about to secure the contract. As we've said all along, that 3 gigawatts would get us to A+. And at least as Google contract has the potential to get us to 8, but we don't want to get ahead of the approval process. We're going to let this play out over the summer and into the early part of the fall and get that approval and keep moving forward. . Shahriar Pourreza: Got it. Perfect. That's consistent. And then just lastly, on the next deal announcement, are you still thinking sometime in that Q3 time frame and -- could we sort of see an update of that plan and the CAGR around the EEI time frame, embedding the next deal? I guess, how do we sort of handicap the next deal timing, et cetera? Joi Harris: Yes. I think we are targeting before the end of the year to have, I've always been consistent about that, having something done before the end of the year. And let me just say that we've got 2 gigawatts of hyperscalers that we are in late-stage negotiations. At least 1 of them has zoning already done. So we feel really good about that, and there's a pathway to zoning for the other. So the conversations are progressing quite well. In terms of the updates that we will provide as the contract is solidified, rest assured, we'll provide updates. Our approach will be to lay out our 5-year plan, no different than prior years during our third quarter call in -- and provided that we have any information or we solidify the contract at that time, we would incorporate it. But if not, it will show up sometime thereafter. . Shahriar Pourreza: Okay. Perfect. Big congrats guys. That's very consistent. Operator: Next question comes from the line of Michael Lonegan with Barclays. Michael Lonegan: So obviously, you highlighted you're pausing your -- you're potentially pausing your next electric rate case filing after the current 1 dependent on ramp-up of data center loan approval of regulatory items. So obviously, this is dependent on a constructive rate case outcome in the current case. I just wondering if you can share your assumption for a range of ROE and equity ratio outcomes in the case for that pause? And also how you're thinking about the IRM mechanism coming out of it. . Joi Harris: Yes. So thanks for the question. We enter every case with an expectation and belief that we'll get a constructive outcome, and that's what we've included in our planning assumptions. The investments that we have highlighted in case are all targeted towards the grid. -- which are necessary and also to transition to cleaner generation, and that's all underpinned by legislation. So we feel really good about the case that we put before the commission. The IRM is underpinned by our DSP and which is aligned with the Liberty audit that was completed in 2024. And this was a directive from the commission that we followed through on. So we feel very strongly about what we've put forward. And at least a clear understanding of how those investments are going to deliver value for our customers. In terms of ROE, what we requested is 10.25%. And then in terms of equity layer, -- we typically have included a 51% equity in our filing. And so we'll let this play out as we always do over the course of the next several months, we'll start to see staff and intervenor testimony and that will give us indications as to whether or not we're aligned with the commission, but we feel good about where we stand today. Michael Lonegan: Great. And then you got potential pause in electric, but shifting to gas, after the current pending case, when could we expect you to file the next gas rate case? Joi Harris: We're going to let this case play out. We did ask for an increase in the IRM, which was supported by the staff and their testimony, which is a really positive sign. We have some other large investments that we included in this case, which were supported as well. And this is all updating our transmission system and the gas business. So that's really, really positive for us. And once we get the final order, we'll determine the next filing cadence. Operator: Your next question comes from the line of Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Can you hear me okay? Joi Harris: Yes. Julien Dumoulin-Smith: Excellent. Well, congratulations to the Joi and the team here, really nicely done. Congrats on the continued success. Maybe just take it up where Michael left it off here. I mean what is the stat dependent on? Just to pick it up there, just in terms of the timing with Google if it's approved and comes online as planned, how does that impact the electric state here? Can you elaborate just a little bit about some of the parameters here as you think about it. Obviously, Oracle is coming online at the end of '27 here. So -- but you can talk about different pieces. Joi Harris: Sure. The mechanism that we filed essentially takes any excess margin above and beyond what we've incorporated in the case and pushes it into a subsequent filing where we will propose how to flow back the benefit to the customers. And that gives us the potential to stay out for multiple cycles. And if you layer on the Google contract on top of it, once it's approved, that could very well give us the opportunity to push out cases even further. So that's how we've set it up in the case, Julien, and we are looking forward to getting feedback from the commission once they've had an opportunity to fully absorb the filing. We'll start to see testimony from staff in the next several months. And we'll have some indication as to whether or not there's good support. But generally, I think all of us are seeing that data centers are going to deliver the affordability benefits as promised. And this is a way for us to showcase it and deliver on the promise that we've made early on. Julien Dumoulin-Smith: Awesome. Excellent. That's what I thought. There could be a little bit of an extension factor there. especially, I suppose if you get a 1/3 to, right? Again, each 1 would incrementally push out that time line. Joi Harris: Yes. Load growth data center load growth will provide meaningful affordability benefits for our customers. We said that all along. And this is that projection coming to fruition. Julien Dumoulin-Smith: Yes, exactly. And just -- and that's a nitpick, but to come back on the other pieces of the business, if you will, everything else. Just -- so you're guiding here to flat earnings for Vantage by 2030. How do you think about that if you layer in the data center opportunity -- is another way to just talk about the pieces that go into the 6% to 8% here. And then also separately, how do you think about the Vantage Recycling avenue here, especially as we talk about Google and a potential card here. It would seem like that's more right now than ever. But I don't want to put words in your mouth. Joi Harris: Yes. Vantage has a really strong pipeline of opportunities that we continue to advance. The data center opportunity with Vantage is progressing quite well. We're down to the short strokes as I like to call it. And hopefully, we will have an agreement -- a full agreement in place over the next several weeks. -- and be able to communicate this more fully to the broader community. But it's an exciting opportunity that has the potential to expand even beyond where it is. Just given the technology that we're deploying, it's transferable. So recall, this is a behind-the-meter project that is roughly 350 megawatts since there is such shortage of power across the nation, this could be a very interesting opportunity for other hyperscalers and/or co-locators that are looking to expand their footprint. And so we've begun some preliminary just examination of where this might fit. But for right now, we're focused on the project that we have underway, and this fits nicely into the plan that we've already established. As for Vantage and recycle opportunities, -- as always, we look at Vantage and exam Vantage every year. And this business has served us well for over 20 years. That's not to say, though, that we're not always looking to create more shareholder value and so we'll examine for rotation opportunities along the way and provide you updates if anything materializes, but there's nothing imminent. Julien Dumoulin-Smith: I appreciate it. We'll talk soon. All the very best. Joi Harris: All right. Take care. Operator: Your next question comes from the line of Jeremy Tonet with JPMorgan. . Jeremy Tonet: Thanks for the details so far. Just looking to build a little bit more if I could. For the Oracle and Google data centers, how would you frame the ramp in sales growth as these projects come online? How should we think about that over time at this point? Joi Harris: The ramp in '20 -- well, the ramp for Oracle in 2026 is relatively small, but it shoots up exponentially beyond 26. So they get to their full ramp over the next couple of years. Same thing with Google. Google will start out relatively small and then expand to a gigawatt by 2028. So that's how the data centers are looking to ramp over the next couple of years. . Jeremy Tonet: And I guess to refine that a bit more, how do you think that compares to a minimum contracted level? Joi Harris: How does it compare to minimum contracted levels, . Jeremy Tonet: Do you think there's the potential for a faster ramp than maybe where demand charges stay. Joi Harris: Oh, I see. So I think what -- the contract and which is why we've included this mechanism, the contract allows for some flexibility -- and so we won't fully know until the facility is constructed. And what I can tell you is construction is progressing as planned. There's no indication that there is a slowdown of any sort. And so we intend to see Oracle attached to the grid by the end of this year and then begin to take electrons off the grid thereafter in terms of their minimum billing demand as they are ramping, it's aligned with their load ramp. So depending on the scale of their load ramp, and we have not published that. I don't think we've made that public for obvious reasons. But suffice it to say, so long as they stay on schedule, we see that they will be on a fast ramp. But if there is any delay, and they have that option to delay for 1 year. than the mechanism that we are proposing covers it. . Jeremy Tonet: Got it. That's very helpful there. And I just wanted to turn to customer benefits, if you could, in your approaches to $300 million annual in $1.7 billion overall customer benefits from Oracle and Google contracts. Just wondering how those contracts compare if there's any differences to think about there? And really just how do you think about future deals here, bringing similar scope of benefits? Or just what are you looking for in the future? Joi Harris: Yes. So the Oracle contract -- because we did not have to construct anything substantial, we are only building battery storage to support the load and they're covering the full revenue requirement for that battery storage. You've got a pretty significant affordability benefit. We do have to make some additional baseload additions to our fleet to cover off Google, and that will be identified in our IRP. So the affordability benefit, while sizable, is a little less than what you see in the Oracle contract for obvious reasons. . Jeremy Tonet: Got it. And how does this, I guess, inform your -- what you're looking for in any potential future agreements, I guess, as far as what the size or scale of benefits could shape up to be Joi Harris: Any deal that we arrive at has to provide affordability benefits for our customers. The -- that is the requirement of the law. And so our desire is to maximize that at every opportunity. And so it's going to be dependent upon the size and scale of the hyperscaler, the resources that we have to bring online to for them and their ability to flex their load over time, and that will dictate how much affordability savings that will flow to our customers. Operator: Your next question comes from the line of Richard Sunderland with Truist Securities. Richard Sunderland: Just wanted to circle back to some of the rate case discussion. Maybe just to put a finer point on the IRM side -- do you lose an IRM outcome consistent with you're asked for the stay out? Or is it really around this newly proposed mechanism you've been discussing that's, I guess, key for staying out? Joi Harris: Yes. It's around the mechanism that we're proposing. But I can tell you, the IRM, we're looking to grow it to $800 million by 2029, and we have approval for '26 and '27 already. And we feel really good about the IRM potential. We've aligned it to the DSP as requested by the commission and the DSP is in firm alignment with the Liberty audit that was performed in '24. . Richard Sunderland: Got it. That's very helpful. And then there's certainly a lot of attention around the state and kind of the data center dynamic on the local level. It sounds like for you, there's really a lot of continued interest, but trying to understand if you've seen any shifting in sort of your conversations and how the projects are approaching it on their side? And I guess while we're on zoning -- for that Oracle site, is there expansion potential there without additional zoning required? Joi Harris: I'll answer your last question first. I think Oracle is taking up a portion of the footprint. So there is some expansion potential there. As for what we're seeing on the ground, the hyperscalers and colocators have all engaged more fully with local government and local communities. And when they do that, we see that there is more acceptance and more willingness to allow those types of companies to take up locations in those communities, Case in point, [ Venberan ] Township, and there are others. So we are feeling really good about the hyperscalers and co-locators in our pipeline. Many of them have zoning or have a pathway to zoning and they are progressing quite nicely through our pipeline because of it. . Operator: Next question comes from the line of Bill Appicelli with UBS. William Appicelli: Just wanted to ask about the financing around the incremental $5 billion that you outlined here that the Google contract could drive. I mean how should we think about that? Can you just remind us on how you would finance that? And maybe back to the earlier question on capital recycling, would that pull forward some urgency or need for that? . David Ruud: Bill, this is Dave. Yes, the incremental capital that would come into the plan would be partially funded with equity. So we think about 40% equity on average depending on the timing of the cash flows also use converts and hybrids to support our balance sheet as we execute those investments. And you're right before, we weren't -- we didn't have a need for equity. So it does make us think about -- are there other opportunities and ways that we can maximize value across the company by finding some asset recycling that could help. But nothing -- obviously, nothing imminent there. So right now, we just assume some more traditional funding. William Appicelli: Okay. And then as far as future deals, I mean, is your view to run everything through the utility and under these contracts, would there be any desire to look to do something bilateral directly with hyperscalers as opposed to running it through the utility model? Joi Harris: Yes. Our focus is on growing our 2 utilities. And so we're going to continue to leverage the vast assets that we have and the electric companies to serve this load and future load. . William Appicelli: Okay. And then just lastly, on RNG. Is there anything market conditions wise there we should focus on? Or should we just assume that you're going to be able to fully maximize the earnings potential there at RNG on the tax credits? David Ruud: Yes. We have what we think are conservative assumptions in our forecast for the year at $50 million to $60 million. We are seeing now the DOE and -- the DOEs and the treasury are working through the rules right now. We think what we have is a conservative assumption right now, we're producing at a high level. So we feel like we have a good assumption there for RNG. William Appicelli: Okay. So is there a potential for a modest upside to that? Or is that just basically likely within that range? . David Ruud: We did see some upside last year because we started with some conservative assumptions, but we're waiting to see how these rules play out before we would do anything for this year. Operator: Your next question comes from the line of Michael Sullivan with Wolfe Research. Michael Sullivan: Maybe just following on Bill's question there. I know kind of each deal may look different in terms of resource mix, but the $5 billion of CapEx for the 1 gigawatt Google deal, is that like a decent rule of thumb for future deals? And then also the 2 gigawatts in late-stage negotiations, is that basically 2 customers of similar size? Would that be a fair assumption as well? . David Ruud: I'd say, Michael, on your first question, all these deals are pretty bespoke and what they're going to be providing as far as capital and when that will flow in. This 1 has -- the Google 1 has a lot of renewables and storage as well as some baseload. So I would say they'll all be somewhat bespoke and how they'll come in over time. And then on your second question, as far as new deals, there's an assortment of sizes in what we're looking at, but there are some that are among that scale of what we're seeing with Google One, too. Michael Sullivan: Okay. That's helpful. And then, Dave, just sticking with you, like any more color you can provide on just the trading rent for the quarter. I know you pointed to kind of some timing reversals going to still hit the high end of the segment for the year, but I think it's been a little bit since we've seen like a negative quarter just in absolute terms? Just any more color on the dynamic there would be helpful. . David Ruud: Yes. The shaping that we saw in the first quarter was contemplated in our guidance that we gave in February. As you said, we do remain confident in the full year guidance and hitting the high end because we have these hedged and contracted revenues are going to play out for us. So we did experience similar shaping in '23 and '24. So we expected it. And then additionally, some of the impact we saw in the first quarter was timing, and we know that, that's going to flow back through us through the year through some contracted position. So we do remain highly confident that we're going to hit the high end of our full year guidance of trading this year. Michael Sullivan: Okay. And then just in the spirit of like some of the asset rotation questions. Any thoughts as to whether this still remains like a core business or would it be monetized at all? Joi Harris: Yes. Trading is a part of our core business. But again, every year, we look at the nonutility businesses and we examine whether there's additional shareholder value that we can realize. And so we'll continue to examine that. But for now trading is part of the DTE company, part of the DTE family and will remain so. Operator: Your next question comes from the line of Andrew Weisel with Scotiabank.. Andrew Weisel: Thank you for all the details, and I appreciate all the insights on a strong update. First question, on the data centers, I appreciate the credit protections that you have in place and all the specifics to you in the prepared remarks. My question is, can you remind us of the concentration from these customers first? They're obviously going to represent a major portion of your sales volumes and revenues. I want to say 40% of the total is in my mind. Is that figure, right? And my real question is, do you have different requirements for different customers based on credit risk profiles. Would you have different protections in place or different credit or collateral requirements for Oracle versus Google and Alphabet. And what about hyperscalers that might be less high profile? Would you treat those customers differently? Joi Harris: So the credit protections are differ based on the strength of the counterparty. And so we examine them each separately and determine what credit protections are necessary. And then you are correct, yes, the concentration will be roughly 40% once they arrive at their full ramp. And so as we get more data centers online, we will examine their position. We'll examine the assets that we have to build on their behalf, and then we will establish the appropriate credit protections that will insulate our customers from stranded assets and also rate shop. Andrew Weisel: Okay. Could you comment Oracle specifically versus Google and Alphabet are those 2 being treated the same or differently? Joi Harris: I can't comment on that. That is commercial information that we have not made publicly available. But suffice it to say, we treat them accordingly. Andrew Weisel: Okay. Understood. That's fair enough. Second question, in terms of the storms, certainly impressive results in terms of the data on outage restoration and results, well done on that, very impressive. My question is, given the history of negative feedback on reliability, what kind of responses are you giving from key stakeholders like regulators, the staff, local community leaders, politicians? And on the cost side, to get those results? Were these storms more expensive than what you've historically spent in terms of prestaging and execution? Or is it more like you're being rewarded for the good investments you've been making over the past few years? Joi Harris: I'll answer the -- your last question first. The storms are not more expensive than prior years. And as you heard in my opening comments, similar storm actually that was less severe, resulted in 750,000 customers out. And this storm this year with 70 mile-hour wins, we only saw 300,000 customers out and we were able to get everybody back on within 48 hours. And that we are measuring at the circuit level how each circuit is performing under duress. And we can say definitively that these investments are, in fact, working. Where we've made the investments, the grid is holding up quite nicely to really extreme conditions. Your -- the first question was around how stakeholders are responding. I would just point you to the commission and their comments on the behind-the-meter podcast, where they're pointing to the improvements that are made in the grid and how DTE is performing as a result of the investments and the work that we've done to improve our processes. We're hearing from our customers and other stakeholders that things have improved, it's noticeable, but clearly, there's more work to be done. Operator: Our next question comes from the line of Paul Fremont with Ladenburg. Paul Fremont: Congratulations. My first question is how much of the $5 billion of Google investment would you expect would fall into your current 5-year capital spending plan? Joi Harris: Yes. Paul, thanks for the question. You could assume that some of the renewables, some of the storage would fall into the 5-year. And then we would begin to ramp the base load generation toward the back end of the 5-year and then it will carry beyond the 5-year time horizon. Paul Fremont: Right. So I would expect then that the 700-megawatt gas plant that will show up in the IRP would be mostly, if not completely beyond sort of the forecast period. Is that fair? . David Ruud: Well, actually, a lot of that comes in ahead of time and preparing the site and making some of the purchases we have to make, too. So I think it will straddle the 5-year and then a little bit beyond it. Paul Fremont: Great. And then when would you update your capital spending plan to include Google? Is that -- are you waiting for regulatory approval or -- Joi Harris: Yes that would be yes, that will be the timing that we would likely update our plan, and we're expecting to get an order early in September. And so by the time we are with you all at EEI, we would likely be in a position to talk to you about exactly when that $5 billion shows up and then what years. Paul Fremont: Got it. Perfect. And last question for me. Can you maybe update us a little bit about the governor's race and -- what so far any of the candidates have commented with respect to either affordability or with respect to their positions on data centers? Joi Harris: Yes. Yes, the field is forming. There are really 4 candidates now. The Republicans, there's a neck-and-neck race between John, James and Perry Johnson here in the state. We've got 1 Democrat in [ Joslin Benson ] and an independent in [ Mike Dugan. ] And we have been sharing our story around affordability, which is a good one. We've showcased our build growth on an absolute basis being in top decile at 5% compared to the national average, which is roughly 26%. We've talked to them about share of wallet and where we stand relative to the nation, we're at 1.8% and balance of the country is at 2%. And we had our best reliability performance in 20 years and a really strong performance in the first quarter, as I mentioned in my opening remarks. We've talked to them about the affordability benefits that data centers offer to our customers and how we intend to flow those back. Case in point, our most recent filing. The messages have been well received. Had just recently spoke with John James, and we'll have some follow-up discussions. I've had conversations with [ Joshin Benson ] and also with [ Mike Dugan. ] Generally all support data centers. They like the load growth and the opportunities it presents for our customers in terms of affordability benefits. But we are also focused on economic development and how we can continue to bring more growth to the state. So this has been a really constructive introduction, and we're going to continue those conversations as the race unfolds. Operator: Next question comes from the line of Anthony Crowdell with Mizuho. Anthony Crowdell: Follow-up to an earlier question on Vantage. Obviously, we read a lot in papers about just bringing your own generation interest with hyperscalers, especially in the RTO regions. Any interest in Vantage looking at opportunity in whether it's PJM or other parts of the country? Joi Harris: Anthony, yes, we are -- like I said, we've got to get this 1 first deal under our belt, but it is proving to be a very interesting vertical. We are seeing just the application certainly capable of serving other hyperscalers and/or co-locators in other jurisdictions. And so while we are hyper focused on closing out this first deal. We're scanning the environment to see if there's potential elsewhere and the counterparty that we're dealing with has interest beyond this first location that they're working on. So it could be a very interesting vertical like I've mentioned before. . Anthony Crowdell: Great. Just the last one. The 1 gigawatt for Google expected to be fully ramped by the end of '28, what infrastructure does DT need to put in or build to reach their full ramp by -- I'm just trying to think of what needs to be on the DTE side to get to the full ramp. Joi Harris: Yes. To get to their full ramp, we're going to build likely renewables, battery storage -- and remember, they've also incorporated a demand response in the contract. So those assets to serve them at least near term, will fold those into our 5-year update and of course, once we solidify our IRP and then we will begin to fold in the build-out of baseload generation even further. Operator: Your last question comes from the line of [ Rene Singh ] from Bank of America. Unknown Analyst: I just had a question on the mechanism you're talking about. Obviously, you're talking about being able to capture the excess margin. Just -- is this like -- is there a precedent for this in at the Michigan PSC maybe in a different customer cost? And I guess what triggers that mechanism? And also just -- is it just the rate case that is to be approved? Or is there any other regulatory approvals that it needs to go through? Joi Harris: I'll answer your last question first. Yes, there will be some additional regulatory approvals. The mechanism will be punted, if you will, to a separate filing and dispositioned accordingly. Is there a precedent? I'd say, yes, we did something very similar during the Cove years when we saw increased residential load, we were able to pass those savings on to customers to defray to keep us out of rate cases, but also to defray the cost of us doing true term. Unknown Analyst: Okay. That makes sense. And then just a secondary question more on -- as you kind of go down this 5 to 6 gigawatt pipeline, and you're thinking that you kind of need more capital-intensive baseload power. How do you see the economics and the contract structure is changing -- is it more demand response from the customers? Or is it a higher contract cost? Yes, just love to hear more about that. Joi Harris: It could be a demand response. But like I said, these are all bespoke agreements. It's going to be a function of the size and the interest that the hyperscaler has in particular assets -- and then obviously, where they choose to locate. So we are keeping all options open and certainly very interested in solidifying a deal before the end of the year. Operator: We have no further questions. Joi Harris: Thank you. Well, thank you, everyone. Thank you, everyone, for joining us today. I'll just close out by saying we are off to a great start in 2026 and we remain well positioned to achieve our goals for the year, and I'm very excited about our long-term plan and the opportunities ahead, and I look forward to seeing many of you on the road throughout the years. Have a great morning, stay healthy and stay safe. Thank you again. Operator: Ladies and gentlemen, that concludes today's call.
Operator: Good morning, and welcome to the Core Laboratories First Quarter Earnings Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Larry Bruno, Chairman and CEO. Please go ahead. Lawrence Bruno: Thanks, Valentina. Good morning in the Americas, good afternoon in Europe, Africa and the Middle East, and good evening in Asia Pacific. We'd like to welcome all of our shareholders, analysts and most importantly, our employees to Core Laboratories First Quarter 2026 Earnings Call. This morning, I'm joined by Chris Hill, Core's Chief Financial Officer; and Gwen Gresham, Core's Senior Vice President and Head of Investor Relations. The call will be divided into 6 segments. Gwen will start by making remarks regarding forward-looking statements. We'll then have some opening comments, including a high-level review of important factors in Core's Q1 performance. In addition, we'll review Core's strategies and the 3 financial tenets that Core Lab employs to build long-term shareholder value. Chris will then give a detailed financial overview and have additional comments regarding shareholder value. Following Chris, Gwen will provide some comments on the company's outlook and guidance. I'll then review Core's 2 operating segments, detailing our progress and discussing the continued successful introduction and deployment of Core Lab technologies as well as highlighting some of Core's operations, recent client interactions and major projects worldwide. Then we'll open the phones for a Q&A session. I'll now turn the call over to Gwen for remarks on forward-looking statements. Gwendolyn Schreffler: Before we start the conference this morning, I'll mention that some of the statements that we make during this call may include projections, estimates and other forward-looking information. This would include any discussion of the company's business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to materially differ from our forward-looking statements. These risks and uncertainties are discussed in our most recent annual report on Form 10-K as well as other reports and registration statements filed by us with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our comments also include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our first quarter results. Those non-GAAP measures can also be found on our website. With that, I'll turn it back to Larry. Lawrence Bruno: Thanks, Gwen. Moving now to some high-level comments about our first quarter. The military conflict in the Middle East introduced geopolitical uncertainties that created meaningful disruptions across the Middle East countries in which we operate. As the company announced on March 23, the conflict closed many client offices and resulted in project delays. In addition, the suspension of maritime hydrocarbon transportation from the Middle East region forced operators to halt hydrocarbon production. For Core Lab, the disruption to hydrocarbon transportation routes extends beyond the Middle East region and into the company's global assay laboratory network that services the market for the maritime transportation and trading of crude oil, natural gas and refined products. The biggest impact of the conflict have been on Reservoir Description and the service side of Production Enhancement due to their roles in actively supporting reservoir rock and fluid characterization studies, completion diagnostic programs and hydrocarbon assay work all of which require predictable client activity levels and field access for sample acquisition. To date, Production Enhancements, completion products have been comparatively less affected by the Middle East conflict although shipments of energetic products into the region were delayed or temporarily suspended. As a result of these factors, Core lowered its forecast for the first quarter of 2026 revenue and earnings compared to the guidance we provided in our earnings call on February 4. The situation remains volatile and unpredictable shifts in the conflict will affect our operations. Other factors also impacted the first quarter. Demand for assay services was also negatively impacted by the ongoing geopolitical conflict in Russia, Ukraine. Attacks on hydrocarbon transportation and refining infrastructure, along with evolving western sanctions continue to create demand uncertainties and operational inefficiencies. Early in 2026, severe cold weather in North America affected onshore client completion activities and resulted in the temporary closure of Core Lab's manufacturing facilities. Additionally, adverse weather in the Mediterranean Sea related to Storm Harry temporarily suspended the demand for lab services across several countries and caused significant damage to one of the company's facilities creating further revenue and margin headwinds for the quarter. We are still in the progress of restoring service at the damage location. Looking at Reservoir Description, first quarter revenue was down 11% from Q4 of 2025 and flat compared to Q1 of last year. First quarter operating margins in Reservoir Description ex items were 6%, down sequentially by nearly 800 basis points and margins also down year-over-year. Despite the multiple factors impacting Core Lab's first quarter results, the company maintained its focus on creating new technology offerings, maximizing operating efficiency and on leveraging its global network to continue to support Core's clients. In Production Enhancement, first quarter revenue was down 13% compared to Q4 of 2025. Ex items, first quarter 2026 operating margins and production enhancement were 5%, down from 7% in Q4 of 2025. Sequential margins were impacted by the Middle East conflict, which delayed certain energetic shipments to the region and halted completion diagnostic field programs. [ Soft ] sequential U.S. land activity amplified by severe cold weather in North America also reduced U.S. completion activity and resulted in the temporary closure of Core's manufacturing facilities. These headwinds were partially offset by strong demand for Core's proprietary completion diagnostic services across both onshore and offshore markets outside of the Middle East. The company continued its long-standing commitment to shareholder returns during the quarter, returning free cash to our shareholders through our quarterly dividend and by repurchasing more than 51,000 shares of company stock, representing a value of $900,000. Q1 marked the sixth consecutive quarter of share buybacks. Core intends to continue to use free cash to fund our quarterly dividend, pursue growth opportunities and improve shareholder value through opportunistic share repurchases. Looking ahead now to the mid and longer term. Core Lab has persevered through previous conflicts in the Middle East. The company and its dedicated employees remain committed to serving our long-standing clients throughout this vital region. Despite near-term headwinds, Core Lab's global operations, asset-light business model and diversified technology portfolio continue to position the company for long-term success. For 90 years, Core Lab's resilience, technical leadership and unwavering client focus has enabled the company to deliver differentiated, scientific and technological solutions that help its clients derisk their operational decisions. Core strengths together with disciplined capital deployment, continued free cash flow generation and the company's commitment to returning excess capital to its owners will drive long-term value creation for the company's shareholders. As we move ahead, Core will continue to execute on its key strategic objectives by: one, introducing new product and service offerings in key geographic markets; two, maintaining a lean and focused organization; and three, maintaining our commitments to returning excess free cash to our shareholders and strengthening the company's balance sheet. The interest of our shareholders, clients and employees will always be well served by Core Lab's resilient culture, which emphasizes innovation and the application of technology to derisk client decisions along with dedicated customer service. I'll talk more about some of our latest innovations in the operational review section of this call. Now to review Core Lab's financial tenants that have guided the company's shareholder value creation through our more than 31-year history as a publicly traded company. We will continue to pursue growth opportunities. The company will remain focused on its 3 long-standing financial tenets, those being to maximize free cash flow, maximize return on invested capital and returning excess free cash to our shareholders. I'll now turn it over to Chris for the detailed financial review. Chris Hill: Thanks, Larry. Before we review the financial performance for the quarter, the guidance we gave on our last call and past calls excluded the impact of any FX gains or losses and assumed an effective tax rate of 25%. So accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods. Additionally, the financial results for the first quarter of 2026 includes a charge of $3.7 million for noncash stock compensation expense associated with the future vesting of performance shares for certain employees who have reached eligible retirement age. We also recorded $600,000 of additional costs associated with exiting certain facilities as we continue to optimize our global footprint. The comparison periods for the first and fourth quarter of 2025 also include items that were discussed in those calls and highlighted in our earnings release for those periods. These items have also been excluded from the discussion of the financial results today. You can find a summary of those items in the tables attached to our press release for the first quarter of 2026. Now looking at the income statement. Revenue was $121.8 million in the first quarter, down 12% compared to the prior quarter and down 1% year-over-year. Core Lab will typically experience a seasonal decline in revenue from the fourth quarter to the first quarter of each year. However, as Larry mentioned, in the first quarter of 2026 was also negatively impacted by the escalation of the conflict in the Middle East along with severe weather events in North America and Europe. Of this revenue, service revenue, which is more international, was $94.3 million for the quarter, down 12% sequentially and 1% year-over-year. Our service revenue associated with crude assay services and regional studies continue to be impacted by the geopolitical conflicts in Russia, Ukraine, but particularly in the Middle East this quarter. Additionally, severe weather across North America, Europe and the Mediterranean region negatively impacted certain laboratory operations and disrupted client activity this quarter. Offsetting some of the decline this quarter, we continue to see increased demand for our well completion diagnostic services, particularly in the Gulf of Mexico. Product sales, which are more equally tied to North America and international activity were $27.5 million for the quarter and were down 12% from last quarter and down 3% year-over-year. Our international product sales are typically larger bulk orders and can vary from 1 quarter to another and were down sequentially in the first quarter of 2026. The decrease in product sales this quarter when compared to the fourth quarter of 2025 was partially offset by a higher level of product sales in the U.S. Moving on to cost of services, ex items for the quarter was 81% of service revenue, which increased from 75% in the prior quarter and 77% last year. The sequential increase was primarily caused by the conflict in the Middle East, which resulted in a sharp decrease in revenue as the -- and our clients were forced to suspend operations. As discussed in our previous calls, the service side of our business has been more impacted by the geopolitical conflicts and expanded sanctions, the volatility in crude oil prices and more recently, the geopolitical conflict in the Middle East caused disruptions to both our operations in the region and demand for crude assay services tied to the trading and maritime movement of crude oil and derived products. The company will continue to manage its cost structure as effectively as we can through these temporary disruptions in certain regions. Cost of sales ex items in the first quarter was 94% of revenue, which is relatively flat compared to last quarter and was 91% last year. The company continues to face challenges with increased costs for raw materials and logistics, some of which we've had to absorb. Despite these challenges, we remain focused on improving cost efficiencies and anticipate the manufacturing absorption rate in future quarters will be in line with projected product sales. G&A ex items for the quarter was $11 million, up a little from $10.6 million in the prior quarter. For 2026, we expect G&A ex-items to be approximately $42 million to $45 million. It is also important to note that 100% of our corporate G&A expenses are allocated and absorbed into the financial performance of the reported segments. Depreciation for the quarter was $3.8 million and increased slightly compared to $3.7 million in the last quarter and the first quarter of last year. EBIT ex items for the quarter was $6.6 million, down from $15.7 million last quarter, yielding an EBIT margin of over 5%. Our EBIT for the quarter on a GAAP basis was $1.9 million. Interest expense of $2.9 million for the first quarter increased from $2.6 million in the prior quarter and the same quarter in the prior year. As mentioned last quarter, the increase in the interest expense is associated with the higher interest rate on the new term loan under our credit facility, which was used to retire $45 million of senior notes in January 2026. Income tax expense and an effective tax rate of 25% and ex items was $900,000 for the quarter. On a GAAP basis, we recorded a tax benefit of $300,000 for the quarter. Net income ex items for the quarter was $2.7 million, down 72% sequentially and down 59% from first quarter of last year. On a GAAP basis, we had a net loss of $800,000 for the quarter. Earnings per diluted share ex items was $0.06 for the quarter compared to $0.21 in the prior quarter and $0.14 in the first quarter of last year. On a GAAP basis, we had a loss per diluted share of $0.02 for the quarter. Turning to the balance sheet. Receivables were $108.3 million and decreased approximately $5.3 million from the prior quarter. Our DSOs for the first quarter were at 74 days, up from 69 days last quarter. The increase in DSOs was primarily driven by the escalation of the conflict in the Middle East, which impacted revenue for the quarter and also slowed collections. We will continue to focus our collection efforts in the affected region and anticipate that our DSO will improve in future quarters. Inventory at March 31, 2026, was $57.8 million, up $3.3 million from last quarter end. Inventory turns for the quarter were 1.8% and down from 2.1% last quarter, which is primarily associated with the decrease in international bulk sales this quarter. And now to the liability side of the balance sheet. Our long-term debt was $117 million as of March 31, 2026, and considering cash of $22.8 million, net debt was $94.2 million, which increased $3.9 million from last quarter. Our leverage ratio is currently at 1.2 compared to 1.1% last quarter. Our debt is currently comprised of our senior notes at $65 million, a term loan of $50 million and $2 million outstanding under our bank credit facility. As stated earlier, in the first quarter, we made a single draw of $50 million on a term loan under our credit facility and retired $45 million of senior notes in January of 26. Looking at cash flow for the first quarter of 2026, Cash flow from operating activities was $4 million and after paying approximately $3.5 million of CapEx for operations, our free cash flow for the quarter was $500,000. As discussed in prior quarters, the capital expenditures associated with rebuilding our U.K. facility, which was damaged by fire are covered by the company's property and casualty insurance and have been excluded in the calculation of free cash flow. The capital expenditures associated with rebuilding the U.K. facility in the first quarter were $1.4 million. Looking ahead to the rest of the year, we will continue our strict capital discipline and asset-light business model with capital expenditures primarily targeted at growth opportunities. Excluding the CapEx associated with rebuilding the U.K. facility, we expect capital expenditures to remain aligned with activity levels and for the full year 2026 to be in the range of $15 million to $18 million. Core Lab's operational leverage continues to provide the ability to grow revenue and profitability with minimal capital requirements. Capital expenditures for the operations has historically ranged from 2% to 4% of revenue even during periods of significant growth. That same level with laboratory infrastructure, intellectual property and leverage exists in the business today. We believe evaluating a company's ability to generate free cash flow and free cash flow yield is an important metric for shareholders when comparing and projecting company's financial results, particularly for those shareholders who utilize discounted cash flow models to assess valuations. I will now turn it over to Gwen for an update on our guidance and outlook. Gwendolyn Schreffler: Thank you, Chris. Turning to Core Lab's outlook for the second quarter of 2026, the IEA, the EIA and OPEC are projecting crude oil demand growth in 2026 of approximately 600,000 to 1.4 million barrels per day, supporting constructive long-term market fundamentals despite near-term volatility. The IEA also continues to highlight that accelerating natural decline rates in existing producing fields remain a significant long-term supply risk, reinforcing the need for sustained investment. Recent disruptions, including the closure of the Strait of Hormuz and damage to regional refining infrastructure have reduced global crude oil supply by approximately 20%. These geopolitical events are likely to support the need for new oil and gas development to address energy security risk. In the U.S., year-over-year production is expected to remain measured, as capital discipline and maturing shale plays offset efficiency gains. Combined, these trends suggest that new hydrocarbon exploration will come from international offshore conventional reservoir targets. In the near term, geopolitical instability in the Middle East, sanctions and evolving trade policies, along with OPEC+ production decisions will continue to contribute to market volatility. However, a multiyear cycle of international offshore exploration and development activity will be required to support future demand. Core Lab maintains a constructive multiyear outlook and is positioned to support ongoing client investment needs. Recent changes in client activity levels across the Middle East are directly impacting Core's operations. Client-driven project disruptions have led to delays in project execution and logistical constraints. For Core Lab, the disruption of hydrocarbon trading routes extends beyond the Middle East region and into the company's global lab network, which services the maritime transportation and trading of crude oil, natural gas and refined products. The impact has been more pronounced in Reservoir Description and the service side of Production Enhancement due to Core Lab's unique role supporting regional client studies, reservoir rock and fluid characterization completion diagnostics and hydrocarbon assay testing. These services rely on predictable fuel access, sample movement and laboratory operations. Production Enhancement products has been comparatively less affected. However, shipments of energetic systems into certain countries have experienced delays. U.S. land completion activity is expected to remain below prior year levels with modest improvement likely driven by small to midsize operators. Growth in demand for Core's diagnostic services production optimization technologies and proprietary energetic systems are expected to partially offset softer year-over-year U.S. onshore activity. However, costs for certain imported raw materials use in production enhancement continue to increase and remain subject to tariffs and supply chain volatility. Client discussions indicate that international projects outside the Middle East are proceeding. However, circumstances in the Middle East create difficulty in forecasting the pace and timing of activity recovery for the effective region. Collectively, these factors support expectations for modest sequential operational improvement for Core Lab. In summary, Reservoir Description's second quarter 2026 revenue is projected to range from $77.5 million to $82.5 million, with operating income of $3.5 million to $5.4 million. Production Enhancement second quarter revenue is estimated to range from $45.5 million to $48.5 million with operating income of $2.8 million to $4.7 million. So in summary, Core Lab's second quarter 2026 revenue is projected to range from $123 million to $131 million, with operating income of $6.4 million to $10.2 million, yielding operating margins of 7%. EPS for the second quarter 2026 is expected to range from $0.06 to $0.12. The company's guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange and assumes an effective tax rate of 25%. With that, I'll turn the call back over to Larry. Lawrence Bruno: Thanks, Gwen. First, I'd like to thank our global team of employees for providing innovative solutions, integrity and exceptional service to our clients. I'd particularly like to thank our dedicated staff in the Middle East for the uncertainties and stresses they've recently had to endure during the conflict. As we celebrate our 90th year, our staff's collective expertise and their dedication to servicing our clients has been the foundation of the company's success. Looking at the macro, even as global energy markets work through near-term economic headwinds and volatile commodity prices, the IEA, EIA and OPEC are forecasting year-over-year growth in global crude oil demand to range between 0.6 million and 1.4 million barrels per day for 2026. In addition to the forecasted growth in demand, new production will be needed to be brought online to offset the natural decline from existing producing fields. Combined, these trends will require continued investment in the long-term development of new onshore and offshore crude oil fields. U.S. tight oil production has been by far the largest component of non-OPEC oil production growth since 2010. The most recent EIA short-term energy outlook for U.S. oil production projects approximately 13.5 million barrels per day for 2026, essentially flat to 2025 and with modest growth expected in 2027 in response to projected stronger commodity prices. Growing global oil demand, combined with moderating incremental U.S. production growth, continue to support the thesis that future supply will need to come from new discoveries and field developments, largely driven from long-cycle offshore investments outside the Continental U.S. The most recent IEA long-term outlook under its current policy scenario shows global oil demand continuing to rise through 2050 to approximately 113 million barrels per day. As highlighted in the IEA September 2025 analysis, global field-by-field data show that the natural decline in existing producing oil fields is accelerating and has become a dominant long-term supply risk. The IEA estimates that absent reinvestment, global oil production would decline by approximately 8% per year due to natural field depletion. As a result, the majority of upstream capital spending globally is now required to simply offset decline rather than to meet incremental demand growth. The IEA also noted that nearly 90% of upstream investment since 2019 has gone towards sustaining existing production rather than expanding supply. The IEA states that significant annual investment in oil and gas resource development will be required for many years to come to ensure energy security and market stability. The U.S. EIA's long-term reference case forecast shows even higher crude oil demand through 2050, approaching 120 million barrels per day, reinforcing the conclusion that continued investment in new crude oil production will remain necessary. In summary, current demand forecasts support a multiyear investment cycle in which U.S. onshore production growth slows and in which future global supply growth will increasingly be driven by capital investment in long cycle international conventional offshore opportunities as well as with unconventional plays in the Middle East, trends that continue to support the demand for Core Lab services. Current supply disruptions and renewed concerns about energy security only strengthened the case for a geographically broad-based cycle of new hydrocarbon exploration appraisal and development. Core's Reservoir Description and Production Enhancement technologies are directly aligned with the investment imperatives required to find and develop new oil and gas fields and to improve recovery from existing fields. Now let's review the first quarter performance of our 2 business segments. Turning first to Reservoir Description. For the first quarter of 2026, revenue came in at $82 million, down 11% compared to Q4 of 2025. Operating income for Reservoir Description ex items was $5 million, down from $13 million in Q4, yielding operating margins of 6%. Incremental margins were negatively impacted by 2 factors: the conflict in the Middle East and severe weather in North America and in the Mediterranean. While demand for Reservoir Descriptions lab services remained strong in several regions across our global network, ongoing international geopolitical conflicts along with sanctions that were enacted in 2025 and further expanded throughout the year and yet again in Q1 of 2026, continue to produce headwinds that negatively impacted the demand for laboratory services tied to the trade and transportation of crude oil and derived products. Now for some operational highlights from Reservoir Description. In the first quarter of 2026, Core Lab continued to advance its integrated digital data strategy through the delivery of key reservoir data sets via our proprietary rapid platform. These data sets include a wide array of laboratory data and mark an important milestone in the company's ongoing effort to standardize and digitize reservoir data across our global portfolio. By making these data streams more accessible and easier to integrate into Core's clients' existing workflows, Core Lab is improving turnaround times reducing friction and data transfer and helping clients make faster and more informed decisions. This digital offering continues to reinforce Core Lab's differentiated position as a technology-led provider of high-value reservoir solutions. Core Lab's proprietary rapid database delivers the highly structured, well organized, geological petrophysical and engineering data that will form a critical foundation for developing artificial intelligence initiatives by both Core Lab and its clients. Moving now to Production Enhancement, where Core Lab technologies continue to help our clients optimize well completions and improve production. Revenue for production enhancement for the first quarter of 2026 came in at $40 million down 7% year-over-year. Q1 2026 operating income for Production Enhancement, ex items was $2 million, yielding operating margins of 5%. Margins were negatively impacted by soft sequential U.S. land activity and severe cold weather that both reduced U.S. completions and temporarily closed Core Lab's completion product manufacturing facilities. In addition, the Middle East conflict reduced client activity in the region and delayed certain energetic product shipments. Diagnostic Services benefited from strong demand in complex U.S. land completion designs and on offshore projects, domestic and international markets. Now for some operational highlights from Production Enhancement. Early in the first quarter of 2026, Core Lab was engaged by a national oil company in the Middle East to address a significant excess water production issue affecting multiple wells, which had led to shut-ins. The client deployed Core's [ GTX expand Extreme High temperature casing patch solution ] to address the issue. Core Lab's [ GTX X-Band ] proprietary technology is specifically engineered for harsh cyclic steam injection environments where temperatures can reach up to 600 degrees Fahrenheit. The [ GTX X-band ] installation significantly reduced water cut from the well from 99% down to 40% and thus materially lowered water disposal and environmental remediation costs. Based on this success, the client initiated an additional 10-well campaign using Core's proprietary [ GTX expand ] technology. Also in the first quarter, an independent operator in the Permian Basin deployed Core Labs FLOWPROFILER solid oil tracers across a 30-stage horizontal well to evaluate stage-by-stage oil contribution within an upper bench test in an existing reservoir. Core's FLOWPROFILER engineered delivery system is designed to stay within the proppant pack of each individual [ frac ] stage and then slowly release the oil tracer as the produced oil moves past the engineered particles and into the production strength. Flowback analysis of the produced oil provided clear insight into the production performance along the lateral length, showing that the strongest oil contribution came from the heel and to sections of the well, with materially lower contribution from the mid-lateral. Core Lab's FLOWPROFILER diagnostic results are allowing the operator to optimize future drilling targets and completion design. Importantly, based on the success of this program, the client plans to deploy FLOWPROFILER in 5 additional wells, highlighting the value of Core's differentiated technology. That concludes our operational review. We appreciate your participation, and Valentina will now open the call for questions. Operator: [Operator Instructions]. The first question comes from Don Crist from Johnson Rice. Donald Crist: I wanted to touch on the Middle East. Obviously, it's unfortunate what's going on with the conflict there. But I just wanted to ensure that your facilities are undamaged and once this conflict is resolved, everything should bounce back to pretty much normal. I mean, is that the correct read on the situation? Lawrence Bruno: Yes. Absolutely, Don. And so first of all, thanks for the question. And first of all, no damage to any of our infrastructure. Our staff has been beyond admirable in their ability to cope with a very challenging situation here. I do think it's important to understand that the flow of oil and refined products that normally underpins our -- some of our revenue in Reservoir Description in the region to essentially come to a halt. And when that happens, we have all the costs and none of the revenue. And so we're doing what we can to mitigate those costs. What we think will happen is as the situation gets resolved, there's going to be a strong rebound. I hesitate to use the word surge because that's going to depend on things out of our control, but a strong rebound in oil movement out of the region and into the rest of the global network. What we tried to illustrate in our comments was we have a revenue opportunity on that assay work in the region. And then once it leaves a region and makes port in some other part of the world, we have another revenue opportunity. So it extends beyond the region for us, but we think there's a very quick rebound in the flow of our work on -- tied to the maritime transportation of crude oil and refined products, natural gas as well out of the region. And then I think beyond that, the office closures that -- and I'll call it the slow down of field access that impaired acquisition of more upstream crude oil and rock samples, that will start picking up. We've seen some early indications of that during the cease fire, and we've kind of dialed that into our thinking already. But we think that things are poised for a nice rebound for us across Reservoir Description and then products will start moving in there as well. Donald Crist: Yes, that's exactly as I thought that everything should get back to pretty quick. I wanted to touch on a topic that we've heard across many conference calls this earnings cycle. And it's the fact that worldwide supplies or storage has fallen significantly and a lot of investors are now thinking that there's a significant disconnect between the physical market and the paper market. You're in that physical market much more than a lot of other companies. I don't know if you have an opinion on that? And is it influencing any NOCs and IOCs around the world to get more urgent in developing resources closer to home from an energy security standpoint. Any comments around that? Because we're hearing that from a lot more investors now whether they believe it or not. Lawrence Bruno: Yes. I do think that the worldwide supply -- we've been burning through -- there was apparently around 400 million barrels of oil committed out of strategic reserves that are flowing into the system. If you roughly balance that off at 20 million barrels a day disrupted from the Middle East, and I think it might be a little less than that, some stuff coming out at [ Yanbu ] in Western Saudi Arabia. But call it, 20 million barrels a day and then also refined products and all, I think inventory levels on both crude oil and on refined products are being consumed pretty quickly here. And so I think that is inevitably going to drive people to think about the longer term, hey, I don't want to be in this position whenever -- if I can avoid it. And so I would say, Don, long before the war started, we saw reinvestment and directional changes in places like Malaysia and Indonesia. And in other parts of the world to say, hey, we've got to get some things going closer to home than we have in the past to avoid disruptions that might be shipping related, conflict-related canal related depending on the 2 big canal systems in the world that move oil around. And so I think there's a growing awareness that you need to derisk your energy supply, and that's going to mean a very -- as I've said in my comments, there are a broad geographically based investment in new studies, new appraisals and get -- make sure that oil can get to market. Whether it comes from -- to get into the Western hemisphere, that could come from West Africa as well but it could also mean more stuff in the Gulf of Mexico, more stuff in South Atlantic margin happen to be developed. Donald Crist: Yes. That supports what we're hearing there as well. I wanted to touch on one -- Lawrence Bruno: I think the European situation maybe amplifies that they're pretty concerned about flow of oil from the Middle East right now. Donald Crist: Understandably. And my last question, I'll turn back to queue. We saw a press release at Olivia this week where a major is going to start assessing the reservoirs in Libya. I don't know if you can talk specifically about that, but I think that kind of supports what has been talked about for the past couple of quarters that North Africa region is going to be developed sooner rather than later. I don't know if you have any comments broadly on that. Lawrence Bruno: Yes. Don, I think several quarters ago on our earnings call, we talked about having conducted a client Technology Day focused on 2 things. Improving recovery from existing fields and an unconventional development, and we held that in Tunisia to address opportunities in Libya and in Algeria and into Egypt as well. Very well attended, 50 client companies represented here. And so we've had a number of discussions with operators and with government agencies about Core Lab's involvement and our availability and readiness to participate in getting those Libyan and other regional assets up to speed for the older fields that need a lot of remediation and for unconventional plays. There is a nice unconventional opportunity in North Africa. Very close to the European market. I think it plays out very nicely. And Core Lab has been on top of that, and we've got some of our top hands engaged in those conversations. Operator: The next question comes from Sean Mitchell from Daniel Energy Partners. Sean Mitchell: Congrats on 90 years. That's great. Lawrence Bruno: I'm going to follow up Sean, I have to look it up. Silver anniversary is 25. 50 is gold. 90th anniversary is the Granite anniversary. So I think it's quite appropriate that it's a rock of some type. Sean Mitchell: There we go. Maybe following on. Thanks for all the color on the macro. Maybe following on to what Don was asking about. Just when we think about recovery time lines in the Middle East, reopening the Strait is really just the first step. There's obviously storage that can move quickly, but restarting production requires tanker repositioning, infrastructure coordination and really damage assessment across the value chain. From what you're seeing on the ground, do you think the market is underestimating how complex and potentially prolong this recovery could be? Any color on that front? Lawrence Bruno: Yes. I mean I think there are some prior and Core Lab has been through these. I talked about our confidence that we'll navigate through this. There are prior disruptions, whether it was the wars in Kuwait and Iraq where there was considerable field damage. It doesn't appear that some of the, I'll call it, the metal -- there's not as much bent metal at this point. as there was during some of those conflicts. So I think that doesn't have to -- that won't take as long as get going. But I do think it will be -- there'll be, I'll call it, a strong push and a rebound in trying to move as much crude oil and refined product as possible. And then longer term, I think there's going to be maybe infrastructure opportunities, not all of which will affect Core Lab. I think there'll be more pipelines built to try to avoid choke points in the future. I think we saw some comments coming out of the UAE about that. And I think it's going to be a costly process to get oil back into the system, get strategic reserves refilled. And I think the refining infrastructure hits that have occurred in the Middle East are going to compromise for a while natural gas and some crude oil exports. Sean Mitchell: Got it. Got it. And then maybe just as that process plays out where you're bringing production back on, I'm assuming this might create some incremental demand for reservoir diagnostics and optimization? Lawrence Bruno: Yes. I mean I think the clients are going to want to make up for lost time, so to speak. And so we have seen, by the way, and it relates to this a little bit, we have seen a few operators outside of the Middle East come to us and say, for example, Hey, we want to increase production, take advantage of the higher price here. We want to run some [ PVT ] fluids testing to make sure that we understand exactly the phase behavior if we start depleting the reservoir a little faster here, are we going to some type of physical change in the properties of the oil, viscosity change or bubble point potentially being impacted. So we are seeing that. And I think that can ripple through the Middle East. If people try to put more oil back on the market in the short term. There'll be some opportunities there for us to help them assess what [ ratcheting ] up production might mean for their reservoir models for the long term. Sean Mitchell: Got it. Well, as always, guys, appreciate the color, especially the macro commentary and the current environment. It's super helpful. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Larry Bruno for any closing remarks. Lawrence Bruno: Okay. We'll wrap up here. In summary, Core's operational leadership continues to position the company for improving client activity levels in the coming quarters and years. For 90 years, Core Lab has navigated geopolitical conflicts and uncertainties, and we will do so again. We have never been better operationally or technologically positioned to help our global client base, optimize their reservoirs and to address their evolving needs. We remain uniquely focused and are the most technologically advanced, client-focused reservoir optimization company in the oilfield service sector. The company will remain focused on maximizing free cash and returns on invested capital. In addition to our quarterly dividend, we'll bring value to our shareholders via growth opportunities, driven by both the introduction of problem-solving technologies and new market penetration. In the near term, Core will continue to use free cash to repurchase shares and strengthen its balance sheet, while always investing in growth opportunities and evaluating various methods to increase shareholder value. So in closing, we thank and appreciate all of our shareholders and the analysts that cover Core Lab. The executive management team and the Board of Core Laboratories give a special thanks to our worldwide employees that have made these results possible. We're proud to be associated with our continuing achievements. So thanks for spending time with us, and we look forward to our next update. Goodbye for now. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the Hyatt First Quarter 2026 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the call over to Adam Rohman, Senior Vice President of Investor Relations and Global FP&A. Thank you. Please go ahead. Adam Rohman: Thank you, and welcome to Hyatt's First Quarter 2026 Earnings Conference Call. Joining me on today's call are Mark Hoplamazian, Hyatt's Chairman, President and Chief Executive Officer; and Joan Bottarini, Hyatt's Chief Financial Officer. Before we start, I would like to remind everyone that our comments today will include forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K quarterly reports on Form 10-Q and other SEC filings. These risks could cause our actual results to be materially different from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued today, along with the comments on this call, are made only as of today and will not be updated as actual events unfold. In addition, you can find a reconciliation of non-GAAP financial measures referred to in today's remarks under the Financial section of our Investor Relations website and in this morning's earnings release. An archive of this call will be available on our website for 90 days. Additionally, we posted an investor presentation on our Investor Relations website this morning containing supplemental information. Please note that unless otherwise stated, references to occupancy, average daily rate and RevPAR reflect comparable system-wide hotels on a constant currency basis and closed hotels in Jamaica are excluded from comparable metrics in 2026. Percentage changes disclosed during the call are on a year-over-year basis unless otherwise noted. With that, I will now turn the call over to Mark. Mark Hoplamazian: Thank you, Adam, and good morning, everyone. We appreciate you joining us today. Before I begin, I want to acknowledge recent events in the Middle East. We are closely monitoring the evolving situation and remain in regular contact with our hotel teams who've done a remarkable job of managing operations during trying times. And I'm extremely grateful for the professionalism and care with which my colleagues have conducted themselves throughout. The quarter also saw isolated security concerns in Mexico and Hyatt colleagues, guests and our hotels were thankfully unaffected. The safety of our guests and colleagues remains our top priority, and I'm proud of the care and resilience that our teams continue to demonstrate. At times like these, our purpose to care for people so they can be their best, continues to guide our actions. Turning to operating results. This morning, we reported first quarter system-wide RevPAR growth of 5.4% and performance exceeded our expectations, driven by continued strength in our luxury brands globally. RevPAR growth in the United States was ahead of expectations, and we saw strong growth across most international markets. Leisure demand from premium customers was exceptionally strong in the quarter, increasing approximately 7% compared to last year, with the strongest demand realized by our luxury brands. Business and group travel was also solid with business transient RevPAR up 2.4% in the first quarter and group RevPAR up nearly 4% compared to last year. Our core fee business remains durable and our diverse global portfolio has proven resilient in the face of demand fluctuations, including certain macro and geopolitical disruptions. Our differentiated brands continue to deliver results over the long term and reinforce our position as a preferred brand portfolio for guests. We continue to see this preference reflected in our World of Hyatt loyalty program. We ended the first quarter with approximately 66 million members, an increase of 18% compared to the first quarter of last year. And World of Hyatt members accounted for nearly half of total occupied rooms globally during the quarter. World of Hyatt's success goes beyond scale. We are focused on generating higher value demand. When our members stay with us, they spend nearly twice as much compared to a nonmember, highlighting the engagement from our premium customer base. The value proposition of our loyalty program continues to resonate with our members. Enhancing Hyatt's attractiveness to owners and developers. Development activity during the quarter was very strong, we ended the first quarter with a record development pipeline of approximately 151,000 rooms, up more than 9% compared to the first quarter last year. We continue to see strong interest in our newest brands with owners recognizing the value of our brands and the strength of our commercial engine. In the first quarter, we signed a number of new franchise agreements across Hyatt Studios Height Select and unscripted by Hyatt brands in the United States and have many more in discussion. In total, the pipeline for new hotels in our Essentials Brand Group increased nearly 25% compared to the first quarter of 2025. Outside the United States, our development engine is strong. with significant signings activity during the quarter. We're seeing broad interest across our brand portfolios throughout the world, reinforcing our confidence in our ability to drive durable, capital-efficient fee growth over the long term. We achieved net rooms growth of 5% for the first quarter of 2026, in line with our expectations as we lapped a quarter of outsized openings last year. We had several notable openings in our lifestyle brands, including the Anda Lisbon, which strengthens our lifestyle brand presence in Europe, Diana's Shanghai ITC a luxurious and modern addition to our already strong brand presence in Greater China and the Livingston, our first hotel in Brooklyn, New York. These openings reflect our continued focus on expanding our portfolio in high demand markets with differentiated offerings. With many exciting additions to our lifestyle portfolio slated to open in 2026 and further strengthening our position as a leader in lifestyle offerings at scale. We also continue to see strong momentum in our Essentials brands, entering 7 new markets during the quarter. This included the expansion of our upper mid-scale portfolio with several UrCove by Hyatt openings as well as the third Height Studios property in the U.S. These brands are an important driver of our growth strategy, allowing us to expand our brand footprint in markets where we have significant white space while also offering attractive economic returns to owners. We expect our net range growth to accelerate over the course of the year as we benefit from meaningful opportunities to convert hotels into our system, along with openings from our pipeline. Now shifting to an update on transactions. We continue to make progress on the plan to sell Hyatt Grand Central New York and could be in a position to close that transaction in the fourth quarter of 2026, if various closing conditions are satisfied. We will continue to provide updates on this transaction as we reach key milestones. During the quarter, we elected to terminate the purchase of sale agreement for the sale of the Anda London Liverpool Street. And separately, we are no longer under contract for two other properties that were previously signed, our decisions not to move forward were specific to the individual transactions and reflect our continued discipline around pricing and terms. To be clear, our broader plans for additional asset sales and our confidence in the transactions market remain unchanged. We remain active in the market and are in discussions regarding certain assets to further realize value from our owned portfolio. Our approach remains consistent with our previous track record, ensuring we realize attractive values when we sell hotels and ensuring we execute transactions in a disciplined manner that retains the sold properties within our portfolio and increases shareholder value. As we look forward into 2026 and beyond, I'm confident about our future. We have significant competitive advantages that drove the strength in our core business in the first quarter. We are focused on elevating Hyatt so we can respond faster, innovate more and perform at a higher level. in an increasingly dynamic environment. At its core, elevating Hyatt and maximizing our potential comes down to three integrated areas working together, our brands, our talent and our technology. Increasing brand equity is a key component of how we drive value for our stakeholders. Our sharpened brand focus strengthens differentiation, enhances the guest experience and drive stronger performance across our portfolio. This makes it that much more attractive to owners and developers supporting our expectations for long-term growth and growing free cash flow. Brands create the most value when they are executed consistently, and that comes down to our people. We are focused on developing leaders who could execute at a high level while continuing to innovate as enabled by our culture. We've built an organization grounded in quality, responsiveness, performance and continuous improvement. Strong brands and great teams performed best when enabled by the right data and the right technology that we are leveraging to uncover deeper insights. These insights will allow us to better engage with our guests, support our colleagues and enable faster, more informed decision-making. We navigated a very dynamic quarter with several events requiring speed and responsiveness that our colleagues handled exceptionally well. I'm proud of our colleagues around the world who live our purpose every day, which I truly believe allowed us to deliver such strong quarterly results. I'll now turn the call over to Joan to provide more details on the quarter. Joan, over to you. Joan Bottarini: Thank you, Mark, and good morning, everyone. In the first quarter, RevPAR exceeded our expectations, increasing 5.4% compared to last year, driven by strong demand across our global portfolio and continued strength of the high-end traveler. In the United States, RevPAR increased 3.3% compared to last year. Performance was led by our full-service hotels, which benefited from strong leisure demand, including at our resorts, which had a particularly strong March. Group RevPAR was up 1.2% in the face of more difficult comparisons in Washington, D.C. due to the January 2025 presidential inauguration. We also saw improvements in select service RevPAR, which increased 1.8%, led by business transient demand. Outside the United States, RevPAR growth was even stronger, increasing over 8% and reflecting robust international travel demand. Greater China grew RevPAR over 12% in the quarter, supported by improved domestic leisure demand, particularly during the Lunar New Year holiday in February. Along with improved international inbound travel, including from the United States. Asia Pacific, excluding Greater China RevPAR increased over 11%, driven by strong inbound travel and demand across key markets. Europe continued to perform well, with RevPAR growth of 7.5%, supported by strong leisure travel and solid group demand benefiting from the Olympics in Milan. RevPAR in the Middle East and Africa declined by approximately 4% compared to last year due to the conflict in the Middle East. Net package RevPAR in our all-inclusive portfolio increased 7.4% and compared to last year despite the security concerns in Mexico beginning in late February. Overall, our first quarter results reflect strong demand for premium leisure travel globally and a healthy commercial travel backdrop. Turning to our financial results. Our core fee business continued to perform well in the first quarter, supported by our top line performance, with tell level profitability, increasing scale and the quality of our portfolio. Gross fees increased approximately 9% to $333 million, driven by strong performance across our managed portfolio, fees from newly opened hotels and the newly structured management agreements from the Playa portfolio. We also grew incentive fees approximately 14%, reflecting solid hotel level profitability, particularly in international markets. In the first quarter, owned and leased segment adjusted EBITDA declined by approximately $2 million adjusted for the impact of asset sales. Distribution segment adjusted EBITDA declined versus the prior year due to temporary factors, including the closure of hotels in Jamaica because of Hurricane Melissa and lower demand in Mexico due to security concerns. The distribution segment was also impacted by lower demand for 4-star properties a dynamic we have shared that will take time to return to previous levels as travel spend improves for this consumer segment. Overall, adjusted EBITDA for the quarter reflects the strength of our core fee business. As of March 31, we had total liquidity of approximately $2.2 billion, including $1.5 billion of capacity on our revolving credit facility. In the first quarter, we repurchased $135 million of Class A common stock, returning approximately $149 million to shareholders through share repurchases and dividends. We ended the quarter with $543 million remaining under our share repurchase authorization. We remain committed to our investment-grade profile and our balance sheet is strong. Looking ahead to the rest of 2026. We are operating in a dynamic environment that varies from region to region. RevPAR in the Middle East is expected to be down significantly compared to last year, impacting fees by approximately $10 million for the balance of the year. Pace for our all-inclusive resorts in the Americas is up in the low single digits in the second quarter due to lower demand in Mexico. While we expect positive net package RevPAR growth in the Americas, we do not expect to see the same level of growth for the remainder of the year compared to the first quarter due to the disruptions from the security concerns in February. Overall, these disruptions are expected to have a modest impact to results. We are increasingly positive about the outlook for the United States. Forward-booking trends in the United States are strong for the balance of 2026 with group pace for full service hotels up in the mid-single digits for the remainder of the year. We continue to hear positive feedback from our group and corporate customers about their intent to travel this year, and we expect the strong leisure trends to continue. We are also seeing improved select service trends as we lap easier comparisons starting in the second quarter. Outside of the United States, we also expect performance in Greater China and the rest of Asia to be very strong in the balance of 2026. We believe the improved performance in the United States supports increasing our full year system-wide RevPAR growth outlook to between 2% to 4%. RevPAR in the United States could grow between 2% and 3% for the full year, reflecting the improved trends that I just reviewed. We expect moderately higher growth in international markets compared to the United States overall, but growth will be lower compared to our expectations last quarter, primarily due to the impact of the conflict in the Middle East. We expect net rooms growth of 6% to 7% for the full year with continued momentum behind our new brands, driving another year of strong organic growth. We are raising our gross fees outlook for the full year and expect fees to grow between 9% to 11% in the range of $1.305 billion to $1.335 billion. We are maintaining our full year adjusted EBITDA outlook range and we expect adjusted EBITDA to grow at a strong rate of 13% to 18% in the range of $1.155 billion to $1.205 billion. This outlook reflects stronger performance in our core fee business, offset by revised expectations for the Distribution segment, which we believe will decline by approximately $25 million for the full year compared to 2025. including $15 million in the second quarter from the impact of the security concerns in Mexico. We are maintaining our adjusted free cash flow outlook for the full year in the range of $580 million to $630 million an increase of between 20% to 30%. This reflects the conversion of adjusted EBITDA to adjusted free cash flow of at least 50% for the full year. Finally, we expect to return between $325 million and $375 million of capital to shareholders for the full year through share repurchases and dividends. For the second quarter of 2026, we expect global RevPAR growth of around 3%, which reflects solid growth in the United States, including the start of the FIFA World Cup in June and continued strength in international markets, except for the Middle East. Gross fees could grow in the mid-single-digit range in the second quarter compared to last year. We expect adjusted EBITDA for the second quarter to be up in the mid-single digits compared to what we reported in the second quarter of 2025 after removing $17 million of pro rata JV EBITDA consistent with our updated definition and $14 million of owned and leased adjusted EBITDA for the period of ownership of supply portfolio. Please refer to Schedule A 9 in this morning's earnings release for the 2025 adjusted EBITDA baseline by quarter which excludes pro rata share of JV EBITDA and asset sales that were completed last year. In closing, our first quarter results reflect the strength of our core fee-driven earnings, our results demonstrate the performance of our brands and the resilience of our premium customer base across brands and geographies in the face of a dynamic operating environment. As we look ahead, we remain confident in our ability to deliver continued growth, supported by our strong pipeline, differentiated brand portfolio and disciplined approach to capital allocation. We believe we are well positioned to navigate a dynamic environment while continuing to deliver meaningful long-term value for our shareholders. This concludes our prepared remarks, and we're now happy to answer your questions. Operator: [Operator Instructions]. Our first question comes from Lizzie Dove with Goldman Sachs. Elizabeth Dove: So we've seen, obviously, this really meaningful positive shift in the U.S. demand dynamic. There's been some talk of the C-shaped economy, but it also seems like your higher-end customer is still doing very, very well. And so, maybe you could just unpack a little more about what you're seeing real time, what's embedded in that 2% to 3% you raised it to in the U.S. in terms of business in leisure and how you expect that? Joan Bottarini: Sure, Lizzie. Yes, we had a result in the first quarter that exceeded our expectations and leisure transient in the quarter in the U.S. alone was up 4%, and group RevPAR being up 1.2 with the comparison we had to the inauguration last year was a strong result and even probably more, I guess, in excess of our expectations was select service RevPAR was strong, and that was driven by business transient improving. So all of those trends that we saw that were in excess of our expectations. We're looking at the second quarter and the rest of the year. and factoring that into our outlook. I mentioned that we expect the U.S. in the second quarter to be between 2% to 3% growth. And that's going to be helped in part to by the group business that we're seeing from FIFA in June, and that will carry over into July a bit too. So for the full year, we believe we have a strong and reasonable expectation given what we're seeing, I mentioned group up in the mid-single digits for the remainder of the year in the U.S. and business transient and leisure transient, the booking windows are still modest, but we feel really confident about our outlook now for the U.S. Mark Hoplamazian: I'll just add a couple of comments, Lizzie, thanks for the question. First, on the group front, we have sequentially over the last approximately 9 months grown group share. And our RevPAR realization has steadily increased over that period of time. Part of that has to do with a new approach into -- in terms of how we go to market. And that reflects the quality and the positioning of the groups that we are actually attracting differentially. Secondly, whether you look at STR chain scales or you look at the luxury brand group that we've defined for ourselves, they were the strongest RevPAR growth sectors -- segments in our portfolio. If you look at our brand group, for example, we were up in the double digits, RevPAR growth in the first quarter. And we also had the most expansive index growth, so market share growth, almost 5 points of increase in share in the first quarter. So we really -- if there's any sign of weakness in terms of the high-end customer, we have not seen it. Of course, I think we are playing the game differently and also really focused on the clients that we serve and how we go to market. And I think our relative performance is a reflection of that. Operator: Your next question comes from the line of Stephen Grambling with Morgan Stanley. Stephen Grambling: I wanted to turn to the distribution segment a little bit. I recognize that you had some kind of one-off things that are impacting it. But how should investors think about the drivers of this segment longer term? And separately, do you still see synergies from this business within the overall portfolio, if you will? Or is this more kind of a standalone at this point? Mark Hoplamazian: Thank you, Stephen. First of all, the way we think about the business is, it has been -- it's been hit by a couple of isolated issues that have had an obvious impact. And you heard what we -- what our outlook is for the year. There's some FX in that as well, but a lot of it is the change in volumes that relate to Jamaica being largely shut down in relation to the core bookings that we had last year into Jamaica before Hurricane Melissa. And then secondly, the Mexico security concerns. I would say that we view both of those as isolated. The second thing is we see actually more -- if I had to say, do we see more opportunities than risks. The answer is absolutely yes. and they really derived from 2 things. One is, in the same way that we have revamped how we go to market in certain areas within our core business. We have done the same in relation to ALG vacations. And we have an AI strategy road map for new capabilities that we're building that will make us more effective and more efficient and I think drive more volume. And the platform itself is highly enabled to be able to serve others on a white label basis. And we see growing opportunities in that domain because there are a lot of larger -- there are companies with large customer bases that are looking to offer more and different types of services to their customer base. And package travel is one key area. So we see really significant opportunity. Having said all of that, the principal reason we own this business is because of its interface and integration with IC, the height inclusive collection because it's still a significant revenue generator for that business, and it strategically serves a purpose of being able to have greater visibility into things like Lyft. We buy, I don't know, I would hazard a guess, it's in excess of $1 billion, probably more like $1.5 billion of airline seats every year as part of the packages. So we have extremely close relationships with all the carriers as well as charter operators. That visibility gives us a lot to go on in terms of how we forecast and what the outlook looks like for each market. So I would say there is a strategic rationale. It does fit with the inclusive collection. If that were not true, I'm not sure that we would own this business, but it is true, so we own it. It happens that we are not looking at this as sort of just a cog in the wheel. We're looking at it as a real business with a real opportunity in the future. Joan Bottarini: And the only thing I would add to what Mark said -- sorry, the only thing I would add to what Mark just said is, structurally, about half of the business serves 5 star locations and half of the business serves 4 star locations. So when you think about the performance of our portfolio and the demand that we saw despite the securities concerns in Mexico, that there was redirection of a lot of that business into other locations. So that is something that has benefited our portfolio, but on the temporary side with respect to Forestar we're seeing actually after the disruption late February and into March, that pick up, stabilize and grow. So when we look at the second half of the year, that's where we're seeing the impact from the first year -- excuse me, from the first quarter and the second quarter to get much better and particularly into the third and fourth quarters of this year. Mark Hoplamazian: So while we're on this topic, I do want to provide a couple of pieces of data that I think will provide context first. In terms of gross fees, Mexico represents about 10% of our total gross fees. The Dominican Republic represents about 6% and Jamaica represents about 1%. And so as we talk about these markets, I think it's important for everyone to understand the relative size. Secondly, we were positive the heightened [indiscernible] had positive RevPAR growth across each of those markets -- sorry, not Jamaica. Jamaica is still wildly disrupted, so let's leave that out. But up 3% in Mexico, up 11% in the Dominican Republic, really where you saw the massive change was March. So Mexico was down 5%, but the Dominican Republic was up 16%. And that is a direct reflection of the channel shift that we actually played a big role in because we have the largest tour operator in North America. To actually cascade business that wasn't going to Mexico because of security concerns into the Dominican Republic. So that's just a hard data point for you to actually understand in terms of the strategic value that ALGV provides to the business itself. Operator: Your next question comes from the line of Michael Bellisario with Baird. Michael Bellisario: Mark, on the demand front and sort of your big picture outlook kind of taking those together. Just how are you thinking about or maybe sensitizing just the whole potential range of outcomes with all the macro uncertainties out there, just higher gasoline, higher airline ticket prices, reduced flight capacity. Just how are you thinking about that? Are you seeing anything yet in the booking pace that maybe gives you any pause? Mark Hoplamazian: Not at the moment. I think we're very sensitive to what's happening with airfares because airlines will have to adjust their affairs to accommodate fuel price increases. And of course, the biggest issue is the persistency of the current situation overnight last night, oil moved quite a lot. And -- but again, I think there's a danger in trying to make predictions off of momentary strategy -- or sorry, policy positions that the participants and the board might be taking. So we are looking at a situation in which if there is a persistence of higher oil prices and that keeps going up. I think the biggest hit in terms of demand will be at -- in -- amongst lower income households. That's true across retail as well as hospitality. It's -- that's really where a disproportionate amount of the pain will be felt. I think airfares have already gone up. And depending on what market you're looking at, they've gone up between 5% and 10%, maybe a little higher than that in certain markets. And that hasn't really affected our volumes. They've shifted as I just described, but it hasn't affected our volumes. And I think, once again, this goes back to the actual client base that we have. We're not serving primarily the market of lower household -- lower household incomes relatively speaking. It's really very concentrated in higher-income households. And also households that have financial assets, investments in the stock market and so forth. So there's a [indiscernible]. And so -- we don't see any significant demand shifts at this point. But we are paying close attention to this because at some level, ever-escalating oil prices and inflation will have an impact. Operator: Your next question comes from the line of Richard Clarke with Bernstein. Richard Clarke: Just want to follow up a little bit more on some of the Caribbean dynamics. So I think at the full year results, you would have expected the Jamaica hotels to reopen by the end of this year. I think it looks like that's going to move to early '27. So what impact does that have on this year's numbers? And just on Mexico, are you seeing demand there now normalizing? Is that what you're saying for the second half that Mexico will be back to normal levels of demand beyond the second quarter? Joan Bottarini: Richard, I think you were referring to Jamaica. And we have removed Jamaica for this year. So impact to this year is nothing greater than what we've presented in our EBITDA and fee outlook. And we provided a walk during our investor presentation -- in our investor presentation in the fourth quarter on that specifically. So that's the story with Jamaica and we'll keep you posted as far as reopening and our expectations in 2027. With respect to Mexico, we are seeing a moderating of the impact that we -- that I mentioned that we saw in late February and into March. So we feel good about what we're seeing in the last couple of weeks. So week-on-week, we're actually seeing pace getting better. And as Mark mentioned, airline capacity has not gotten larger, but airlines are actually managing this with load capacity. So there's still quite a bit of demand that's going into these markets as we look out into future quarters. So the second half of the year, we feel good about that we'll be able to pick up -- and our outlook overall is positive for the Caribbean and for our net package RevPAR in the Americas. Part of that is due to the improvement in Mexico and part of that is due to some of this redirection of travel into other markets where we have hotels. Operator: Your next question comes from the line of Shaun Kelley with Bank of America. Shaun Kelley: I just wanted to ask about some of your global expectations. Could you just give us a little bit more color on how you're thinking about Middle East and Africa trending through the balance of the year? And then just maybe some of the offsets globally as -- I don't know if Asia is seeing any redirected business is now staying more in that market and not kind of crossing over to Europe or just how you see some of those kind of global puts and takes. Joan Bottarini: So I'll start with what our outlook includes Sean. And then maybe Mark will want to add as well as far as the macro. But Middle East, right now, what's built into our outlook is a more pronounced impact in the second quarter, which is embedded in our EBITDA outlook that we -- that I shared -- so we expect demand in the second quarter to be more impacted and then to improve in the second half of the year sequentially quarter-over-quarter. So kind of by the end of the year, getting closer to maybe flat, but we'll see because it's very uncertain as far as how this will evolve over the coming quarters. But that's what's embedded within our outlook. And the one region that has been exceptionally strong is China. And I mentioned the growth in the quarter of 12%. And the region overall, excluding Greater China, is up 11%. We're seeing strong results into April on a preliminary basis. So that has also been a region that has exceeded our expectations. In China, this is -- we had the Lunar New Year holiday in the quarter, which always gives a boost, but we're also seeing group slightly up and BT about flat. So across all demand segments, China looks like a region that we can continue to rely on growth for the remainder of the year. Mark Hoplamazian: The only region I would add a little commentary to about Europe. Which was up 7.5% in the first quarter stronger than we anticipated. There are ongoing. There's more and more talk about fragility, economic fragility in Europe, especially around energy prices and the escalation of energy prices. Again, this is an example where I think there's going to be a difference between how economy budget mid-scale performs in Europe versus full service and luxury. And so we actually have a positive outlook in Europe for the remainder of the year. It seems like in 20 -- I remember thinking in 2022, the '23 would be Europe's big breakout year. It turned out to be true. I thought '24 could be good. It turned out to be great. '25, I thought couldn't beat '24, it beat it. -- so Europe has actually been, at least for our portfolio, have been very resilient. And I've learned over the last 3 years that counting your about is a mistake. So I would say we have a pretty positive outlook on Europe. Operator: Your next question comes from the line of Smedes Rose with Citi. Bennett Rose: I appreciate all the color around Mexico and the Middle East. Maybe just kind of switching gears a little bit. I was just curious as to your comments at the beginning of the call about terminating your sale of the Andaz in London and not moving forward with a couple of other asset sales. Could you maybe just -- I don't know if you can provide any more color around what sort of broke those deals that would certainly be of interest. But then also, how are you just thinking about the transaction environment overall? Is it getting more favorable relative to your last call and maybe this time a year ago? And any kind of I don't know, would you like to be able to complete additional asset sales, I guess, as we move through the balance of the year? Mark Hoplamazian: Sure. Thank you for the question, Smedes. I think with respect to Liverpool, for those of you who don't know, the hotel sits on top of rail lines that are part of network rail. That's the U.K.'s national rail system and adjacent to the liver posted station. And the redevelopment that we had a part in with respect to a developer coming together with the MTA from Hong Kong to redevelop the entirety of that site had a number of conditions associated with it, including approvals from network rail that didn't -- were not issued. We don't believe the opportunity is dead. We believe that the deal that we had signed up doesn't have the authorities that it needs to move forward. I don't believe that, that means that there won't be a redevelopment, I believe it will take a different shape. And you can imagine, we remain in very close contact with all the parties involved. And I'm actually optimistic. It's a great location and a great hotel market. adjacent to some of the biggest businesses in the city of London. And when I say adjacent, I mean literally across the street from. So we have great corporate drivers and the hotel has got a great reputation as a social event destination. So I'm very optimistic we can find our way to a different type of deal, but it will take some more time for Network Rail to make some additional decisions about how the sequencing of that project unfolds and so forth. In the meantime, the hotel is performing very well. So we don't -- we're getting paid to wait, so to speak. So that's really the whole story there. And I would describe it as a setback, not a not something that we are turning off because we won't be able to sell it. Secondly, we won't -- we will not do the redevelopment by the way. We will only participate by way of selling the property into a redevelopment plan. That's -- so we're not going to undertake a mass redevelopment in the City of London. The other hotels actually were relatively small deals. We mentioned a few calls ago that we have a few hotels that are -- we would put in the category of portfolio cleanup. They happen to be unleased property. So it's a ground lease that the hotels operate on. So they're not material we ended up with market-specific reasons why we elected not to proceed with two of those properties with two properties that we had previously had signed. And we believe that the markets will perform well this year will get paid to wait. And we will we will look to put another deal together in the future. Finally, yes, we are working on other opportunities to have additional asset sales. So when I mentioned our plans with respect to asset sales and our outlook on the transaction market remains unchanged. What that means is our intention to continue to sell properties. And I do think that the market for property sales is much more constructive this year than it was last year. Operator: Your next question comes from the line of Duane Pfennigwerth with Evercore. Duane Pfennigwerth: So just low singles EBITDA growth in the first quarter. It sounds like mid-singles in the second quarter. Can you just big picture walk us through the building blocks of why we would get so much acceleration in the back half? Joan Bottarini: Sure. The -- as we look at the core business, we've been talking about how strong we have been performing and how we anticipate continuing to perform, including our net rooms growth expectations. So when you look at the total year RevPAR, total year net rooms growth, that's going to lead to very strong fee growth for the year. And in the second half, I mentioned that the distribution segment will recover. There will be better performance, particularly in the fourth quarter because we are experiencing easier comps in that quarter. So there's a couple of factors related to all of those items built into the second half of the year. There's also structurally -- if you'll recall, we renegotiated the Playa contracts. And in the second half of the year, we don't have the headwinds from the franchise fees that we had in the first quarter. So that helps us in the pickup on the fee growth into the second half of the year. So there's a couple of structural items. There's improvement in the distribution business that we're confident in and in the core fee business will remain strong going into the second half of the year. Also, I would mention, Duane, the G&A that we posted in the first quarter was a little bit higher than our expectations, mostly due to timing. So as we look at the last 3 quarters of the year, we'll have lower G&A expense as well. Operator: Your next question comes from the line of Dan Politzer with JPMorgan. Daniel Politzer: I think you spoke a little bit about general drivers of demand, but something that I think we came into the year hearing a lot of that was World Cup, Americas 250th things of that nature. So I mean has there been any change in kind of the outlook there as it impacts your business, especially in the kind of the peak summer season? Mark Hoplamazian: No, I think there's been no change in the outlook, it's positive. The pace that we're seeing into the cities that are hosting World Cup, are very strong. And we -- New York is, I think, a significant driver of that because that's where the finals will be. So the July pace for New York is really extremely strong. And interestingly, we've got real group business, significant group business that's also pacing well ahead in those cities. So it's not just transient, which is inherently shorter term. And so our visibility to how much transient we actually pick up between now and the time that we get to World Cup is low, but our visibility on the group side is quite good. And the pace increases for those markets is in the mid-teens in terms of group pace. So I would say we thought it was going to be strong in those particular cities, and we continue to feel that way. Operator: Your next question comes from the line of David Katz with Jefferies. David Katz: I wanted to just go back to technology and AI, in particular, it's obviously a growing topic across the industry. Mark, I'd love your perspectives on sort of where you're at, where you'd like to get to and how you see it evolving for Hyatt in any industry. Mark Hoplamazian: Sure. We have really made significant progress over the last 2 years, more than that, about 2 years and 4 months now of really putting together our entire environment and then building out a number of genic platforms. I would say one should never measure success based on how many agents you have deployed in your company. And I don't believe that any particular platform or tool is a durable competitive advantage. So however, what I do think is if you combine advanced advancements and facility with building platforms that have actually generated real impact to date, which we have. And we become more and more practiced at the human elements that are required in order for that to really generate value. I think that's really where competitive advantage can be uncovered. So there are two dimensions to that. The first is the level of expertise and, frankly, reps repetitions of creating great tools and great platforms. And being able to pivot and continuously modify and optimize those platforms even as the models themselves learn, they're self-learning embedded in that, as you know. The second dimension is the expansion of the adoption of regular use of AI tools. We have enterprise-wide licenses on a few platforms, and we are looking to extend and expand. And I have to say every -- literally every week that goes by in my team meeting, I hear new and different applications that hotel teams have come up with that I'm blown away by. And I think it's true that the adoption rate and level of expertise varies across the company. But we've heard about some really remarkable advancements. And I think it's the combination of that enablement at the center with a special focus on expanding and scaling adoption with the entrepreneurship at the local level, the combination of those 2 things is really where magic can happen. And so we continue to see revenue focused activity is our #1 focus. It happens that in every case, every revenue-facing initiative that we've undertaken has also resulted in productivity gains. And the question is, what do you do with that productivity gain. And in many cases, we redeploy those resources to actually optimize further and hone and get more specific around insights that we've derived on our customer base to be able to go to market differentially. And I think that's why our performance has just -- in our core business has strengthened over this period of time, and I think it's 1 key driver of that is the application of AI. So that's our philosophy. That's how we're approaching this. We see the big opportunity is to actually really elevate the level of humanity and the interactions that we have with our guests and our own colleagues by taking a lot of administrative work out of the system entirely. And that's really a powerful motivator for us given that we're very much a purpose-driven business. Operator: Your next question comes from the line of Chad Beynon with Macquarie. Chad Beynon: Great to see the increased pipeline of executed MNF contracts that you announced in the print -- just with respect to the Middle East conflict, should we expect any type of construction start delays or overall activity delays? Or do you think this pipeline should be executed kind of as planned? Mark Hoplamazian: Yes. Given the nature of what we've got in the region, which is more concentrated in Saudi than anywhere else, we don't see any impact in 2025 -- sorry, '26. I forgot what year we're in. Operator: Your next question comes from the line of Trey Bowers with Wells Fargo. Unknown Analyst: This is [ Nick Wikel ] on for Trey. I just want to dig in a bit more on NUG, and try to figure out like which brands you're seeing the most uptake in, maybe the mix between like conversions and newbuilds for the year and you just hit on the impact or potential impact from the Middle East. So any color would be great. Mark Hoplamazian: Yes. Super encouraging. When we look at the pipeline increase year-over-year the activity level has gone up a lot. A lot of that has been in our Essentials brands, our slot service brands, up 25% in terms of pipeline size year-over-year, which is notable to say the least. We've had a sequential improvement in hotels under construction. It's up 10% quarter-over-quarter. About 1/3 of our hotels are under construction now. I would say as we our outlook currently includes about 2/3 of our room openings this year gross room openings this year coming from our pipeline and 1/3 or maybe it's 65, 35 or something like that being in the year for the year. And of that, in the year for the year openings figure, we already have 60% that we've identified and have opening dates for. So we feel really good about where we stand at the moment. And yes, the activity in the U.S. in the Essentials brands is really, really strong right now. I think we've hit a vein with Studios Select and unscripted. Of those brands select has really taken off. And we have quite a few, if I count them correctly, probably over 30% of the conversions that we see already planned for the year are select -- Hyatt select hotels. So -- and I think it will grow from there. So I'm encouraged across the board, but I have to say in the U.S., the Essentials portfolio is really the strongest category. Which will really help us fill in a lot of markets in which we have no representation whatsoever. We opened 7 new markets in the first quarter, and I think we're going to end up opening a huge number of new markets this year. Operator: And the final question will come from Meredith Jensen with HSBC. Meredith Prichard Jensen: I was hoping you might speak a little bit more about the loyalty program. I know you gave the membership and the strong growth. But I was hoping if you might dig into a little bit more about spend, redemption behavior, how that's evolving kind of over regions and customer cohorts and perhaps adding any insights you might be getting from your credit card partnerships, that kind of thing, that would be great. Mark Hoplamazian: SP1772067257 Sure. First of all, in terms of the nature of the spend, I think it's like 60% or 65% of the room nights are paid for. with the remainder being redemption. So it's a very healthy ratio of our guests actually there as paying guests and not simply as redemption. Of course, we not only welcome but celebrate those who are redeeming their points because that is the flywheel with respect to loyalty. The demographic profile of our membership base continues to grow stronger, and we see that in the total spend of our members versus our nonmembers. I referenced some data in my talking point, so you can refer back to those. But roughly speaking, it's -- they spent twice the amount that nonmembers spend. And that relates to both engagement and also total spend per stay increasing over time. The other thing that we have really been intrigued with is as we work closely with partners of ours and sponsorship initiatives that we've undertaken, we're seeing not only high engagement, but also more interrogation, more data fidelity and robustness of the data on our customer base that is really attractive to other high-end platforms. And there's an adage where you want to go to where the money is. And so I don't remember the exact percentages, but a very high proportion something like 75% of the spend -- travel spend is represented by the top 40% of travelers. And that we play primarily in the top 20% of the travelers. So they are the highest spending guests. And I just think that we have new and different ways in which we're going to be able to add value for them. and it's primarily through experiences. And our focus on -- within that continues to remain very tightly focused around well-being. So I think that's how we think about it. It's some comments I made about experiences and emotional connectivity versus transactional caught a lot of attention. And really, I didn't mean that the transactional aspects were not important they are. But that's not how we think about what's most meaningful and most valuable for our members. It's really about the emotional connectivity we can establish the care that we can extend not only in through well-being and other experiences, but also in just how we approach our members. So that's our approach. We are small enough and differentiate enough to really make this model work very powerfully. And I think that's why you're seeing such persistent significant growth in the membership base, which will continue to evolve to our benefit. So thank you for that. I want to thank everybody for all of your time this morning. We're incredibly excited about where we stand and the principles that -- and the strategies that have left us in a very strong position I do want to remind everyone that we have an Investor Day in Chicago on May '28, and I have a request. If any of you who are coming are not currently world of hype members, first I'm shocked, Secondly, please sign up and join. And then after you've joined book through the World of Hyatt app or hyatt.com because many benefits will flow in your direction if you do. And then for those of you, most of you, if not all of you, who are already world of Hyatt members, thank you. And don't forget to book through your World of Hyatt or hyatt.com. So thank you for that support, and I wish you all a great rest of the day. Operator: Thank you. This concludes today's conference call. Thank you for participating, and have a wonderful day. You may all disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the American Financial Group 2026 First Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to Diane Weidner, Vice President of Investor Relations. Please go ahead. Diane P. Weidner: Good morning, and welcome to American Financial Group's first quarter 2026 earnings results conference call. We released our results yesterday afternoon. Our press release, investor supplement and webcast presentation are posted on AFG's website under the Investor Relations section. These materials will be referenced during portions of today's call. Joining me this morning are Carl Lindner III and Craig Lindner, Co-CEOs of American Financial Group; and Brian Hertzman, AFG's CFO. Before I turn the discussion over to Carl, I would like to draw your attention to the notes on Slide 2 of our webcast. Some of the matters to be discussed today are forward looking. These forward-looking statements involve certain risks and uncertainties that could cause our actual results and/or financial condition to differ materially from these statements. A detailed description of these risks and uncertainties can be found in AFG's filings with the Securities and Exchange Commission, which are also available on our website. We may include references to core net operating earnings, a non-GAAP financial measure in our remarks or in responses to questions today. A reconciliation of net earnings to core net operating earnings is included in our earnings release. And finally, if you're reading a transcript of this call, please note that it may not be authorized or reviewed for accuracy. And as a result, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements. Now I'm pleased to turn the call over to Carl to discuss our results. Carl Lindner: Well, good morning, and I'll begin by sharing a few highlights of AFG's 2026 first quarter results, after which Craig and I will walk through more details. We'll then open it up for Q&A, where Craig, Brian and I will respond to your questions. We are pleased to report an annualized core operating return on equity of 17% for the first quarter, which was driven by strong underwriting margins. Our compelling mix of specialty insurance businesses, entrepreneurial culture, disciplined operating philosophy and an astute team of in-house investment professionals continue to position us well for the future, enable us to continue to create value for our shareholders. Craig and I thank God, our talented management team and our great employees for helping us to achieve these results. I'll now turn the discussion over to Craig to walk us through some of these details. Craig Lindner: Thank you, Carl. Please turn to Slides 3 and 4 for a summary of earnings information for the quarter. AFG reported core net operating earnings of $2.47 per share at a 2026 first quarter, a 36% increase from the prior year period. I'll start with an overview of AFG's investment performance and financial position and share a few comments about AFG's capital and liquidity. The details surrounding our $17.1 billion investment portfolio are presented on Slides 5 and 6. Excluding the impact of alternative investments, net investment income at our property and casualty insurance operations for the 3 months ended March 31, 2026, increased 8% year-over-year due primarily to higher balances of invested assets. As you'll see on Slide 6, approximately 2/3 of our portfolio is invested in fixed maturities. In the current interest rate environment, we're able to invest in fixed maturity securities at yields of approximately 5.25%. The duration of our P&C fixed maturity portfolio, including cash and cash equivalents, was 3.1 years at March 31, 2026. The annualized return on alternative investments at our P&C portfolio was slightly negative in the 2026 first quarter compared to 1.8% for the prior year first quarter. A number of factors contributed to the lower returns with the most significant impact attributable to a $13 million mark-to-market loss on our $133 million investment in the CLOs that AFG manages. The mark-to-market loss reflects the deterioration in the broadly syndicated loan market in the first quarter of 2026. Longer term, we continue to remain optimistic regarding the prospects of attractive returns from our overall alternative investment portfolio with an expectation of annual returns averaging 10% or better. Recently, there's been an increased focus on insurers' exposure to private credit. AFG has direct private credit exposure, which we define as direct lending to private companies approximating $250 million, which represents 1.5% of total investments. We also have indirect private credit exposure via investments, which are almost exclusively investment-grade rated and benefit from significant structural subordination. We own investment-grade rated bonds issued by BDCs and private credit funds aggregating approximately $800 million, which represent less than 5% of total investments. In addition, we own AAA-rated middle market CLO tranches as disclosed at our supplement. We believe that even in a severely adverse economic environment, the significant structural subordination in these securities provide meaningful protection against any material risk of loss. As of March 31, 2026, the market value of our direct and indirect exposure to private credit is approximately equal to cost. In April of 2026, AFG reached definitive agreements to sell the Charleston Harbor Resort and Marina. Subject to receipt of necessary third-party approvals and satisfaction of customary closing conditions, the transaction is expected to close in the second or third quarter of 2026. AFG currently expects to recognize a pretax core operating gain of approximately $125 million on the sale. This transaction was not complicated -- contemplated in AFG's original business plan assumptions. Please turn to Slide 7, where you'll find a summary of AFG's financial position at March 31, 2026. During the quarter, we returned nearly $260 million to our shareholders, including $60 million in share repurchases, a $1.50 per share special dividend and a $0.88 per share regular quarterly dividend. We expect our operations to continue to generate significant excess capital throughout the remainder of 2026, which provides ample opportunity for acquisitions, special dividends or share repurchases. We evaluate the best alternatives for capital deployment on a regular basis. We continue to view total value creation as measured by growth in book value plus dividends is an important measure of performance over the long term. For the three months ended March 31, 2026, AFG's growth in book value per share, excluding AOCI, plus dividends was 3.1%. Our strong operating results, coupled with the effect of capital management and our entrepreneurial opportunistic culture and disciplined operating philosophy, enable us to continue to create value for our shareholders. I'll now turn the call over to Carl to discuss the results of our P&C operations. Carl Lindner: Thanks, Craig. Please turn to Slides 8 and 9 of the webcast, which includes an overview of our first quarter results. Our Specialty Property and Casualty businesses are off to a strong start this year, producing a 66% year-over-year increase in underwriting profit. Looking at a few details, you'll see on Slide 8 that our Specialty Property and Casualty insurance businesses produced a strong 90.3 million combined ratio in the first quarter of 2026, an improvement of 3.7 points from the 94% reported in the first quarter of 2025. First quarter 2026 results include 2.2 points from catastrophe losses compared to 4.5 points in the first quarter of 2025. First quarter 2026 results benefited from 4.4 points of favorable prior year reserve development compared to 1.3 points in the first quarter of 2025. Each of our Specialty Property and Casualty groups reported higher year-over-year underwriting profit. In first quarter 2026 gross and net written premiums were 6% and 3% higher, respectively, than the comparable period in 2025. We continue to benefit from the diversification across our 36 businesses and achieved premium growth in the vast majority of them as a result of a combination of new business opportunities, a good renewal rate environment and increased exposures while maintaining discipline and focusing on underwriting profitability. Average renewal rates across our Property and Casualty Group, excluding workers' comp, were up approximately 5% for the quarter. That was in line with the previous quarter. Average renewal rates, including workers' comp were up approximately 3% overall. We have reported overall renewal rate increases for 39 consecutive quarters and we believe we're achieving overall renewal rate increases that enable us to meet or exceed our targeted returns. Now I'd like to turn to Slide 9 to review a few highlights from each of our Specialty Property and Causality business groups. Details are included in our earnings release, so I'm going to focus just on summary results here. The businesses in the Property and Transportation Group achieved an excellent 87.6% calendar year combined ratio overall in the first quarter of 2026, an improvement of 4.9 points from the 92.5% reported in the comparable 2025 period. Nearly all the businesses in this group reported higher year-over-year profitability led by Agricultural and Transportation businesses. First quarter 2026 gross and net written premiums in this group were 11% and 6% higher than the comparable prior year period. The increase is primarily attributable to growth in our crop insurance products with higher premium sessions, along with new business opportunities, higher exposures and a favorable rate environment in several of our transportation businesses. Overall, rates in this group increased approximately 6% on average in the first quarter of 2026. Our Commercial Auto businesses produced a solid underwriting profit in the first quarter. After 15 years of rate increases, continued refinement of underwriting and claims routines and investments in our loss control and risk management practices, we're seeing progress in commercial auto liability. And I'm especially pleased to report a small underwriting profit in commercial auto liability for the quarter. We still have more work to do and remain focused on achieving rate in excess of prospective loss ratio trends. In fact, our rates in this line were up approximately 14% in the first quarter. And taking an early look at crop insurance, industry estimates for the 2026 planted acreage for corn and soybeans overall are generally unchanged from 2025 levels. And planning progress is ahead of historical averages. Generally speaking, for the vast majority of our insured crops, the corn planting window runs from mid-April through the end of May, and the soybean planting window runs from late April to the end of June. It is really early in the growing season. Current commodity futures for corn and soybeans are trading about 7% and 5% higher, respectively, than 2020 spring discovery -- 2026 spring discovery prices. Our crop results for 2026 will depend on the harvest yields and prices in the second half of this year. Now the businesses in our Specialty Casualty Group achieved a 95.8% calendar year combined ratio overall in the first quarter, an improvement of 1.8 points from the 97.6% reported in a comparable period in 2025. First quarter 2026 gross and net written premiums both increased 2% when compared to the same prior year period. growth from new business opportunities and higher renewals in our targeted markets and workers' compensation businesses were partially offset by heightened competitive conditions in our excess and surplus lines business. Excluding our workers' comp businesses, renewal rates for this group were up approximately 6% in the first quarter, consistent with the prior quarter. Pricing in this group, including workers' comp was up about 3%. Now on the Specialty Financial Group, we continued to achieve excellent underwriting margins and reported an exceptional calendar year combined ratio for the first quarter of 2026, an improvement of 7 points from the comparable period in 2025. Gross and net written premiums in this group increased by 6% and 1% respectively, in the 2026 first quarter compared to the same 2025 period, primarily due to growth in our lender services businesses. Net written premiums were tempered by our decision to seed more of the coastal exposed property business in our financial institutions business beginning in the second quarter of last year. Renewal pricing in this group was up about 1% in the first quarter of 2026, consistent with the prior quarter and reflecting the strong margins overall earned on these businesses. Craig and I are proud of our proven track record of long-term value creation, and we feel AFG is well positioned to continue to build long-term value for our shareholders for the remainder of this year and beyond. I will now open lines for a Q&A portion of today's call. And Craig and Brian and I would be happy to respond to your questions. Operator: [Operator Instructions] The first question comes from Hristian Getsov with Wells Fargo. Hristian Getsov: My first question is on the marina sale. Can you quantify what the yield or NII contribution was from that asset? Do we think about revising the go-forward NII? And any specific you could provide for the use of the proceeds once the sale is completed. Craig Lindner: Brian, you might have exactly what's reported in the financials. Last year, we did about $16 million of NOI on the property. Brian Hertzman: If you think about the proceeds all how to invest with the $125 million estimated pretax gain, we're going to have more than sort of triple the cost basis to reinvest. If you think of it that way, to replace that income, just investing so ever our normal returns, I think we'll sort of replace the investment income depending how we do, what we do with the money, but just reinvesting that proceeds at, say, 5% or 6% would replace the income from the property. Craig Lindner: Yes. I'm doing a kind of pro forma, I think it really depends upon what we do with the cash. Half of the asset is owned in the parent company. Half is owned in the P&C business. I mean, if we repurchase shares, you get one answer. If you just invest in bonds, you get a different answer. But -- or if we invest in our business earning high-teens returns on capital. So the question is what do we use the proceeds for. I think there's some opportunities for us to to redeploy that capital and have it not be dilutive? Hristian Getsov: Got it. And then for my second question, I noticed you pulled the comment from the press release that the P&C pricing was ahead of loss trend. Can you talk through where pricing is relative to the trend now? And was that common in prior periods primarily on the pricing including comp, which I think was down a point quarter-over-quarter. It also applies to the pricing metric ex comp, which was stable. Carl Lindner: Yes. I'm very pleased with our our pricing results in the first quarter. Outside of workers' comp, really, the quarter price increases for each of the segments in that we're in line with the fourth quarter. Workers' comp pricing was down around 3% in the first quarter. The good news along with that is, when you look at the loss ratio trends in our workers' comp book, they continue to be very benign, and in some cases, positive. And our workers' comp results continue to be excellent in the first quarter. So actually, very pleased. I think overall, it's probably good news if -- when almost all of our businesses are earning the targeted returns, it allows us potentially to be more competitive and just cover loss ratio trends, not necessarily exceed them. Now that said, in certain businesses where we still have some work to do. As I mentioned, commercial auto liability. We'd like to see that continue to make a bigger underwriting profit. We're taking a rate that's in excess of prospective loss ratio trends. I think the same is true in Specialty Casualty with our excess liability and umbrella business, where we're getting priced that continues to be very strong. So I'm very pleased with our first quarter pricing results. Craig Lindner: Should go back to your first question on Charleston. So Brian, just is giving me the amount that was expected to be reported in 2026. I gave you an NOI number of $16 million. The amount that we had in our plan from Charleston was $12.3 million. So it must be a depreciation that accounts for the difference. Hristian Getsov: Got it. And then, I guess, just sticking with the return. So originally, when you laid out your business plan assumption, you were looking for 8% for the full year. Does the first quarter result change that perception, or do you expect like a meaningful acceleration as we go into the back half? Craig Lindner: I would say, given the start to the year, 8% is probably an aggressive number. We give assumptions that go into our initial plan, but don't intend to update those during the year. Certainly, our expectation is for better performance from the old portfolio for the balance of the year. Operator: And the next question comes from Andrew Anderson with Jefferies. Andrew Andersen: Could you walk through some of the drivers of the expense ratio increase? Maybe how much of that is structural versus timing from investments and tech or growth initiatives, or how much of it might be on contingent commissions? Brian Hertzman: Sure, Andrew. This is Brian. So if you look across the segments, there's different things driving the different segments. Overall, we continue to invest in our future with IT initiatives around customer experience, IT security and data analytics. So that does have some upward upward pressure there, but that's relatively modest. If you look at Specialty Casualty, the expense ratio is up a little bit. Some of that is mix of business. And some of that is in our -- some of our excess and surplus businesses. We're getting slightly lower ceding commissions from reinsurers. So on ceding commissions reduced underwriting expenses, beginning a little bit lower ceding commission has modest negative impact on the expense ratio in casualty, but we still feel really good about those reinsurance contracts and the results overall from those businesses. And then in the financial segment where you see the biggest uptick, that's kind of a bit of good news in that our financial institutions business, some of the commissions that we paid to brokers and agents vary with the profitability of the business. So with that business being very profitable for another quarter in a row, that shows improvement in the loss ratio. But then in the expense ratio because of the higher commission, the contingent commission goes up and makes that expense ratio go up a little bit. Andrew Andersen: And then on consolidated premium growth, I think the business plan was for 3% to 5% for full year. It sounds like crop pricing as early reads are positive. I don't know if you could share what you were kind of thinking in terms of consolidated full year planned growth relative to crop insurance, but it seems like it's starting out better than perhaps the last couple of years from a pricing perspective? Carl Lindner: Yes. I think we would see -- when you look at where the spring discovery prices end up, went up a little bit, went down a little bit and -- on corn. So I mean, we think that when all is said and done, our gross written premium is going to be flat. And because we're -- due to some changes in our quota share, our net written premiums will be up nicely. So that's kind of what the growth perspective is there in crop. Operator: And our next question is going to come from Michael Zaremski with BMO Capital Markets. Michael Zaremski: On the Specialty Casualty segment, if we kind of look at the underlying loss ratio good results. I think there is some kind of positive seasonality there. Did that come through in a big way? I guess I'm trying to tease out whether you all feel better about kind of turning the corner on social inflationary lines and starting to see some maybe directionally better loss ratios on those lines in this segment. Carl Lindner: Yes. I mean, I do think we feel -- we do feel better in that. I wouldn't make too much out of any one quarter. We always kind of caution. You can have some variability quarter-by-quarter on that. But yes, I think we are more positive. I mean that said, as I just mentioned, in lines like excess liability, where social inflation creates loss ratio trends that are higher. We're still very much focused on pricing that either equal or exceeds the loss ratio trends in that. So I think in past conference calls, I talked about being through pretty much the re-underwriting and restructuring in excess liability on limits reductions and our nonprofit business, getting off business. And both our nonprofit business and our excess liability umbrella businesses are showing growth in the first quarter. So happy to see that there is a positive trend on the growth side there also. Michael Zaremski: Got it. Switching gears is helpful to share repurchases, a bit higher than expected, although I see the share count not too different than expected, so maybe there was some movement there. Anything we should read into on share purchases that you might be leaning into a bit more at current valuations or just normal kind of activity? Craig Lindner: Yes. This is Craig. So we have a lot of excess capital currently expect to generate a significant amount of additional excess capital for the balance of the year. And we just thought at the prices that we were able to repurchase stock that was a very good use of some of our excess capital. I think we paid a little over $127 a share and felt that was a very good value. Michael Zaremski: Got it. And just maybe just stepping back in terms of the competitive environment, I think one of the main questions we continue to get is industry is earning very healthy returns. Should we expect kind of the competitive levels to continue to incrementally increase as as the year plays out. It feels like that's a direction kind of the right direction unless you all feel like they're maybe some level of some lines have kind of reached the floor on how much further they can kind of change in price? Carl Lindner: Yes. I think it's more status quo. I think what we're seeing in the first quarter is what we're going to see for the rest of the year. And as you mentioned, I mean, we're in plus different businesses and competitive conditions are different in each. And there are some businesses like commercial auto and commercial liability where the industry is still feeling the pain. And I think where we're getting our shop in order, it could provide some nice opportunities for a little bit better growth for us there. Clearly, in things like excess liability, everybody is still challenged by the loss ratio trends there. So I think -- so I was kind of happy to see some disruption here on the -- among fronting companies here recently and around issues around casualty. I've always been pretty skeptical about how many of the MGAs or MGUs or the private equity capital coming behind and reinsurers coming behind a lot of these entities writing volatile casualty business. If anything, I think those that have been pricing below us and commercial auto liability and excess liability and some of the more volatile lines, I actually think there's probably going to be more problems that are going to surface over the next 12 months rather than status quo at least in some of those -- some of the more longer-tail casualty lines. Operator: And our next question will come from Paul Newsome with Piper Sandler. Unknown Analyst: This is Cam on for Paul. I know you mentioned a little bit of pain in commercial auto, and we've certainly seen some companies dealing with that this quarter and in some quarters in the past. I'm just curious if the trend on inflation and severity in commercial auto if you're seeing any acceleration in that trend, or is it more so relatively stable than what we've seen in the past couple of quarters? Carl Lindner: I think it's been pretty consistent. Really, it's been consistent for years being high single digit, even low double digit in some years. We're really pleased that, again, I'm paused after having to be on the conference calls over the last 8 years, telling you I want to get commercial auto liability to an underwriting prop. I'm happy to report, we've done that in the first quarter. So when you look at our overall commercial auto results then earning really solid returns at this point with us getting the commercial auto liability to [indiscernible] rent profit. Operator: And our next question is going to come from Meyer Shields with Keefe, Bruyette, & Woods. Meyer Shields: I just want to stick with the commercial auto side, if I can, because it is impressive where you've come. When you talk about can you talk about the bringing more work to do, is that rate or is that other underwriting actions within the book? Carl Lindner: No, I think it has to do with continuing to take rate that exceeds loss ratio trends in order to get the commercial auto liability from a small underwriting profit to a meaningful underwriting profit. Meyer Shields: Okay. That's helpful. I just don't know if there's anything else going on. And then Brian, one follow-up question on Specialty Financial. I totally get the variable compensation. But last year's loss ratio in this segment was actually lower and the expense ratio was all flower. So I'm wondering what else is going on underneath the surface. Brian Hertzman: So there are a couple of other things there. One is the commissions that we plan that business over long periods of time. So the commission -- if you had some bad quarters, they kind of roll off and good quarters roll in, it can make the cumulative commission higher. There's also a mix of business impact there in that -- some of the other businesses in financial that run at a higher loss ratio than that financial institutions business also grew this quarter. And I think another thing to look at, too, is those commissions are based on the profitability overall. So if you can get an accident year loss ratio ex cats, cats were higher last year than this year in the Financial segment, so that would have also had an impact on commissions making this our a better year from a including cats perspective. Operator: And the next question will come from Hristian Getsov with Wells Fargo. Hristian Getsov: I just have one more follow-up. Any indirect impact on your portfolio that we should think about from the Iran complex, particularly just thinking about like the huge uptick in fertilizer costs and then just overall inflation acceleration? Like how are you guys thinking about that? Carl Lindner: Yes. I think we're in good shape so far. I mean, the near-term impact to us is negligible or pretty modest and manageable in that higher fertilizer and fuel costs really don't impact this year much. I think most of the fertilizer and that was already purchased by farmers, and they're in the process of planning. I think future impact kind of has to do with how long the -- - this conflict goes or this war goes on that. But as far as other in other lines of business and that we really have pretty modest exposure in that. Operator: [Operator Instructions] I am showing no further questions at this time. I will now turn the call back over to Diane for closing remarks. Diane P. Weidner: Thank you, Michelle, and thank you all for joining us this morning and for your questions. We look forward to connecting with you again when we share results at the end of the second quarter. We hope you all have a great day. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: My name is Shyamali, I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's First Quarter 2026 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star then the number one on your telephone key. If you would like to withdraw your question, press star then the number two. I would now like to turn the call over to Christina Jones, vice president of investor relations. Ms. Jones, you may begin your conference. Christina Jones: Thank you, and thank you everyone for joining on today's call. I am joined today by Olumide Soroye, Fortive Corporation's President and CEO, and Mark D. Okerstrom, Fortive Corporation's CFO. During today's call, we present certain non-GAAP financial measures. Information required by Regulation G is available on the Investors section of our website at fortive.com. We will also make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and actual results might differ materially from any forward-looking statement that we make today. Information regarding these risk factors is available in our SEC filings including our Annual Report on Form 10-K and the subsequent Quarterly Reports on Form 10-Q. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements. Our statements on period to period increases or decreases refer to year-over-year comparisons unless otherwise specified and our results and outlook discussed today are on a continuing operations basis. With that, I will turn the call over to Olumide. Olumide Soroye: Thank you, Christina. Let me begin on slide three. Q1 marked a strong start to the year with another quarter of solid performance. We remain laser focused on delivering on our strategic and financial plans for 2026 and continue to make encouraging progress on executing our Fortive Accelerator strategy. We have four key messages to cover today. First, our teams executed well in 2026, delivering solid performance in both segments. On a consolidated basis, we delivered core revenue growth of just over 5%, adjusted EBITDA growth of 13%, and adjusted EPS growth of over 25%. Please note that our core revenue growth in the quarter was aided by approximately 150 basis points of tailwind from additional year-over-year selling days in the quarter. Second, we continue our disciplined capital allocation approach with a relentless focus on optimizing shareholder returns over the medium to long term. In the first quarter, we completed approximately $500 million of share repurchases. We have now reduced our share count by just over 10% since we launched New Fortive Corporation in July 2025. Third, with three quarters of execution now behind us, our confidence continues to build in the power of the Fortive Accelerator strategy to unlock benchmark-beating returns for our shareholders over the medium to long term. I will spend a few minutes on this in the next slide. Lastly, we are reaffirming our full year adjusted EPS guidance range of $2.90 to $3.00. Based on our Q1 performance and trends to date, we believe results are trending toward the upper half of that range. Moving to slide four. Before we get into our Q1 results, I want to highlight some of the progress we are making in execution of three pillars of our Fortive Accelerator strategy. Starting with the first pillar, delivering faster profitable organic growth powered by our Fortive Business System Amplified. This quarter, we continued to increase our innovation velocity with several notable hardware product milestones and AI-enhanced product launches. As discussed last quarter, Fluke launched a new data center testing solution, CertiFiber Max, with the fastest throughput in the industry in late Q4. Customer response continues to significantly exceed our expectations, underscoring the strength of Fluke's brand and the effectiveness of our broader data center strategy. We are particularly encouraged by CertiFiber Max's ability to drive meaningful pull-through of other Fluke products into data center applications, including power quality, battery testing, imaging, and calibration solutions essential for both build out and ongoing operations and maintenance of data centers. In healthcare, we introduced Provation Mirror Documentation Assist, a real-time AI-powered voice-driven documentation capability enabled by deep domain expertise and proprietary data, and embedded directly into GI procedure workflows. This solution enables clinicians to capture structured documentation during the procedure, reducing the need to reconstruct details afterwards and enabling the clinical team to focus on the best patient care. On the commercial side, we continue to focus on faster growing end markets and regions, where we have made deliberate targeted investments to capture growth. At Fluke, we continue to invest in commercial expertise across high growth verticals such as data centers, defense, and distributed energy, and we are seeing solid early traction from our focused efforts. At ASP, we continue to advance our made-in-region strategies in India and China, supported by related commercial investments, and we are beginning to see positive impact of these efforts in our results. We are also advancing ASP's growth strategies in EMEA, with the European commercial launch of STERRAD Ultra GI. On our recurring customer value initiatives, we continued to make progress on driving deeper customer lifecycle engagement and improving revenue durability. In Q1, recurring revenue again grew faster than consolidated revenue in both segments. Our recurring customer value progress continued in our iconic hardware brands. Fluke continues to make progress on increasing recurring revenue, with double-digit services growth in the quarter. Industrial Scientific continued to see strong growth and share gains in our hardware-as-a-service product line. Moving to the second pillar, disciplined capital allocation is an integral component of our Fortive Accelerator strategy. Consistent with our priorities, we deployed another roughly $500 million to share repurchases in Q1. Since the spin-off, we have deployed approximately $1.8 billion to share repurchases representing 35 million shares or just over 10% of diluted shares outstanding. Our revamped bolt-on M&A engine and team is in place, and we will continue to evaluate opportunities for high quality accretive bolt-on acquisitions that meet our rigorous strategic and financial criteria. Looking forward, our capital allocation priorities remain clear: invest in organic growth, pursue bolt-on M&A where risk-adjusted returns exceed other uses of capital, return capital through share repurchases, and maintain a modest growing dividend, all with a focus on best relative returns and maximizing medium to long term shareholder value. Moving to our final pillar, building and maintaining investor trust. We were pleased to deliver solid performance ahead of expectations for a third consecutive quarter as New Fortive Corporation. That is a good start. We look forward to building on our momentum. We remain laser focused on executing against our 2026 financial and strategic plan and continue to have strong confidence in our 2026–2027 financial framework that we shared at our June 2025 Investor Day. With that, I will turn it over to Mark to walk through our financial results for the first quarter in more detail. Mark D. Okerstrom: Thanks, Olumide. I will begin with slide five. In the first quarter, we delivered total revenue of nearly $1.1 billion, up almost 8% year over year on a reported basis and up just over 5% on a core basis, benefiting from an approximately 150 basis point tailwind from the impact of additional year-over-year selling days in the quarter. We are pleased to see price and volume growth at both segments, driven by healthy customer demand and strong commercial and operational execution, leading to solid performance across the board. We were also pleased to see strong growth in software revenue, reflecting the underlying strength of our businesses and robust customer demand for our increasingly AI-driven new product releases. From a geographic perspective, we saw another quarter of solid performance in North America, which continues to be our strongest region. Europe improved sequentially, reflecting stabilizing conditions and solid commercial execution. Adjusted gross margin in the quarter was just over 63%, down about 100 basis points from prior year, which is largely consistent with the year-over-year gross margin trends we saw last quarter and was driven mostly by the net impact of tariffs that were introduced last year. Q1 adjusted EBITDA was $314 million, up about 13% year over year. This strong performance was driven by operating leverage, structural cost savings, and the favorable impact from foreign exchange rates, partially offset by continued innovation and commercial growth investments. Adjusted EBITDA margin in the quarter expanded approximately 140 basis points year over year to just over 29%. We delivered adjusted earnings per share of $0.70 in Q1, up over 25% year over year, marking our third consecutive quarter of double-digit adjusted EPS growth. Strong adjusted EPS performance was driven by growth in adjusted EBITDA and the positive year-over-year impact of share repurchases. We generated $194 million of free cash flow in the first quarter, with Q1 conversion on adjusted net income in line with normal historical patterns. Our trailing twelve-month free cash flow conversion remains north of 100%. Moving to our segment results, starting with Intelligent Operating Solutions on slide six. Revenue for the segment grew about 8% on a reported basis, with core revenue growth of about 5%, modestly ahead of our expectations. Based on the product mix in the segment, the year-over-year impact of additional selling days in Q1 resulted in a roughly 100 basis point benefit for IOS, making normalized core growth in the segment broadly consistent with what we saw last quarter. Core growth was driven by both price and volume, reflecting solid performance across Professional Instrumentation, Facilities and Asset Lifecycle Solutions, and gas detection products. At Fluke, order volume was strong, with orders growth outpacing revenue growth, and our teams continued to execute with strong operational discipline while increasingly deploying investment dollars towards growth initiatives. North America continues to be the strongest growth driver and we were encouraged by another quarter of sequential improvement in Europe. Growth in Facilities and Asset Lifecycle Solutions accelerated from Q4, and was again accretive to the IOS segment, with particular strength in demand for multisite facility maintenance and marketplace software in North America. Our commercial investments and accelerated pace of innovation across these businesses are beginning to bear fruit. Our gas detection business continues to grow nicely, buoyed by strong demand and share gains from our hardware-as-a-service product line in North America, Europe, and the Middle East, as we begin to see our investments in the business show up in our results. Adjusted gross margin in the segment was just over 65%, down about 150 basis points year over year, which is largely consistent with the year-over-year gross margin trends we saw last quarter, primarily due to product mix and the net effect of tariffs. Q1 adjusted EBITDA in the segment grew 8% to $255 million, driven by operating leverage, structural cost savings, and the favorable impact from foreign exchange rates, partially offset by targeted growth investments to support innovation and commercial initiatives. Adjusted EBITDA margin for Q1 was just over 34% in IOS, in line with the comparable period prior year. Moving to our Advanced Healthcare Solutions segment on slide seven. We delivered total revenue of $326 million. Revenue grew approximately 8% year over year and approximately 6% on a core basis. Our healthcare consumables and software product lines benefited from the year-over-year impact of additional selling days in Q1, resulting in a roughly 300 basis point benefit to growth for AHS. On a normalized basis, we saw slight acceleration in growth versus last quarter. Q1 growth was driven by solid demand for healthcare consumables, services, and software in North America. Low temperature sterilization capital demand improved modestly in Q1, though hospital spending pressures continue to persist. Our software products in the segment continue to deliver strong growth, driven by effective execution and strong provider demand for our gastrointestinal case documentation solution. Adjusted gross margin in the segment was about 59%, in line with the prior year period, with modest operating leverage offset by the net impact of tariffs. Q1 adjusted EBITDA in this segment was $84 million, up approximately 18% year over year, driven by operating leverage, structural cost savings, and the favorable impact from foreign exchange rates, partially offset by targeted growth investments to support innovation and commercial initiatives. Adjusted EBITDA margin in Q1 expanded by about 200 basis points year over year to just under 26%. Turning to slide eight. Our balance sheet remains strong. We finished the quarter at 2.8 times gross debt to adjusted EBITDA, reflecting a modest increase in commercial paper to fund share repurchases in the quarter. We continue to have ample capacity to execute on our capital deployment priorities in 2026, and we remain steadfast in our commitment to disciplined capital allocation and an overall approach that seeks best relative returns. As noted earlier, we deployed roughly $500 million to share repurchases in the first quarter, reflecting continued confidence in our ability to deliver on our value creation plan. As a result, diluted shares outstanding were approximately [inaudible] million at the end of Q1. In addition to retooling our process and revamping our M&A team, integration and the execution of our value creation plans for the two small bolt-on acquisitions we completed in Q4 are both going according to plan. We continue to be on the lookout for high quality, accretive bolt-on deals that meet our rigorous strategic financial criteria. Moving to slide nine. We are reaffirming our full year 2026 adjusted EPS guidance range of $2.90 to $3.00 per share. Given the trends to date inclusive of Q1 performance modestly ahead of our expectations, we believe results are trending towards the upper half of that range. This outlook assumes a continuation of the market dynamics we experienced in Q1 and reflects current tariff rates. Let me provide a few additional considerations to assist with modeling. Based on current foreign exchange rates, we expect full year reported revenue of around $4.3 billion. We continue to expect core growth in the 2% to 3% range and, given strong order patterns, we believe results are trending towards the upper end of that range. In terms of the shape of the year, based on Q1 results modestly ahead of our expectations, we expect Q1 will comprise a slightly higher percentage of total revenue than historical patterns, with Q2 and Q3 broadly in line. We would note that Q4 has four fewer year-over-year selling days, resulting in a $15 million to $20 million revenue headwind in the quarter. We expect FX and M&A combined to be about a 150 basis point tailwind to reported revenue in Q2, moderating to roughly 50 to 100 basis points throughout the second half of the year. We are now modeling a Q2 effective tax rate in the mid-teens, Q3 in the high-teens, and Q4 in the high single-digit to low double-digit range. We are also expecting full year net interest expense of just over $135 million. Based on what we see today and based on these modeling considerations, we would expect Q2 and Q3 adjusted EPS to be broadly similar to what we delivered in Q1. As the year unfolds and we continue to execute on our Fortive Accelerator strategy, quarterly phasing may evolve. As a final note before turning it back to Olumide for closing remarks and Q&A, we are off to a strong start to 2026 at New Fortive Corporation, and we remain committed to unrelenting execution on the Fortive Accelerator three pillar value creation strategy and financial framework that we outlined at our June 2025 Investor Day. I will now turn it back over to Olumide. Olumide Soroye: Thanks, Mark. Let me close with a few observations on the quarter and where we are headed. Q1 represents a strong start to the year and further evidence of the progress we are making as New Fortive Corporation. We delivered solid organic growth, meaningful adjusted EBITDA growth, and a third consecutive quarter of double-digit adjusted EPS growth, while continuing to invest deliberately and execute diligently against our Fortive Accelerator strategy. We are seeing early traction from our innovation, commercial, and recurring customer value growth initiatives. We are methodically allocating capital in ways that we believe will generate the best relative returns over the medium to long term, and we remain steadfast in our commitment to building and maintaining investor trust. Our teams are aligned, our FBS operating cadence is strong, and our confidence in the 2026–2027 financial framework we outlined at Investor Day 2025 is fully intact. I want to thank our Fortive Corporation team members around the world for their commitment to our shared purpose of innovating essential technologies to keep our world safe and productive, and 100 thousand customers for placing their trust in us every day. With that, I will turn it back to Christina to open the call for questions. Christina Jones: Thanks, Olumide. That concludes our prepared remarks. We will now open the call for questions. Operator: Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. It may be necessary to pick up the handset before pressing the star keys. One moment, while we poll for questions. Our first question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question. Nigel Coe: By the way, Mark, thanks for the call out on the selling days. It is really helpful. Not all teams do that. Just on the Q2 plan, I just want to make sure we think about this correctly. You mentioned Q2, Q3 EPS roughly similar to Q1. Normally, we see Q2 step from Q1, but we have the selling days impact. So I am just wondering, the core growth in Q2 looking to be in that sort of mid-single-digit range, but pretty flat with sales in the first quarter, but up mid-single digits. And margins would also be fairly similar to Q1 as well. Mark D. Okerstrom: Nigel, thanks for the question. I think you are broadly in the zone. Again, Q2 we obviously do not have the benefit of days. We do have a slightly easier comp, I called out the FX tailwind that combined with M&A being about 150 basis points, and I think over the last couple of quarters we are starting to see just some momentum across each of the two segments, based upon our own execution with IOS a little bit ahead of AHS. Based on what we see right now, we are expecting those trends to continue through full year. Nigel Coe: Great. And then my follow-on question, I think, Olumide, you mentioned some success with some of the AI-driven product releases. Within AI is meant to be a negative, not a positive. So maybe just talk about that a little bit and perhaps a little bit more color on how the FAL portfolio performed in the quarter? Olumide Soroye: Yes, happy to take that. AI is certainly a disruptive technology that is shaping the landscape. As we have discussed previously, we feel very good about the businesses we have and how our teams are taking advantage of AI-powered innovation to drive growth in those businesses. Looking at FAL as an example, it is a great case of how we are using AI deployed on top of our mission-critical proprietary data-rich software solutions for customers to really deliver new value for them that is driving faster growth in that platform. We have talked about a few examples of ServiceChannel AI and what our team is doing with that, and you see that showing up in the numbers. We are very pleased with FAL’s performance in the quarter. It grew faster than the IOS segment core growth of about 5%. All the operating brands contributed to that growth, with ServiceChannel leading the pack with continued strength, especially in North America. The broad trends in all our key operational metrics—ARR, GDDR, MDR—are really good, and we are excited about the opportunity to see continued improvement in those metrics as we execute on our Fortive Accelerator strategy, including these AI-powered use cases. Everything we see, given the nature of those businesses and the quality of the quantitative data on performance, we feel quite good. Operator: Thanks, Nigel. Thank you. Our next question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question. Deane Dray: Thank you. Good day, everyone. Olumide Soroye: Hi, Deane. Deane Dray: Hey. There were a number of references about data center and Fluke is right in the middle of all of it. Can you just give us a sense of what the opportunity is? And there are some newer technologies like optical switching that should also position Fluke well. Any update there and kind of what the overall exposure is would be helpful. Olumide Soroye: Thanks, Deane. We are very excited about the data center investment cycle, and not just construction and build out, but frankly the larger and more durable opportunity for ongoing operations and maintenance of these massive data centers that are getting built out. Fluke already participates in the tool belt for data centers with a wide range of products—power quality monitoring and analytics, high voltage diagnostics, high density fiber testing, electrical ground fault detection, power calibration, thermal health, etcetera. New technologies like optical switching, to your point, will create additional demand for a lot of these products we already have. Even more exciting, frankly, is the tremendous job our Fluke team is doing on accelerating innovation that is aimed at data center needs that are not yet fully met. We talked about the CertiFiber Max product that we launched in Q4 of last year and the incredible customer response to that, and how our team is using that new product to pull through the entire suite of offerings we have for the data centers, and really working hard at getting specced in to hyperscaler standard maintenance tool sets for how they manage these data centers. We feel really good about the setup and the enduring tailwind that offers for us at Fluke. The exact magnitude of that is still ahead of us, but we are quite excited. Deane Dray: Great to hear. And then just can you address price/cost expectations for the year—ability to offset inflation and any tariff pressures at the margin? Mark D. Okerstrom: Yes, price/cost was north of one in the first quarter. We would expect that to persist. FBS continues to be at the absolute core of Fortive Corporation and that continues to drive value engineering and cost efficiencies as we move through the year. The tariffs, again, have been a headwind to our gross margins even though they are completely countermeasured from a bottom-line perspective. You saw that headwind show up in IOS this quarter. It is going to persist through partway through the third quarter when we are fully countermeasured, and then you will see that dissipate completely as we lap over the countermeasures in the fourth quarter. Operator: Thank you. Olumide Soroye: You are welcome. Operator: Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Please proceed with your question. Julian Mitchell: Hi, good morning. Maybe I wondered if you could flesh out perhaps some of the commentary on the orders strength you have seen recently. I think some other companies have not exactly been shy about touting large orders in recent months. So how are the orders progressing there? And any update on the cadence of demand in some of the shorter cycle hardware businesses like Fluke or AHS consumables in recent weeks or months? Any signs of pre-buy or broad changes in demand ex restock/destock—anything to call out there? Olumide Soroye: Great, Julian, happy to take that. We were really happy with the orders growth that we saw. Orders grew faster than our approximately 5% core and roughly 8% total revenue growth, which is a great signal about the trajectory of the business. The growth we saw was broad-based across the two segments—in IOS, Fluke, FAL, Industrial Scientific—as well as on the AHS side, ASP also had really strong order growth in the quarter. That is a result of good conditions in our markets, the strength of our operating brands, and the early positive impact of our Fortive Accelerator strategy. On short cycle, using a couple of examples: at Fluke, POS trends remain solid, book-to-bill was over one, healthy backlogs to end the quarter, channel inventories relatively normal in the U.S., continuing to get better outside the U.S. We feel really good about the trends we are seeing on short cycle. As you know, Fluke has been a very durable business with order growth in almost every quarter of the last five years despite PMI contractions in most of that time. That continued in the quarter as well. For ASP, on the consumables side, we saw the resiliency you would expect; even adjusting for the extra selling days, low temperature sterilization consumables continued to grow in a very durable way. All the signals were good for us. Julian Mitchell: That is very helpful, thank you. And then if we think about operating leverage or operating margins—there was very high operating leverage in Q1 year on year even with the tariff headwinds. I understand there was a selling days mechanical impact, but when we look at the balance of the year, anything we should bear in mind on operating leverage as we move through the year? I imagine there is not a big Section 232 tariff effect for Fortive Corporation. Any help there you could provide? Mark D. Okerstrom: Sure, happy to. Again, to reiterate, we are very confident in our medium-term financial framework, and that calls for 50 to 100 basis points of EBITDA margin expansion over the course of this year and next year—each year. That is the framework we are operating under. Really, the way we have been managing the business is taking costs out of areas where they are not particularly value-added—you saw us flatten the segment structures, take out corporate costs in addition to the stranded cost reduction—and reinvest that in initiatives that we believe will accelerate growth and deliver excellent returns. That is the formula. What you will see this year, though, is that because we have the days impact in the first half of the year and easier comps in the first half, in the back half of the year the comps get a little bit harder in Q3, and then you have the days impact in Q4. You will lap over a lot of the pretty significant cost actions that we took in the third and fourth quarter of last year. You will see a little bit less margin expansion in the back half of the year than we are able to deliver in the first half. But we feel super good about the overall margin trajectory of the business. FBS is working, we are reinvesting in initiatives, and although it is early, it seems to be driving growth. The financial framework is well intact. Julian Mitchell: That is great to hear. Thank you. Operator: Thank you. Our next question comes from the line of Andy Kaplowitz with Citigroup. Please proceed with your question. Andy Kaplowitz: Hey, good morning, everyone. Operator: Morning. Andy Kaplowitz: If I can follow up on AHS—you mentioned, I think, slight acceleration in Q1 despite some hospital CapEx pressure in the U.S. How would you characterize fundamentals? I know you answered Julian's question on consumables, but overall equipment—does the environment continue to get better here this year? Differences between North America and China—what are you seeing on the AHS demand side? Olumide Soroye: Happy to address that. We were pleased with the performance in the AHS segment and ASP’s role within that in the quarter. As a reminder, the segment did benefit from roughly a 300 basis point tailwind related to the additional days in the quarter, but even after normalizing for that, we saw some acceleration in the segment, reflecting the strength in consumables, services, and software. In terms of capital equipment, we have seen modest sequential improvement since 2025. As you might recall, that was the toughest period with the impact of healthcare reimbursement and related policies on hospital procurement of capital equipment. Q1 continued to show that improvement. Hospitals remain cautious about capital spending when the exact timing is discretionary, but we feel really good about lapping that year-over-year dynamic as we go into Q2 here, because Q2 last year is when it started. The underlying capital funnel we have is really strong, and as we lap this dynamic in Q2, we like the setup for the rest of the year. The U.S. continues to be the main pressure point on hospital budgets, but it is getting better, and with some of the made-in-country initiatives we have in China and India for ASP, that is adding some tailwind for us in those particular markets as they want locally made products. We feel quite good as we look at the rest of the year; things are getting better on the equipment side even though there is still some caution. Andy Kaplowitz: Very helpful. And then I want to follow up on FAL—you mentioned the strength in ServiceChannel and that FAL is stronger than core growth in IOS in Q1. Maybe you could talk about the outlook for Facilities and Asset Lifecycle for the year. Would you say that ServiceChannel, Gordian could all continue to be higher than that 2% to 3% core growth you are guiding? Any more color would be helpful. Olumide Soroye: Thanks for that. The leading indicators are what we are seeing on order growth and ARR, GDDR, and MDR in those businesses, and also the exciting actions our teams are taking with respect to the innovation funnel and commercial initiatives to invest in areas where we have momentum across the range of options, and to drive improved customer experience. All of those things are pointing north for us in those businesses. We feel good about the setup for the rest of the year for FAL and the role it continues to play in our mix. Operator: Thank you. Our next question comes from the line of Andrew Buscaglia with BNP Paribas. Please proceed with your question. Andrew Buscaglia: Thanks for taking my question. So I just want to reiterate that you are guiding to a similar level for Q2, and you are talking about some incremental things you are working on to drive some margin expansion. But guidance really, at the midpoint, does imply earnings moderating or even potentially declining in one of the quarters. Is this just conservatism, or what are you waiting to see in terms of moving that guidance higher? Mark D. Okerstrom: Thanks for the question. We feel very good about the momentum that we are seeing in the business and the early results of our execution on the Fortive Accelerator strategy across all three pillars, particularly the efforts we are making on commercial acceleration and innovation acceleration. What I would say is that it is early in the year; we have got a quarter under our belt. We have a lot of exciting things going on, and we like what we see, but it is just a little bit too early to get out ahead of our skis. Take the fact that we gave some color that we are expecting growth near the higher end of our range and adjusted EPS on the full year near the upper half as an expression of our confidence in what we see, and we look forward to updating you on the next call in terms of how it is going. Andrew Buscaglia: Fair enough. I wanted to check on M&A. You guys have been doing a good job managing on the cash flow side. What is the outlook like? You have got your footing post separation at this point. You have a better idea of where you want to go with your capital allocation priorities. What do you see in terms of M&A as it plays out this year? Mark D. Okerstrom: Thanks for the question. Capital allocation is a critical pillar to the Fortive Accelerator strategy, and we have been pleased to deploy capital with discipline, retiring just north of 10% of our share count since the time of the spin. We are really looking to deploy capital across organic growth initiatives, M&A, share repurchase, and a modest growing dividend based upon best relative returns. As it relates to M&A specifically, we have revamped our approach with more of a focus on bolt-ons. We put in place rigorous strategic and financial criteria. We have essentially rebuilt the team. We executed a couple of bolt-on acquisitions in the back half of the year, and those are going very well—the value creation plans are tracking and the teams are performing really well. We are also super excited that on Monday, Corbin Wahlberger will be joining us to run corporate development for us globally and run M&A. Corbin is well known in circles around this industry, so we think he is going to be a fantastic fit, and we are excited to have him join what is already a really excellent team. We will see what happens—obviously, if spreads start to expand on a relative basis, M&A becomes more attractive. We are putting ourselves in a position where we are building pipeline, the team is strong and getting stronger, and when the time comes where that becomes the best use of capital, we will be there, proactive, and ready to go. Operator: Alright. Thank you. Our next question comes from the line of Analyst with Baird. Please proceed with your question. Analyst: Hi, thanks. Question on Gordian. I think June is typically a more sizable month for that business with year-end government spending. You obviously did not see that last year. Any visibility to whether that normalized year-end spend materializes this year, or what is baked into the Q2 guide? Olumide Soroye: Yes, thanks for the question. A lot of the state and local agencies have June as fiscal year-end. Our team is doing a phenomenal job of being very close to customers and being there to serve them on any budgets that are left. We feel really good about the funnel that we have and expect to have a strong outcome. We have not presumed anything extra-normal in terms of the Q2 guidance. If we get more there than we got last year, we will capture the upside. We feel quite good about the setup and the work our team is doing to be close to customers as we go through Q2. Analyst: Okay, thank you. And then second one would be on the Detection business. Any color you can share on what you are seeing in the Middle East—any disruption tied to that? And then any discussions with customers about potential rebuild-related orders? Olumide Soroye: I will take that. With respect to the gas detection business overall, we are very pleased with how it did in the quarter. It was accretive to IOS segment growth overall. Demand was strong globally, with solid performance in North America, Europe, and the Middle East. In the Middle East, we are seeing increased demand, and we do not think the rebuild is at the peak yet. We are excited about the opportunity to show up for customers as that picks up in the region. Overall, sales in the Middle East are a small part of Fortive Corporation overall—low single-digit percentage of actual revenues—but that team, based on the order book, is feeling quite excited. Thankfully, our teams in the region are all safe and staying close to customers. We are feeling good about being able to help in a challenging context. Operator: Thank you. Our next question comes from the line of Analyst with JPMorgan. Analyst: Hi, good afternoon. Thanks for taking my question. I just have a quick follow-up on FAL. You commented that it grew faster than IOS—growth was about 5% during the quarter. Can you just clarify if that is what it was adjusting for the selling day impacts and how that compares to last quarter? Olumide Soroye: FAL performed very well, even if you adjust for the selling days, and that statement holds even adjusting for selling days. That is an indication of the great job our team is doing on building the order book over the last several quarters that is now beginning to show up in revenues as revenue recognition kicks in for those new orders. It feels quite good, and as I mentioned, the leading indicators looking ahead are also quite strong, excluding extra selling days. Analyst: Okay, great. And how does that compare to last quarter? Any color there? Olumide Soroye: Overall, we are seeing steady acceleration in the platform. One of the things we liked about Q1 is the broad-based nature of acceleration we saw, and FAL was no exception to that compared to last quarter. Analyst: Okay, great. Thanks. And just my last question—were the trends similar for the AHS software business? Mark D. Okerstrom: Yes, AHS as well. Continued very strong performance even adjusting for days, and again, as I said in my prepared remarks, our software revenue in totality is growing nicely ahead of the overall business. We really do not, as we look across the whole portfolio, see an exception to that. Those businesses, with the renewed focus on innovation acceleration and commercial efforts, are showing good early signs. Analyst: Okay, great. Thanks so much for the color. Operator: Thank you. Our next question comes from the line of Scott Graham with Seaport Research Partners. Please proceed with your question. Scott Graham: The old Fortive talked a lot about OMX and how FBS poured productivity into that. I was wondering if you might be able to give us some type of data point on this. I know you have enhanced those programs. Is this 50 to 100 basis point goal here for productivity—is there a sustainability to whatever your goal is? Any kind of data point or KPI you can give us would be helpful. Olumide Soroye: Thanks for the question. Starting from the foundation of our culture—our Fortive Business System and the relentless pursuit of better, including productivity and now increasingly growth—is stronger than ever. We have our President’s Kaizen Week next week with Fortive Corporation teams around the world focused on driving growth and productivity. The fundamentals of how we operate are only getting stronger, so you should expect good things from that. We have intentionally framed this 50 to 100 basis points of adjusted EBITDA margin expansion a year in our financial framework as the governing framework for productivity and the fall-through on high-margin incremental revenues that we drive. That is intentional because we want to give ourselves the space to invest productivity gains in growth that is going to sustain and accelerate outperformance across both segments. Within that framework, productivity is as big a piece as ever, and deliberate investment in growth is a bigger piece than it has ever been because, looking at the performance this quarter and roughly 5% core growth across the company, we would like to keep investing to make outcomes like that more the norm. Productivity remains as strong as ever, it is baked into that 50 to 100 basis points of adjusted EBITDA margin expansion a year, and we feel really good about the setup. Scott Graham: Okay, thank you for that. My follow-up is simple. It looks like FAL is kind of getting back to that mid-single-digit growth that I think you talked about at the Analyst Day. Is there an opportunity this year for Fluke to catch up? You have the new data center product, you are anticipating some pull-through—maybe later this year or next year. You have Fluke connectivity going, you are adding products to the tool belt as usual. It is a terrific business. I am wondering if it is going to potentially catch up to FAL this year in your view. Olumide Soroye: When Mark was talking about the 2% to 3% modeling consideration guide on core growth for the year and the fact that we are tracking towards the upper half of that range, all of that reflects the conviction we have about potential across the platform. Given that Fluke is almost 40% of what we do, you should translate that to mean we feel really good about the setup at Fluke and the chance to continue to make a really great business even more extraordinary—from a growth and margin performance and brand and customer loyalty point of view. Short answer: we see Fluke as a really exciting platform. We will continue to make that great business even better from a profitable growth point of view, and from a multiyear basis, we see no ceiling ahead of us. Operator: And we have reached the end of the question and answer session. I would now like to turn the floor back over to CEO, Olumide Soroye for closing remarks. Olumide Soroye: Great. Thank you, and thank you all for your interest in Fortive Corporation. I am incredibly excited about the job our team did in the first quarter to deliver really strong results and adjusted EPS growth of over 25%, which is again our third quarter of double-digit growth in EPS. More importantly, I am really excited about the momentum across our teams as we look ahead and feel really good about the setup we have for the year and for the multiyear extraordinary value creation opportunity we believe we have here for our long-term shareholders. Thank you all for your interest, and we will see you next time. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. Have a great day.
Operator: Good morning, and welcome to the First Quarter of 2026 Pilgrim's Pride Earnings Conference Call and Webcast. [Operator Instructions] At the company's request, this call is being recorded. Please note that the slides referenced during today's call are available for download from the Investors section of the company's website at www.pilgrims.com. After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Andrew Rojeski, Head of Strategy, Investor Relations and Sustainability for Pilgrim's Pride. Andrew Rojeski: Good morning, and thank you for joining us today as we review our operating and financial results for the first quarter ended on March 29, 2026. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of this release is available on our website at ir.pilgrims.com, along with slides for reference. These items have also been filed as Form 8-K and are available online at sec.gov. Fabio Sandri, President and Chief Executive Officer; and Matt Galvanoni, Chief Financial Officer, will present on today's call. Before we begin our prepared remarks, I would like to remind everyone of our safe harbor disclaimer. Today's call may contain certain forward-looking statements that represent our outlook and current expectations as of the day of this release. Other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward-looking statements. Further information concerning these factors have been provided in yesterday's press release along our Form 10-K and our regular filings with the SEC. I would now like to turn the call over to Fabio Sandri. Fabio Sandri: Thank you, Andy. Good morning, everyone, and thank you for joining us today. For the first quarter of 2026, we reported net revenues of $4.5 billion with adjusted EBITDA of $308 million. Our adjusted EBITDA margin was 6.8% compared to 12% last year. During the quarter, we were able to navigate a volatile market in the commodity segments, protecting the downside with the most stable parts of our portfolio. We also drove extensive progress in our growth investments, strengthening our portfolio of differentiated products that could provide higher and more stable margins while supporting the growth of our key customers. In the U.S., demand for key customers for retail tray pack remains strong in fresh. Prepared Foods grew from expansions across retail and foodservice. However, sales and profitability fell as jumbo commodity cutout and deli small bird values were significantly lower than last year. Margins were also impacted by planned downtime from plant upgrades to improve the mix and interruptions from winter storms during February. Europe's diversified portfolio maintained steady sales and margins compared to last year amid changing consumer confidence towards more value offerings, especially poultry and fresh and frozen meals. Back-office integration and network optimization continues to improve productivity and support further growth. Mexico fresh sales remained steady and branded sales increased double digits compared to last year. Prepared Foods continued to grow in retail and QSR. However, margins were compressed as excess production in the live commodity market and increased imports persisted throughout the quarter. Our projects to diversify our footprint in fresh to different regions of the country and increase our presence in prepared foods remain on track. Once fully operational, these projects will unlock additional sales growth and further diversify our profitability, enhancing our margins and reducing volatility. Turning to the supply in U.S. USDA reported ready-to-cook production increase of 3.4% year-over-year from increased headcounts, continued improvement in live performance and higher average life weights. Egg sets grew 1.1% compared to the same period last year, extending recent gains from a more productive layer flock. Similarly, chick placements increased 1.7% versus last year, reflecting modest improvements in hatchability during the period. Going forward, given the size of the layer flock and the growth in pullet placements, combined with the elevated hatchery utilization, the USDA expects chicken production to increase 2% for 2026, primarily driven by growth during the first half of the year. As for the other proteins, the USDA anticipates minor increase in beef supplies as higher imports offset domestic production headwinds and limited growth in pork production. When these factors are combined with additional chicken supply, the USDA expects net protein availability to rise by 1.6% compared to last year. Within the U.S., consumer sentiment declined to a 3-month low at the end of the first quarter as inflation rose amid higher energy prices. Consumers saw more value-oriented offerings. With this environment, chicken remained attractive given its relative affordability, resulting in increased volumes across channels. In retail, the fresh meat department posted dollar sales growth across proteins as volume grew in chicken, beef and pork. Results were uneven during the quarter as strong performance in January was followed by softer-than-expected demand in February and March as winter storms disrupted shopping patterns and pulled some purchases forward as customers stock up early. Chicken maintained a compelling value advantage on shelf compared to the other proteins. Boneless, skinless, breast pricing remained steady and spreads against ground beef continue to be at record levels. Boneless thighs continued their multiyear trend of strong volume growth, given sustained consumer interest. Deli continues to grow at a steady pace, given its role as a convenient and affordable meal solution for consumers. Appetizers, particularly popcorn chicken formats, along with gains in whole birds drove moderate growth. Frozen prepared products continue to deliver positive volume growth, led by popcorn chicken, chunks and nuggets. In foodservice, chicken offerings expanded again as operators lean into value proposition and responded to elevated beef pricing. As such, adoption extended beyond traditional chicken-focused chains, particularly among QSRs. While menu penetration increased, volume growth was constrained by inventory levels and uneven traffic patterns. Going forward, chicken continues to be well positioned as consumers increasingly prioritize strong perceived value. Chicken-focused QSRs delivered volume growth in the first quarter and outperformed full-service restaurants as inflation-constrained consumers continue to favor value-oriented quick service formats. Noncommercial channels also posted growth, supported in part by favorable pricing conditions. As a result, chicken volumes in foodservice remained stable to slightly higher overall, even as broader sector performance and traffic trend stays mixed. In exports, we continue to monitor global trade movements. In the Middle East, all vessels operating to the Gulf Coast countries were suspended at the end of February, given the military conflict. While the GCC is an important market for U.S. broilers export, strong domestic demand for dark meat, along with robust exports to Mexico mitigated this disruption. To date, we have not seen any material changes to dark meat values as pricing remained above 5-year average for the back half of the bird. Moving forward, we expect several international markets to reopen as the occurrences of commercial high path avian influenza has recently slowed and previously restricted control zones are no longer subject to limitations given the absence of new cases. Nonetheless, we remain vigilant on biosecurity, and we continue to leverage our geographical footprint and cooperate with various governments to ensure international customer needs are continuously met. Turning to the feed inputs. Pricing support for corn emerged from higher energy and fertilizer markets. However, generally favorable crop development in South America, along with larger-than-expected prospective corn plantings in the U.S. reduces risks of significant price increases. As a result, corn stay consistent with the 2025 level pricing. Stocks remain above 2.0 billion bushels, and the market focus is quickly shifting to planting and growing conditions in the U.S. for the upcoming season. In soy, both beans and meal appreciated during the first quarter, given the expectations that China will make additional purchases from the U.S. for the 2025 and 2026 crop year. Better-than-expected exports demand, along with increasing domestic interest for U.S. soybeans also provided further support. However, above-average yields from South America kept global soybean markets well supplied, limiting market upside. Like corn, the market focus for soy will be growing conditions in the U.S. The USDA currently forecasts soybean ending stocks to reach 350 million bushels, up 7% prior year. When combined with the expansion of the U.S. soy processing capacity and growth in global soybean stocks, meal prices are expected to remain manageable. As for wheat, global stock remained well supplied, increasing 24 million metric tons versus last year. Nonetheless, futures appreciated from relatively low levels throughout the first quarter, given geopolitical risks. Moving forward, favorable growing conditions in the Eastern Hemisphere for winter wheat, along with an increase in planted acres and a historic yield in the U.K. should unlock additional value. In the U.S., demand for chicken continued to grow across retail and foodservice. Equally important, we made significant headway in projects to reduce volatility, enhance margins and drive sales of our portfolio. Our progress has also improved our ability to meet increased key customer demand, especially during the upcoming months. In Big Bird, we implemented a variety of plant layout changes, equipment improvement and operation procedures across many locations to increase dark meat deboning and portioning capabilities to support key customers and our Prepared Foods operation that were previously done by external companies. Because of these investments, each site incurred planned downtime, along with additional expenses from project mobilization and production ramp-up. During this time, we also continue to invest in our team members through training and education on revised plant operations. In case-ready, both sales and volume grew as tray pack retail offerings to key customers grew above category. In early April, we also completed our conversion at the Russellville facility from Big Bird to retail to support the growth of one of our key customers. Our investments in Russellville and throughout the Big Bird network will create a more resilient portfolio, given our expanded capability to meet the growth needs of prepared foods, strengthening leadership presence in higher attribute offerings and portions and enhanced production efficiencies. In Small Bird, overall demand remained strong as volume increased compared to prior year. However, consumers are increasingly transitioned from bone-in to boneless offerings. When this factor is considered with the existing supply, the value for deli WOGs continue to be below the 5-year average impacting our sales. Moving forward, we'll continue to evaluate our production mix and ensure if sufficient flexibility exists to meet market demand. In addition, we will explore alternatives to reinvigorate the category through promotional investments and innovation, especially with our key customers. The recent inclusion in the Farm Bill that hot rotisserie will be included in the SNAP eligibility also provides a significant opportunity for the category. During the quarter, many sites were impacted by weather-related events, resulting in unplanned downtime and reducing service levels. When these factors are combined with weakened commodity market fundamentals, impact of our growth projects and small bird deli values, the U.S. fresh sales and profitability was reduced compared to last year. In Prepared Foods, our growth accelerated as we drove the highest retail volume in any quarter. Just BARE continues to lead growth in the frozen fully cooked category as retail sales rose nearly 40% compared to last year from increased distribution and improved velocity. In foodservice, our business continued to expand through growth in branded offerings along with increased distribution in schools and national accounts. Our efforts to support further growth through the construction of our new facility in the Walker County, Georgia remains on schedule. In the interim, we continue to rely on our network of co-packers to support the strong demand for our products. In Europe, our diversified portfolio drove steady volumes and margins compared to last year. Given persistent inflation, consumers increasingly migrated toward value and convenience. As such, our poultry and meal offerings resonated through groceries and each category grew faster than the overall channel. While fresh pork experienced similar growth, bacon and sausage categories declined. In our branded portfolio, Rollover benefited from marketing investments and grew faster than the category average, whereas Fridge Raiders maintained its presence in snacking. Margins for the Richmond remained strong. However, volumes were challenged as promotional activity intensified and consumers changed to more private label offerings. To foster growth in the category, we'll continue to drive our investments in marketing and innovation, given Richmond's growth potential and market positioning. In foodservice, challenges exist as consumers increasingly opted away from dining out and reduced visits to QSRs. Nonetheless, our poultry business remained strong as affordability and limited time offerings resonated throughout the marketplace. Even with the poultry's performance, overall volumes declined as demand for beef fell in Europe, limiting our growth. Moving forward, we will continue to drive distribution through new offerings and promotional support. Our operational excellence efforts made progress as we exceeded our budgeted improvement targets. We'll continue to focus on improvements in productivity, yields and overall costs. In Mexico, we continue to drive our strategies for profitable growth and reduced volatility. To that end, our fresh branded offerings continue to gain traction as sales increased double digits compared to last year. Just BARE led this growth as volume rose over 80%. In Prepared, sales rose nearly 9% compared to last year, further diversifying our portfolio. Like Fresh, our value-added branded offerings grew as sales from Pilgrim's rose 14%. While we've made progress in transforming our portfolio, elevated supply levels in the live commodity market and import pressures persisted throughout the quarter, reducing margins and overall profitability compared to last year. Our expansion efforts remain on track with expansions to different regions in South and Peninsula part of the country and our prepared expansion in Porvenir. Based on these investments, we can improve our ability to grow with key customers, reduce operational risk and further diversify our portfolio. Turning to sustainability. We continue to drive accountability and ownership down the organization to each of our plants. Based on this approach, with investments and operational improvements, we have surpassed our 2025 reduction targets against Scope 1 and 2 emissions intensity set at our sustainability-linked bonds. This achievement reflects our team's mindset and ability to leverage sustainability as a means to create a more efficient operation. With that, I would like to ask our CFO, Matt Galvanoni, to discuss our financial results. Matthew Galvanoni: Thank you, Fabio. Good morning, everyone. For the first quarter of 2026, net revenues were $4.53 billion versus $4.46 billion a year ago, with adjusted EBITDA of $308.1 million and a margin of 6.8% compared to $533.2 million and a 12.0% margin in Q1 last year. Adjusted EBITDA margins in Q1 were 7.0% in the U.S. compared to 14.3% a year ago. For our Europe business, adjusted EBITDA margins came in at 7.8% for Q1 compared to 8.1% last year. In Mexico, adjusted EBITDA margins in the quarter were 3.1% versus 8.4% a year ago. U.S. net revenues were $2.64 billion versus $2.74 billion a year ago, a 3.9% decrease. U.S. adjusted EBITDA came in at $185.5 million compared to $392.5 million in Q1 2025. U.S. margins declined due to significant reduction in the jumbo cutout value, lower sales prices in deli for small birds, impacts of the winter storms that hit the Southeast during the quarter, bird health issues and plant downtime from the implementation of our many growth projects. Our U.S. Prepared Foods business continues to demonstrate robust growth with retail sales of -- Just BARE increasing nearly 40% in the quarter compared to last year. In Europe, coming off strong seasonal results in Q4, adjusted EBITDA in Q1 was $105.8 million versus $99.5 million in Q1 2025, a 6.3% increase. The business has benefited from strength in poultry and meals during the quarter, along with the benefits of its structural reorganization, including integration of support functions and manufacturing optimization programs. Mexico generated $16.8 million in adjusted EBITDA in Q1 compared to $41.2 million last year and $8.5 million in Q4 2025. Sequentially from Q4, the Mexican business profitability improved with marginally better supply-demand fundamentals by the end of the first quarter. SG&A in the quarter was higher year-over-year, primarily due to an increase in legal settlements, associated legal defense costs, true-ups for year-end 2025 incentive compensation and unfavorable FX impacts for both Mexico and Europe. Our effective tax rate for the quarter was 23%. As I noted in our February call, we anticipate our full year effective tax rate to approximate 25%. We have a strong balance sheet, and we'll continue to emphasize cash flows from operating activities, management of working capital and disciplined investment in high-return projects. Our liquidity position remains very strong as we had nearly $1.75 billion in total cash and available credit as of the end of the quarter. Our liquidity position provides flexibility as we pursue our growth ambitions. As of the end of Q1, our net debt totaled $2.55 billion with a leverage ratio of 1.25x our last 12 months' adjusted EBITDA, below our target of 2 to 3x adjusted EBITDA. Net interest expense for the quarter totaled $31 million. Following the completion of our $250 million tender offer of the 2033 notes here in April, we anticipate our full year net interest expense to be between $105 million and $115 million. We spent $235 million in CapEx during the quarter, a substantial increase from Q1 2025 when we spent $98 million. The spending this quarter is primarily associated with the conversion of Russellville to support a retail key customer, progress on our new prepared foods plant in Georgia and the previously mentioned enhancements to a number of our Big Bird plants to improve our product mix and to support the growth of Prepared Foods. At this time, we maintain our full year CapEx estimate of approximately $900 million to $950 million. As we face macroeconomic volatility, we are proactively managing cost headwinds in freight, packaging and other key input costs with productivity initiatives and through procurement actions. Through our key customer relationships, we have regular interactions to discuss structural cost changes in our business. We always focus on what we can control, which is operational excellence with cost discipline. Our team is resilient, and we have consistently demonstrated that we can navigate changing market conditions. Our capital allocation approach will remain disciplined as we continue to align our investment priorities with our overall strategies to drive growth, enhance margins and reduce volatility. Operator, this concludes our prepared remarks. Please open the call for questions. Operator: [Operator Instructions] The first question comes from Ben Theurer with Barclays. Benjamin Theurer: Two relatively quick ones. So first, you've talked about it in the opening remarks as well as in the press release about some of the initiatives you've been doing in the first quarter, which caused downtime. But then at the same time, there were issues around weather, the cold front and all that kind of stuff. Could you help us understand maybe a little bit more as to what the financial impact was in the first quarter within your U.S. business on one side, like kind of like the onetime weather related and then on the other side, like these like transition costs that you were having. So just that we understand what the impact was between those on the results? And then I have a quick follow-up. Fabio Sandri: Yes, sure, Ben. I think we have significant impacts. I think, like I said, it is to improve our portfolio. So the impact is normally we overstaff the plants at the beginning because we need more people for the deboning operations and for the portioning operations. So we carry a heavier staff during at least 3 weeks before the shutdown. So we are prepared for the beginning of the operation. So there is a cost impact in terms of labor. Also, there is a ramp-up cost because after we start, we need to train all the people and we need to get to the efficiency that we expected. That takes up to 2 to 3 weeks. And of course, there is the 1 to 2 weeks where the plants were shut down. So that was significant in those plants that we shut down for improving the portfolio. On the cold front, I think it is multifaceted. We have the direct impact, which is the plants don't operate on the days that we have those ice storms because in the south, they are not prepared for ice and storms. So to keep the people safe, we decided not to operate during 1, 2 or 3 days depending on the locality. And that impacts our cost, but also impacts on the live operations because we have the birds on the field and those birds will need to be processed. And when we have 2 or 3 days without operating, you change the sizes of the birds that you expect. And those birds end up being processed on a Saturday or over time, and that impacts overall costs. It's interesting to mention that -- and we have on the prepared remarks on the very strong January that we have. And when you look at every week, I think there was also an overstocking or a pantry loading on those regions on retail to prepare for the storm. And that's why we have a weaker-than-expected February as people start consuming what they have loaded in their freezers during January. If you look at week-over-week, actually on week 4 of January, you have an increase of 25% of sales in retail. So that created out of stock for the retail, but also pantry loading for the consumers. So that's what created less than expected growth during February on the retail sales. So I think it is a multi vision of impact in terms of our operations because of the changes that we have on our portfolio and in the operations also because of the storm. Benjamin Theurer: Okay. Got it. But you can't really quantify that, correct, just to confirm. Fabio Sandri: Yes. I think we can quantify the operation on the shutdowns, but then the impact on the market, which is actually the most impactful one or the impact on the live operations when we have birds that are not the exact size that we want, you need to downgrade them for a commodity sales rather than a specific sales for a key customer, which a much better pricing. It is the biggest impact. So that's why it is hard to quantify the overall impact. Benjamin Theurer: Okay. And then just as we moved into March and maybe into April, things from a normalization point of view, clearly, we still have the very high production data. So what's that kind of like your outlook as you think into what you saw in the first couple of weeks of the second quarter and how to think about the second quarter in general, given just we're still running at a relatively high exits and placements data? Fabio Sandri: Yes. I think that's a great question. When we look at Q1, we were expecting a 2% increase on the quarter. But looking at the latest numbers from USDA, we are experiencing a 3.4% growth during the quarter. Most of this growth was in March. And as you mentioned, we started with exits that were limited at 1.1%. But after the storms and especially during the end of February, beginning of March, we saw some great growing conditions. And that increased livability that accounted for another 1% in terms of growth, another live weights that accounted for another 0.7%. And we saw an improvement -- a rapid improvement in hatchability also during February that accounted for another 0.6%. More impactful than that is that almost all that growth came in March. So when you look at the growth in March, it was close to 5% to 6%. And when you account for where that growth was impacted heavily the commodity segment. So that's why we saw some significant improvement in the prices during January and then a mild February and some challenges in March and early April. As we mentioned, given the egg sets that we are seeing and given the trend more to a normal levels of hatchability coming back during the summer and also livability as the weather gets warmer, we have lower livability and lower growth in the birds. We expected a more muted growth from those factors and more growth concentrated only on exits that we are running around 1.9%. So when you factor all those, USDA is expecting growth in the range of 2.5% for Q2. Then going forward to Q3 and Q4, we are seeing more moderate growth. USDA is forecasting a total growth for the year of 2%, and we are seeing on the second semester growth below 1% on a year-over-year basis. Operator: The next question comes from Peter Galbo with Bank of America. Peter Galbo: Sorry to beat the dead horse on this. But Fabio, please, can we get a quantification on what the downtime at a minimum was worth? I think it's just important to have that given you don't want folks probably to capitalize that going forward. So just kind of what that discrete item was worth in the quarter and then whether there's any kind of lingering impact into 2Q? Fabio Sandri: Yes. On the lingering effect, I think we don't have any significant lingering effect. The network changes during -- at the beginning of the year because we knew that we want to do those changes before the grilling season. We don't want to impact the market or our operations during the grilling season. The only ramping up operation is still on the Russellville front where we're still ramping up, but we don't expect a significant impact. Like I said, I think it is is multifaceted. There is a lot of impact on our operations in terms of yields, in terms of growth, in terms of downgrading birds that end up in the commodity segment rather than a more specific production. That's why it's so hard, but I will say that it's significant. Peter Galbo: Okay. Okay. And then maybe just to switch gears a little bit. You talked a little bit in your remarks about some of the SNAP changes that may be coming on rotisserie in particular. I would think that's -- given your expertise in that space, just that could be a nice tailwind. So maybe you can expand. I know it's really early days. There's nothing even formalized yet, but just kind of how you view that opportunity, particularly going forward in the U.S. Fabio Sandri: Thank you, Peter. Yes, that's significant for our Small Bird operation. As I mentioned, that has been a long-term trend of moving away from bone-in category to a more boneless category on the small birds. We've been talking about this for years on the chicken wars and as the bone-in category has been declining. And I think our strategy has always been to balance the bone-in on the 8-piece and 9-piece with the growth in the deli section of the retail, especially on the rotisserie. I think that has been a great strategy for us. But lately, we've been seeing a slower growth on the rotisserie on the retail. If you look at -- in Q1, it was only 1.2% growth, and we expected a much higher growth on the rotisserie birds than that. And I think the SNAP can help a lot. I think it is an important tool for the consumers to be able to combat inflation, being able to get a hot rotisserie, which is a competition for the foodservice, but it is a much better value for them. So I think that could give a boost on -- especially on the -- it's a bone-in category, right? Because it's a whole bird for the whole category. Operator: The next question comes from Andrew Strelzik with BMO Capital Markets. Unknown Analyst: This is Ben on for Andrew. So my first question is about the vaccination of the birds. And I was just wondering what kind of impact, if any, you've seen on your own supply chain productivity now that you started vaccinating. Fabio Sandri: Yes. I think I'll just take a step back. There are many types of vaccination, right? I think there has been a lot of discussion about vaccination against high path avian influenza. And that is something that we don't believe it is beneficial for the whole industry as it is isolated events, we have strong biosecurity and that could hamper or could reduce our ability to export our products as vaccination prevent us from access some important markets for the United States. So vaccination for high path AI, we don't think it is a good alternative. And we don't think that is meaningful for the broilers market. Now on respiratory diseases, AMPV and some others, we vaccinated the birds last year after some big events, especially in Georgia. And I think that has helped the livability in the industry. If you look at the overall livability, as I mentioned, it contributed for 1% of the growth quarter-over-quarter. So I think the vaccination against AMPV was important in some specific regions. And I think that helped on our livability and the industry livability, especially in some parts of Georgia. It is a significant cost to the live operations. And as we are seeing less occurrences and a more resilient bird, we may stop those vaccinations going forward. Unknown Analyst: That's super helpful. And my follow-up question is around freight and your exposure to -- or potential exposure to spot market rates for refrigerated freight. We've seen others in the industry deal with some pressure there. So just wanted you to remind us what your exposure is there? Are you more contracted out -- and are you not concerned with the availability of refrigerated freight in the near term here? Fabio Sandri: Yes. In terms of supply of freight, I think we're not concerned. I think we have a big fleet in the United States. We have a very efficient company. So I don't think that there is an availability issue. As for the cost, and I think there is an impact on the freight and there is surcharges, and we have contracts where we have the surcharge based on gasoline or diesel costs. And that is a significant cost to the whole nation. I think just in terms of the portfolio of freight that we have, more than 70% of our sales are with freight included as a specific number. So that is a direct pass-through because freight is not part of our cost. It is just a delivery cost that the buyer will pay. And some of those also are picking up at our operations. So the whole freight, it is a cost -- or from the buyer. So in terms of direct freight to the customers, it's either a specific line on the invoice that is a pass-through or is a pickup order that is not our cost. I think there is some impact on internal freight when we see the delivery of the birds and we see the delivery of feed to our growers. So there is that direct cost that impact us. But I think as we mentioned, we control what we can control. We're trying to identify opportunities to reduce the travel, reduce the freight, get more efficient trucks. So we were trying to reduce the impact of those in our direct cost. Matthew Galvanoni: I think, Ben, it's important just as Fabio talked about the freight costs that go direct to our customers, that freight cost is just from an overall freight spend is a much higher proportion than freight internally to move birds or to move feed between farms, et cetera. So... Operator: The next question comes from Pooran Sharma with Stephens. Unknown Analyst: This is Adam on for Pooran. For my first question, with the Russellville conversion complete now, are you able to give any more details on the expected ramp in volumes and margins with that new case-ready capacity? Fabio Sandri: Yes. I think on the retail, we've seen over time is the more stable margin. And I would say it is double-digit margins, and it's much more resilient and stable than the Big Bird. And when you look at the overall portfolio, right, and this is what we're always talking about, we like the exposure we have to the big bird complex. But we understand that it's very volatile. So in Q1 last year, we see some very strong profitability in that segment. Actually, it was the most profitable part of our portfolio. In this quarter, we see that profitability was much lower than that. And that's why we converted the plant is to have higher and more resilient earnings. It's also important to support the growth of our key customers. We talk about the growth in retail. And as retail increased on the fresh more than 1% this quarter, our key customers increased more than 3%. And I think that's important to mention that we will need to continue to support their growth. So we will need more capacity on the tray pack business. So it's a growth opportunity for us to support our key customers, but it's also an opportunity for us to have more stable, higher margins. Unknown Analyst: Okay. And then for my follow-up, with Just BARE retail sales up 40%, you noted it was on distribution and velocity. Are you able to give any more details on how much of that growth is coming from distribution velocity or pricing or innovation and how you expect those drivers to perform in the back half? Fabio Sandri: No, I think it's a great point, right? Just BARE is a great part of our portfolio is on the prepared side, as we talk about more profitable and more stable. We just reached the $1 billion threshold. And I think that's over the last 5 years, which is an amazing growth. And as we mentioned, there is velocity and there is distribution. We continue to gain distribution. I think the velocity is more a sales tool for Just BARE because if the retailers have Just BARE in their portfolio and their freezers, they see the velocity of the category going up because that the velocity of Just BARE is much ahead of the overall velocity of the category. So it is a sales tool that helps us gain distribution. It is our strategy, right? How can we help our key customers to grow faster than the overall categories. We do that on Fresh, and we do that also on the Prepared. And you also mentioned very important is innovation. We just launched the roasted category on the Just BARE. The Just BARE started as a lightly breaded product as you can -- as you all know. And we just launched the roasted part of that portfolio. That helps with having more shelf space. And we are looking into also on the nugget side, if the presence of Just BARE can be very, very complementary to our overall portfolio. Operator: The next question comes from Leah Jordan with Goldman Sachs. Leah Jordan: But see if you could provide more detail on what you're seeing in terms of consumer behavior across your different regions. We're hearing about softness in Mexico and the U.K. and pressures could be building here in the U.S. So have you seen any notable shifts in products or channels that you would call out? Fabio Sandri: Yes, sure. I think it's a global trend, if you look, that consumers are looking and are over concerned about inflation, about the wage growth and overall consumer sentiment. And what they are looking is as food away from home keeps increasing faster than food at home, we're seeing a shift from foodservice to retail. I think the good news for chicken on that trend is that the penetration on the foodservice despite lower traffic has increased, and that's why chicken has been growing in the foodservice category. But then going to the retail, as we mentioned, the consumer is doing more trips and lower baskets. So that is the trend that we are seeing and we continue to see, and I think that is global. When you go more in the details by geography, demand in Mexico was strong during the quarter. I don't think that the pressure on prices in the region was because of demand. Chicken is the most affordable protein in the category. I mentioned about the spread between ground beef and chicken to the record levels. Ground beef increased more than 30% over the last year and chicken prices are stable. So the demand for chicken continues to be really strong even in Mexico. In Mexico, it was more about the availability of other proteins like eggs and pork at the same price as chicken and the availability of chicken. As we mentioned that the growing conditions in Mexico are typically very difficult during this time of the year because of drought conditions. We've been seeing more rains in Mexico, and that has helped with the growing conditions. So the availability of chicken in Mexico was north of 10% in quarter-over-quarter. So that's what impacted the profitability in Mexico. But as we mentioned in Mexico, it's very volatile quarter-over-quarter, but it adjusts itself throughout the year, and we continue to expect in a growing economy, just like Mexico with good demand for our products for the supply and demand to be more in balance. Europe, it's similar. I think the difference is that the volumes are not growing as fast. It's not a growing economy just like Mexico, but the chicken continues to be the best category for us and for the industry compared to the beef and even pork prices because of affordability. And then it comes to the U.S., and I think the same trend remains, right? The consumer looking for stretching their budgets, doing more trips with smaller baskets and chickens continue to be a great value for it. And I think we talked -- just talked about Just BARE and I think the frozen category has been growing on the -- as well because it's affordable, but also convenient. And we have the perspective of the growth in the whole birds or the deli segment rotisserie in the retail if the SNAP vote goes. Matthew Galvanoni: And Leah, it's Matt. I'll just complement something that Fabio talked about with the U.K. I think also chilled meals is doing quite well there. We're seeing the consumer there going back to what Fabio was talking about with at-home eating and the chilled meals where we have a nice presence. We've seen that increase quite a bit, and it's been a good play for us, too. Operator: The next question comes from Thiago Duarte with BTG Pactual. Thiago Duarte: My question is related to CapEx. And the first part of my question is really what's the timing for the conclusion of the ongoing investments in the mix enhancements and capacity addition? And the reason I'm asking is because you're still running well above last year and what I believe your sustaining CapEx should be. So the timing for the conclusion of these main investments would be interesting to get. And the second part of the question is related to how much incremental capacity or production volumes you effectively believe these investments will bring and how much it's actually basically the conversion of your fresh mix into more prepared mix? That would be an interesting color to get as well. Matthew Galvanoni: Thanks, Thiago, for the question. It's Matt. When you think about timing on CapEx, we provided the guidance that this year will be about $900 million to $950 million in total CapEx. Our sustaining CapEx generally runs in that $400 million range. So you can do the math that the growth or the efficiencies kind of payback CapEx is $500 million to $550 million in a year. We spent $235 million in the quarter. We mentioned a lot of the different projects we have. We've got a lot of that behind us. We've got more to come just as you kind of finalize some things and get builds to come in, et cetera, et cetera. So we'll still see some of that roll through. But that $235 million, I think it really does sort of set up nicely for the pace that we talked about for the year. Now of course, we've got the big spend we have relative to our prepared foods plant that we're building in Georgia. That's not planned to go online until the end of the first half of next year. So we will still be spending quite a bit there. As it relates to kind of our -- the mix of our capital and the growth, I think what's been important we talked about, we want to support Prepared Foods, both by building the plant that we talked about in Georgia, but also a lot of the enhancements that we're doing to our Big Bird plants right now are to support that growth by doing portioning and things that external companies had done for us in the past. And so some of that meat that we would be selling in the past on the market will be sold more so to our Prepared Foods business internally as we think about it that way. So I don't know, Fab, if you want to complement anything on that? Fabio Sandri: No, I think on the incremental capacity, if you think about the conversion of Russellville actually reduces a little bit the overall tonnage because a big bird plant runs 9 to 10 pound bird and a case-ready plant it's between 6.5 and 7. So I think that reduces a little bit. And that's why we're also investing in our Big Bird plants to be able to run a little bit more pounds. Our intention is always to support the growth of our key customers. And when you look at the expectations on the market, it's around 2%, and that's what we want to continue to grow to support them. So around 2% in line with the market. Operator: The next question comes from Heather Jones with Heather Jones Research. Heather Jones: I wanted to go back to what you were saying about the price spread for -- between ground beef and breast meat in the U.S. And there's been a lot of feature at food service and et cetera. But one of the things that I'm hearing and honestly seem to see it in the data is that the pickup in breast meat demand or chicken demand in general at retail hasn't been as pronounced as would have been expected given that price gap. And one, wondering if you agree with that? And two, if so, why do you think that is? Fabio Sandri: An increase from $4.70 a pound at retail to $6.29. And at the same time, chicken price boneless breast has remained stable at $4. So I think there is some elasticity that we see. But what I believe it's happening is that as consumers are, like I said, stretched on their budget, they're moving from foodservice to retail. And when they move from food service to retail, they have more available income because the price of a food away from home is 3x the price of food at home. So they go to the retail, and they are buying the more expensive parts of beef, right? So they are getting the nice cuts. And then you have consumers that are trading down inside beef from expensive cuts to ground beef, and that is supporting the volume of ground beef. So it's a moving from food service to retail that supports the high parts of the beef. And then you have some trading down on the beef category from the high end to the ground beef. And then we see some trading down from ground beef to chicken. But I agree with you, I don't think that the elasticity has been as prevalent as we expected given the spread in prices. And I think there is a limit to it, right? I think that is -- it reached a point where it's so high, the distance that I don't think is creating any more demand for chicken. But the demand for chicken continues to grow, again, in all categories in retail, not only boneless breast. And I think another factor is what we -- the growth that we are seeing on dark meat deboning. And I think this is important to mention as well. We are doing that investment in our operations. I think the whole industry did that investment. The growth in the dark meat or in the boneless ties has been phenomenal at retail. And if you look at the prices at retail, the price of dark meat is actually higher than the price of boneless. But overall, it is a growing category. So you need to take both of those cuts in combination. And when you look at those cuts in combination, I think you see a much better elasticity and a much better demand on the chicken category. Heather Jones: Okay. That makes sense. And then my follow-up is, if I remember correctly, you were converting -- you converted Russellville to case-ready and to NAE. And so oftentimes, when companies convert to NAE, there's an adjustment period. And so wondering if that -- if you anticipate any impact like livability, whatever to continue into Q2? Or is all of that now back at normal levels? Fabio Sandri: That's a great point. We converted to NAE because we want to differentiate our key customers, right? I think just to justify the NAE change. It is a growing category. It is to make the differentiating factor for that key customer is a different package as well. So it's a saddle pack. So I think that's a differentiating factor as well, very convenient for the end user. At the beginning, we see some reduction in livability and in growth, but we have great housing. We have great procedures, and we expect to be similar growth conditions and similar mortality. There is always a little impact, but I don't think it is significant. And I think it makes sense when you look at the higher attribute and it helps our key customer to be differentiated in the marketplace. Operator: The next question comes from the line of Priya Ohri-Gupta with Barclays. Priya Ohri-Gupta: Two quick ones for me. One, I was wondering if you could just give us some more color around some of the competitive dynamics you're seeing in the European market? And then secondly, Matt, if you could just walk us through some of the thought process around the -- taking out the 33s and how we should think about maybe your debt profile going forward, just given how underlevered you are? Fabio Sandri: Yes. Thank you. Again, on Europe, because of our differentiated portfolio, we are seeing different dynamics in each category. As I mentioned, chicken continues to be favored throughout the world, but also in Europe because of affordability and availability. So we saw some growth in volumes and in prices. The more challenging segment has been on the branded portfolio, especially on the Richmond side, the competition from private label. Private label sausage is made with imported meat, especially from Germany and Spain, and we're seeing some very cheap imported pork meat from those geographies because of some challenges to get into China. So because of the lack of exports from Europe to China, we're seeing more available fresh pork from other countries other than U.K. U.K. has a high welfare. So on the retail, we see all the high welfare and it's well priced, and we have key customers and is actually doing well. But on the imported meat that goes into the whole -- on the food service and into sausages, we saw some very cheap pricing. And that with the lower price on the private label, that impacted our volumes in the branded, especially on the Richmond. But we are working with innovation. We're working with gaining distribution, and we're working with more promotional activity to gain those volumes back. And as Matt mentioned in another Q&A, the meals business is also doing really well. As the consumer is staying more at home and meals is a great affordable option for them. We're seeing our meal business, both the fresh and frozen to grow, and we also gained distribution on that. So I think it is how we expected our portfolio to work. So we have similar margins or resilient margins compared to the same year -- same period last year because of the diversification of our portfolio. Matthew Galvanoni: And Priya, regarding your question on the tender offer, our thinking was we had room under the previous authorization from the Board on debt buybacks. There's an opportunity to take some higher coupon debt out. We're confident in our future cash generation. And I think as you mentioned, our balance sheet right now is underlevered. And I think as we look at other growth opportunities, we're always looking to grow the company, could be through M&A and opportunities that we see out there. Our balance sheet is in the right spot to be able to do that if necessary to go back out to the market if necessary. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Fabio Sandri for any closing remarks. Fabio Sandri: Thank you, everyone, for attending today's call. During the quarter, we were able to navigate a volatile market in the commodity segments, protecting the downside with the most stable parts of our portfolio. More important, the underlying fundamentals of our business remain attractive, given chicken's affordability, continued consumer momentum across retail and foodservice and ample grain supplies. We continue in our journey, investing in our operations and in our teams to strengthen our portfolio, ultimately creating a higher return and reducing risk. This quarter, our team members simultaneously drove the business while navigating significant operational changes. This task was even more difficult given extensive weather challenges. As such, I would like to thank our team members for their determination, discipline and commitment to our company. We must continue those efforts with an unwavering focus on team member safety and well-being, along with an unyielding attention to quality, service and sustainability. Given continued progress, we can continue to build our legacy and achieve our vision to be the best and most respected company in our industry, creating the opportunity of a better future for our team members. Thank you, everyone. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Please continue to standby. The conference will begin in approximately one minute. Again, please continue to stand by, and thank you for your patience. Good afternoon, and welcome to the Beazer Homes USA, Inc. earnings conference call for the second quarter ended March 31, 2026. Today's call is being recorded and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company's website at bezier.com. At this point, I will turn the call over to David I. Goldberg, Senior Vice President and Chief Financial Officer. Thank you. David I. Goldberg: Good afternoon, and welcome to the Beazer Homes USA, Inc. conference call discussing our results for 2026. Joining me today is Allan P. Merrill, our Chairman and Chief Executive Officer. After our prepared commentary, we will open up the line and Allan and I will be happy to take your questions. Before we begin, you should be aware that during this call, we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties, and other factors described in our SEC filings that may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date this statement is made. We do not undertake any obligation to update or revise any forward-looking statements as a result of new information, future events, or otherwise. New factors emerge from time to time, and it is simply not possible to predict all such factors. I will now turn the call over to Allan. Allan P. Merrill: Thanks, Dave, and thank you for joining us. I am going to organize my comments today around three topics: the highlights from our second quarter results, our responses to a challenging demand environment, and a review of our progress toward our multiyear goals. Relative to the second quarter, despite some new challenges in the macro environment, we were encouraged that our community count, sales pace, ASP, and gross margin all came in right around our expectations. Of particular note, getting our sales pace back over two per community per month was important, as was the improvement in our Houston business, which was up nicely year over year. Digging a little deeper into the quarter, we were able to drive to-be-built sales higher, to 43% of gross sales, the highest level since 2024. Our new communities, which we define as beginning sales after March, represented 34% of gross sales, up sequentially from 24% last quarter. Both of these positive mix dynamics will contribute to higher ASPs and margins in the back half of the year. From a balance sheet perspective, we have maintained a robust lot pipeline with a healthy 60% controlled by options. During the quarter, we increased liquidity by upsizing our revolver, and we grew book value per share by buying back more than 1 million shares at about 60% of book. Bottom line, our results reflected solid execution in a challenging operating environment. Last quarter, we described the environment and operational results that would be necessary for us to grow EBITDA this year. Among other items, this included a sales pace above 2.5 in the second half of the year and 300 basis points of margin expansion by the fourth quarter. Several macro headwinds developed since then, notably higher mortgage rates and surging energy costs. Both are readily evident to potential homebuyers and both undoubtedly contributed to the recent drop in consumer sentiment. While these challenges may prove temporary, they have left us more cautious and reduced the likelihood of achieving sufficient pace and margin expansion to support full-year EBITDA growth. We now think a sales pace above two for the balance of the year and margin expansion between 200 and 300 basis points by the fourth quarter are more likely and achievable outcomes. With the additional benefit of a sizable mix-driven increase in ASPs and a modest ramp in community counts, we are positioned to sequentially improve profitability and returns in the next two quarters. In this environment, we could probably achieve a higher sales pace by increasing spec starts and offering more incentives. We think that would do little more than spike revenue for a few quarters and burn through our valuable option position. More importantly, it would undermine the progress we are making in getting paid for delivering a more efficient home and the industry's highest-rated customer experience. Our positive margin progression remains intact, but it is built on more than just lower construction costs. It also reflects a growing share of closings from both our newer and our higher-priced existing communities, where we are effectively competing on quality and value. While our sales pace is not where we want it yet, we are actively building awareness with buyers, realtors, and appraisers that our homes are different, perform better, and cost a lot less to operate. We believe this approach will yield greater and more durable returns than simply putting more low-feature specs on the ground. Beyond improving margins, we believe the capital allocation decisions we are making will also improve our returns. Land prices remain quite resilient, and yet our share price implies our existing assets are worth a lot less than we paid for them, which we know is not the case. That is why our 2026 capital allocation approach has been to improve the efficiency of our land spend, sell non-strategic assets at or above book value, and buy back stock at a meaningful discount to book value, all while preserving our growing community count. On our last call, we committed to completing our existing $72 million repurchase authorization this year, and we executed $30 million in the second quarter. Upon completion of the full authorization, we will have bought back nearly 20% of our shares since early fiscal 2025. Taken together, growing profitability and efficiently allocating capital will increase book value per share this year. Now, looking further out, we are still heading toward our longer-term multiyear goals for growth, deleveraging, and book value per share accretion—a combination we believe produces the best path for shareholder value creation. While progress is not easy to synchronize in a difficult environment, we continue to pursue each goal. With 169 communities at quarter end, we are still targeting more than 200 active communities by the end of fiscal 2027. Sales paces in existing communities and the attractiveness of incremental land purchases will determine our path to reaching this goal. We remain focused on deleveraging to the low-30% range by the end of fiscal 2027. However, as we indicated last quarter, we are prioritizing share repurchase activity in fiscal 2026 and expect to make progress on our leverage goal next fiscal year. Growing book value per share into the fifties remains our goal through both earnings and stock buybacks. At quarter end, book value per share was up versus last year, finishing at nearly $42 using weighted average shares and nearly $43 using period-end shares. With that, I will turn the call over to Dave. David I. Goldberg: Thanks, Allan. During the second quarter, we sold 1,048 homes with a pace of 2.1 sales per community per month, with pace increasing from January to February and plateauing in March. On a positive note, our spec sales mix continued to move lower at 57% in the quarter. This is down from 61% in the first quarter and well below the mid- to high-70% range we saw in 2025. This shift toward more to-be-built supports our margin expansion opportunities in the second half. Of note, the impact of the headwinds we mentioned earlier has not been an increase in cancellation rates. Instead, we simply did not see our normal seasonal lift in traffic and leads in March. Our average active community count was 167, representing 3% year-over-year growth. Our homebuilding revenue was $397.7 million; 757 homes closed at an average price of $525,000. As anticipated, our ASP continues to move higher given the positive mix shifts we have referenced. In fact, with an ASP in backlog over $580,000, this trend should accelerate. Homebuilding gross margin was 15.6%, essentially in line with our first quarter results. SG&A was $64 million, approximately $4 million below last year. Surprisingly, taxes represented nearly an $18 million benefit. This reflected an adjustment in our quarterly interim tax treatment. Interim taxes are not intuitive in GAAP, so we have added disclosure in our 10-Q discussing this change. All told, the second quarter diluted loss per share was $0.03 and adjusted EBITDA was $2.6 million. Now let us walk through our third quarter expectations. We expect to sell more than 1,000 homes, up nearly 20% versus last year's third quarter. This implies a sales pace roughly in line with the second quarter. We expect to finish Q3 with about 170 active communities, flat to slightly up sequentially. We anticipate closing about 900 homes with an ASP between $535,000 to $540,000 as our New York communities contribute a larger share of closings. Adjusted homebuilding gross margins should be up more than 50 basis points sequentially, reflecting both direct cost savings and mix benefits. SG&A dollars should be about flat with last year's third quarter. From a land sale perspective, expect to generate about $30 million of revenue in the quarter and still expect $150 million for the full year. Altogether, this should result in total adjusted EBITDA of $5 million to $10 million in the third quarter. Interest amortized as a percentage of homebuilding revenue should be about 3%. Given the variability of our interim tax rate, we are not giving tax or earnings guidance for the quarter. For the full year, we expect our energy efficiency tax credits will drive a net tax benefit of over $10 million and, more importantly, we expect to pay minimal cash taxes for several years as a result of these credits. Finally, we expect further growth in book value per share in the third quarter. Coming into the year, we had two goals related to land spend. First, we wanted to sustain an investment level that supports community count growth. At the same time, we wanted to make our balance sheet more efficient and facilitate share repurchases. We feel pretty good about both. Our total land spend this year, net of land sale proceeds, should be roughly in line with the dollar value of what we are delivering. That would typically lead to a flat community count, but we have been able to improve deal structure and timing and carefully grow our use of developer and land bank options. The resulting balance sheet and land spend efficiencies are helping us turn our assets more quickly and supporting both our growth outlook and buyback activity. Finally, our balance sheet remains strong with approximately $400 million of total liquidity. This includes $116 million of unrestricted cash and $285 million of revolver availability, and we have no maturities until October 2027. During the quarter, we expanded our revolver by $160 million to $525 million and extended its maturity by two years to March 2030. With that, I will turn the call back over to Allan. Allan P. Merrill: Thank you, Dave. To wrap up, I would like to summarize the reasons we are so confident we will create substantial value for our investors. We have a clear and differentiated strategy. We have chosen to compete by offering a home built to lower homeownership costs as the key attribute. This is different from other builders, and we think that is a good thing, and a lot less risky than trying to outmuscle all of the companies building lower-feature homes. We are building momentum toward greater profitability. Our sales pace improved this quarter. Our gross margins are headed in the right direction. Our average sales prices are trending higher, and our community count is growing. Together, this creates a powerful setup for operational leverage. Our balance sheet is strong. We have plenty of liquidity, no looming maturities, ready access to the capital markets, and lots of tax credits that will shield a significant amount of our future profitability. Finally, we have been disciplined capital allocators. Prior to and during the pandemic, we grew our active land portfolio significantly, setting us up for sustained community count growth. In recent quarters, we have improved the efficiency of our balance sheet to facilitate substantial share repurchases. We are not spending time worrying about the macro or hoping for a turn in the market. We are executing against a differentiated strategy that is poised to deliver growing profitability and shareholder returns. Let me finish, as always, by thanking our team for their ongoing efforts to create value for our customers, our partners, our shareholders, and each other. We will now open the call for questions. With that, I will turn the call over to the operator to take us into Q&A. Operator: Thank you. To ask a question, please press star followed by the number one. To withdraw your question, you may press star followed by the number two. Please unmute your phones and state your name when prompted. Once again, that is star one. Our first caller is Natalie Kulasekere with Zelman & Associates. Your line is open. Natalie Kulasekere: Good evening, and thank you for taking my question. Could you tell us what your targeted share of to-be-built sales is in the long run, and can we expect this 43% to climb higher over the coming quarters? If so, what are some changes that you made in the business to accommodate this, and any detail around that would be helpful. Allan P. Merrill: Sure, Natalie. I would answer that a few ways. Longer term, we would like a majority of the homes that we sell to be to-be-built. That is not going to happen over the next several quarters, so that is a longer-term goal to be a majority to-be-built company, like we were, frankly, before the pandemic. In terms of the next couple of quarters, we are going to keep working to drive that percentage, but typically what has happened in the fourth quarter is we have a slight increase in spec sales close to fiscal year-end. So it is not a straight line, but I think we will be able to do period-over-period comparisons over the next year and see slow, steady progress comparing quarters to one another, year over year, where I think we will be able to show increases in to-be-built sales. Natalie Kulasekere: Got it. And what has this share been trending over, say, the past four quarters? Allan P. Merrill: A year ago, it was in the thirties. Now it is 43%. It is the highest it has been since early 2024, and it held in nicely this spring. I do not have each quarter off the top of my head, but it is up over 10 points year over year. Natalie Kulasekere: That is helpful. And just one more for me. What are the margins you see in your backlog right now? Also, is your guidance of 300 basis points of margin expansion in the fourth quarter based on what you are seeing in the backlog and the kind of interest you are seeing with your to-be-built sales? David I. Goldberg: Yes, Natalie. I would tell you the margins in backlog are supportive of the guidance that we have given for the next two quarters. Obviously, we have a lot more visibility on Q3 just given that we are in the middle of Q3 now. The reason we went to 200 to 300 basis points is based on what happens with specs and specs that we sell and close in the next few quarters. Natalie Kulasekere: Alright. Thank you. Operator: Our next question is from Tyler Anton Batory with Oppenheimer. Your line is open. Tyler Anton Batory: Good afternoon, everyone. Thanks for taking my questions. First, can you give some more detail on what you saw in March and April, and how sales in those months compared with normal seasonality? Allan P. Merrill: March was fine, but it was not great. January was kind of normal. February was up a little bit. We were feeling reasonably optimistic. There was weather here and there, but it felt pretty good. In March, it was fine, but we did not see what we normally see—an increase sequentially from February to March in traffic and leads. It did not collapse, but it did not move up, and that is one of the things that made us a little bit more cautious as we look at the next couple of months. April has been very similar to March. Tyler Anton Batory: Perfect. And then I am really trying to understand the EBITDA guide here. Your $5 million to $10 million in Q3—there was some talk earlier about EBITDA perhaps being pretty close to where you were in the prior year for the full year. If that were still the case, it would imply a pretty significant ramp in Q4. I am assuming there are some moving pieces, perhaps on the land side of things. I understand that the environment is a little bit weaker than when we came into the year, but can you help us understand any onetime items that might be moving around Q3 and Q4, and how you see EBITDA for the full year playing out? David I. Goldberg: We are not giving a full-year EBITDA guide, but what we did last quarter was all about trying to create a path and show people what a path could look like to get to growth in EBITDA year over year. As Allan said in his opening comments, in a tougher sales environment—if we are not doing the 2.5 sales pace in Q3 and Q4—that becomes more difficult. There is not a significant change beyond what we just talked about. Our land sale guidance is still around $150 million of land sales. But when you compound having lower sales paces in Q3 and Q4, it has an impact on EBITDA, and there is a lot of operating leverage. The good news is, as Allan talked about in his scripted remarks, there is also a lot of operating leverage the other way. I am happy to take it offline if you want to, but there is no change other than what we outlined in the script. Tyler Anton Batory: Last one for me. Strategically, thinking about getting fair value in the markets for what you offer—you have made some changes to marketing and whatnot. Talk about the sales process and consumer adoption, and whether people are appreciating the value you provide in your homes. Allan P. Merrill: Energy costs are much higher in consumers’ minds than they have been in many years, and that is great for us. What is really resonating is the simple math. One of our new home counselors explained it in a way that is both true and simple. She said that if we save somebody $100 a month or $200 a month in their utility bills—and we can look at homes in the community and the third-party ratings that we get—the purchasing power that creates is enormous. She likes to tell people, “$10,000 in price costs $50 a month. So if we save you $200 a month, how does that $50 a month feel?” The idea about energy efficiency that has been elusive for most consumers is the notion they have to sacrifice something. Having an energy-efficient home is not a sacrifice. Another challenge is people ask, “What is the payback?” We like to talk about it as the payback being in weeks—any difference in monthly payment is less than the savings on the utility line. When you get it that simple for folks, it is easy. There are people who will say, “How did you do that?” and that gives us a great chance to nerd out. What we have gotten better at is not nerding out first and then explaining the benefit, but talking about the math. Then, when they want to know how we did it, we have lots to talk about. Tyler Anton Batory: That is good detail. That is all for me. Thank you. Allan P. Merrill: Thanks, Howard. Operator: Thank you. Once again, if you would like to ask a question, you may press star one. Our next caller is Julio Alberto Romero with Capital Company. Your line is open. Julio Alberto Romero: Good afternoon. My first question is, if demand were to worsen in the second half, what levers do you have to pull on the margin front? Allan, you mentioned you can likely increase sales pace through incentives and increasing spec starts, but are there any other levers as potential offsets to help with margins? Allan P. Merrill: Obviously, those are things that would move margins the wrong way, and we have decided that in this environment, that is not what we want to do. If the market gets a lot tougher, we are going to evaluate—like I think any builder would—everything. Are there changes we need to make to our product? Do we need to restructure the way we do our incentives? We have a full suite of tools available to us, and we have proved reasonably resilient over the last couple of years trying to match what the sentiment in the market is. I wish I could give you the exact thing that we would do, but the trick is Southern California is different from Indianapolis, which is different from Maryland. So the adjustments would vary by market. Julio Alberto Romero: Understood. And circling back on the to-be-built mix from earlier, how do you envision the fiscal 2027 mix of to-be-built to look? Allan P. Merrill: It is not a guide, but my belief is that with the new communities and the enthusiasm around what we are doing, I am hopeful we will have year-over-year improvements in the mix of to-be-built sales. There will be quarter-to-quarter sequential volatility because we typically have a higher share of spec sales in our fourth quarter, but year over year our goal is to be higher than we were in the same quarter the year earlier. That is the plan over the next year or two. Julio Alberto Romero: Got it. I will pass it on. Thank you. Operator: Thank you. Our last question comes from Alexander Rygiel with Tech Capital. Your line is open. Alexander Rygiel: Thank you. Good evening, David and Allan. A couple quick questions here. Can you talk to incentives and, directionally, where they were in the first quarter versus prior periods and where you feel like they are going in the fiscal third quarter? David I. Goldberg: Sure. On an overall basis, incentives were down sequentially in the quarter, but a lot of that had to do with mix and what was coming through from a spec perspective. On a go-forward basis, we think incentives are going to be down a little bit, but again, not at the house level—it is mix-driven. We think we peaked in Q4 and have seen some improvement since then. We do not have a big expectation that house-level or community-level incentives are going to change; it is more mix-related. Allan P. Merrill: And let me just add that at the house level, as I think about March and April, there was a slightly higher cost to buy downs as rates ticked up. We do not control the mortgage rate or what a buy down costs. We feel very good about the pull-through of the things that we can control to drive margins higher, but there is a bit of a headwind from higher rates in the cost of buy downs that will affect the third and fourth quarter, and that is baked into what we have talked about for the rest of the year. Alexander Rygiel: Secondly, it appears that your cancellation rate declined a bit. I suspect that is also due to mix, but are you seeing any other positive trends from that? David I. Goldberg: I would not tell you there is a big change in cancellation behavior. The number does look good. It has not really concerned us in the last couple of quarters, even being a little bit higher. We typically run the business between a 15%–20% cancellation rate, so I do not see that being a big factor on a go-forward basis. Alexander Rygiel: Great. Thank you. Operator: Thank you. At this time, I am showing no further questions. Allan P. Merrill: I want to thank everybody for joining us on our second quarter call and look forward to speaking to everyone for our third quarter call in a few months. Thank you very much. This concludes today's call. Operator: Thank you. Thank you for participating on today's conference call. You may go ahead and disconnect at this time.
Operator: Good morning, and welcome to the Alerus Financial Corporation Earnings Conference Call. All participants are in a listen-only mode. Today's call will reference slides that can be found on Alerus Financial Corporation’s Investor Relations website. You can also view the presentation slides directly within the webcast platform. After today's presentation, there will be an opportunity to ask questions for analysts and institutional investors. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please note this event is being recorded. This call may contain forward-looking statements, and the company's actual results may differ materially from those indicated in any forward-looking statements. Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements are listed in the earnings release and the company's SEC filings. I would now like to turn the conference over to Alerus Financial Corporation’s President and CEO, Katie A. Lorenson. Please go ahead. Katie A. Lorenson: Thank you. Good morning, everyone. Appreciate you joining us today. With me today are Alerus Financial Corporation’s CFO, Alan A. Villalon; our Chief Operating Officer, Karin M. Taylor; our Chief Banking and Revenue Officer, Jim R. Collins; and Alerus Financial Corporation’s Chief Retirement Services Officer, Forrest Rexford Wilson. We delivered a strong first quarter to begin 2026, and more importantly one that demonstrates the progress we have made repositioning Alerus Financial Corporation for higher quality, more durable performance. For the quarter, we reported net income of $23 million, or $0.89 per diluted share. Return on average assets was 1.79% and return on average tangible common equity was approximately 22%. These results were driven by margin expansion, resilient fee income, disciplined expense management, and continued improvement in asset quality. We view this quarter as a clear validation that the strategic actions we have taken are translating into tangible financial outcomes. Our results reflect three structural strengths shaping the business. First, our balance sheet is fundamentally better positioned. Margin expansion in the quarter reflects disciplined funding management, the benefits of balance sheet actions taken last year, and a funding mix that continues to differentiate our franchise. Growth in highly valuable HSA balances, sourced through our benefits services platform, highlights the uniqueness of our funding model, with nearly a quarter of deposits sourced from our integrated and synergistic business lines. Second, diversification continues to matter. More than 40% of our revenues are fee-based, capital-light, and recurring. Our retirement, benefit services, and wealth advisory fee streams provide stability across interest rate and market cycles. Even as asset levels and market conditions fluctuate, underlying engagement, client activity, and long-term profitability across these businesses remain solid. Third, we continued our success in recruiting high-quality talent, adding team members in key markets in Wisconsin and Arizona, in addition to progressing towards our goal of doubling the number of wealth advisers across the franchise. Impressively, we have maintained discipline on expenses while continuing to make selective investments in technology and growth initiatives. Our focus remains on scalability, ensuring that as revenue grows, returns improve in a sustainable way. During the quarter, we remained focused on relationship-driven growth. Commercial and private banking continues to be an area of focus, with year-over-year C&I growth exceeding 10%, supported by healthy pipelines and strong client engagement. At the same time, we have remained intentional in reducing exposure to lower-return and higher-volatility segments of the balance sheet. The mix shift is improving risk-adjusted returns and strengthening the overall profile of the portfolio. On the funding side, deposit trends reflect the value of our diversified platform. Growth in core deposits, including commercial and private banking relationships in addition to our synergistic deposits, reinforces the strategic advantage of our integrated business model. As a result, the loan-to-deposit ratio improved to under 93%. Asset quality improved meaningfully during the quarter. Nonperforming assets declined, and criticized loan balances continued to trend lower. We made significant progress resolving previously identified credit issues. During the quarter, we charged down a nonaccrual and well-reserved C&I credit related to a longstanding client relationship negatively impacted by changes in government funding. This was a single event and not reflective of broader portfolio trends. We also made substantial progress in moving closer to resolution on our largest remaining nonaccrual relationship, which represents approximately 65% of total nonaccrual loans. As a result of portfolio improvement and credit resolution activity, we recorded a reserve release of $4.9 million during the quarter while maintaining an allowance for credit losses of 1.25% of total loans. Taken together, these actions underscore the strength of our credit discipline and our commitment to proactive risk management. Our capital position remains strong. Tangible book value per share increased to $18.15 and tangible common equity to tangible assets improved to nearly 9%. Capital ratios remained comfortably above regulatory requirements. During the quarter, we repurchased $6 million of common stock while continuing to return capital through dividends. Our approach to capital allocation remains disciplined and balanced, supporting growth while returning excess capital to shareholders. Most importantly, the company’s trajectory remains highly positive. The underlying fundamentals of the business—our talented team, balance sheet positioning, diversified revenue models, credit discipline, and operating focus—are stronger than they have been at any other time in our nearly 150 years as an institution. We remain focused on disciplined growth, continued execution, and delivering sustainable long-term value for our shareholders. I will now turn the call over to Alan to walk through the financial results in more detail. Alan A. Villalon: Thanks, Katie. Let us start on page 9 of our investor deck posted on the Investor Relations section of our website. In the first quarter, we delivered a strong start to 2026 and demonstrated the earnings power of the franchise following the balance sheet reposition completed late last year. We generated adjusted diluted EPS of $0.89, inclusive of $6 million of share repurchases during the quarter. Our results reflect continued core net interest margin improvement, disciplined expense management, and the benefit of our diversified business model with noninterest income representing just over 40% of total revenue. Profitability remained strong, with an adjusted return on average tangible common equity of 21.96% and adjusted return on average assets of 1.79%, improving 17 basis points from the prior quarter. Tangible book value per share increased 3.4% linked quarter to $18.15, and our tangible common equity ratio improved to 8.85%, underscoring continued capital generation. Turning to the balance sheet, we remain well positioned to support organic growth. Deposits increased 3.7% on a period-end basis, and our loan-to-deposit ratio improved to 92.8%. In addition, we continue to maintain robust liquidity of approximately $2.7 billion, providing flexibility to fund loan growth, manage through market volatility, and continue returning capital through dividends and share repurchases. Let us turn to page 16 to talk about our earning assets. At quarter end, loans were relatively stable versus the prior quarter. We continue to proactively reallocate capital to full relationships, primarily in C&I and private banking. Excluding this continued rationalization, end-of-period loans would have grown modestly. Overall, our loan mix remains balanced at approximately 50% fixed and 50% floating. On investments, we continue to benefit from the strategic portfolio reposition executed in the fourth quarter. During 4Q, we sold $360 million of available-for-sale securities, representing over two-thirds of total AFS securities at year-end 2025. This restructuring improved the overall average investment portfolio yield by 139 basis points from 4Q 2025 to 3.84% in the first quarter and has been a meaningful contributor to margin expansion. Currently, our balance sheet remains positioned slightly liability sensitive. On a rate cut, we will see slight margin improvement and vice versa on a hike. Turning to deposits on page 17, our funding profile continues to strengthen and remains a key contributor to margin expansion and balance sheet flexibility. On a period-end basis, total deposits increased 3.7% from the prior quarter, reflecting growth across both public funds and core client deposits. Importantly, we continue to see favorable mix improvement and operated during the quarter with only $8 million of brokered deposits. Noninterest-bearing deposits increased 6.2% linked quarter and now represent approximately 19.7% of total deposits. This shift meaningfully supports our cost of funds and improves the durability of our funding base. The quarter-over-quarter increase in deposits was driven by seasonal public fund inflows as well as steady growth from commercial and private banking clients. We are particularly pleased by the continued stability of our core deposit franchise, which reflects core operating and treasury management relationships rather than rate-sensitive behavior. As a result of deposit growth and selective loan originations, our loan-to-deposit ratio improved to 92.8%, providing additional on-balance sheet liquidity and positioning us well to continue to support organic loan growth going forward without relying on higher-cost wholesale funding. Overall, our deposit franchise remains a competitive advantage, supporting loan growth and providing flexibility as we navigate the evolving rate environment. Turning to page 18, net interest income remained stable at $44.9 million. Reported net interest margin expanded 8 basis points to 3.77%, a new post-IPO high. Purchase accounting accretion contributed approximately 25 basis points in the quarter. Excluding accretion, core margin was 3.52%, representing a 35 basis point improvement from the core margin in the fourth quarter. Drivers of the core margin improvement included a 21 basis point decline in the total cost of funds to 1.97% and a higher portfolio yield of 3.84% following the fourth quarter balance sheet repositioning. In addition, strong new business margins across both loans and deposits supported continued margin momentum. New loans were originated at average rates in the low- to mid-6% range, while new deposits were in the low- to mid-2% range. Turning to page 19, adjusted fee income, excluding the balance sheet repositioning and other one-time items, declined 3.2% from the prior quarter, primarily due to lower swap fee revenue. Importantly, fee income continues to represent over 40% of total revenue, demonstrating the value of our diversified model in a dynamic rate environment. Let us turn to page 20 for additional detail on fee income. In banking services fee income, adjusted banking fees declined modestly from the prior quarter, primarily driven by lower swap revenues. We do not include swap revenues in guidance due to inherent variability and client-driven timing. Importantly, our core transaction-based fees remain stable, supported by continued activity across our commercial and consumer client base. Mortgage fee income increased over 130% from the prior year, driven by increased originations, improved gain-on-sale margins, and a higher valuation of mortgage servicing rights. While originations remain seasonally lower, economics per loan improved, demonstrating our ability to generate solid fee contribution even in a muted volume environment. On page 21, highlights for retirement and benefit services: total revenue increased to $17.4 million, up 0.8% linked quarter. Assets under administration and management declined 5.9%. It is important to note this change had, and is expected to have, minimal impact on revenues, as the revenue was replaced with a new partnership onboarded during the quarter. Synergistic deposits within the retirement segment increased 2.3% linked quarter. HSA deposits grew 7.1% to approximately $218 million and continue to be a particularly attractive funding source, carrying an average cost of roughly 10 basis points. Turning to page 22 in wealth and wealth advisory services, revenue in the quarter was $7.2 million. On a linked-quarter basis, revenue declined a modest 2.7%, primarily driven by market-related pressure on asset values, as client retention remained strong. Assets under administration and management decreased 1.2% from the prior quarter, reflecting broader market performance during the period. From a fee mix standpoint, the decline was evenly split between asset-based and transaction-based revenue, consistent with lower market levels and typical first-quarter seasonality. Turning to page 23, our expense discipline continued to translate into positive operating leverage during the quarter. Reported noninterest expense declined 2.9% on a linked-quarter basis, reflecting lower incentive compensation as both mortgage activity and banking production were seasonally lower. Importantly, this decline was achieved while we continued to invest in the franchise. The increase in professional fees during the quarter was driven by the reclassification of certain vendor services previously recorded within business services and technology, rather than incremental new spend. Overall, expense trends remained well controlled, and we continue to demonstrate the scalability of our operating model as revenue growth outpaced expense growth in the first quarter. This discipline supports both near-term profitability and our ability to invest selectively in growth initiatives without compromising returns. Turning to page 24, asset quality improved meaningfully. While net charge-offs were 71 basis points, the increase was driven primarily by a single $6.4 million charge-off on one previously identified C&I relationship that had previously been placed on nonaccrual. This charged-down relationship still has remaining reserves of 78%. Importantly, nonperforming assets declined $15.4 million linked quarter and criticized loans were down 43% year-over-year. We recorded a $4.9 million reserve release, primarily driven by lower loan balances and an improved mix. Despite the continued positive trends, we maintain a reserve level above the industry at 1.25%. On page 25, capital and liquidity remained strong. Tangible common equity to tangible assets improved to 8.85%, and tangible book value per share increased to $18.15. We continued to return capital to shareholders through both our quarterly dividend and $6 million of share repurchases at an average price of $23.90, while maintaining substantial liquidity to support organic growth. Turning to page 26, our 2026 guidance has improved and reflects continued disciplined growth and positive operating leverage. We expect the following: loans to grow at a mid-single-digit rate for the full year despite more than $400 million of contractual maturities; deposits to grow in the low single digits—we have ample liquidity to support loan growth in excess of deposit growth; a net interest margin of approximately 3.55% to 3.65% for 2026; in the second quarter, we expect about 20 basis points of contractual purchase accounting accretion; also, for additional context, the exit rate of our net interest margin was approximately 3.65% for the month of March; adjusted noninterest income to grow in the mid single digits, driven by continued growth in our wealth and retirement businesses—consistent with prior guidance, swap fee income is not included, given variability; total net revenue growth in the mid single digits with noninterest expense growth in the low single digits, supporting positive operating leverage—we do expect second quarter noninterest expenses to be slightly higher due to a seasonal uptick in mortgage and banking production along with improved equity markets in our wealth division, which will push incentives higher; full-year return on assets is expected to exceed 1.25%. Finally, for each additional 25 basis point cut in rates, we would expect net interest margin to improve roughly 3 to 5 basis points. In summary, our first quarter performance demonstrates that the earnings power of the franchise is taking flight, and we believe Alerus Financial Corporation is well positioned for 2026 and beyond to reach new heights. We will now open the call for questions. Operator: To ask a question, please press 11 on your telephone. You will then hear an automated message advising your hand is raised. Please wait for your name and company to be announced before proceeding with your question. The first question will be coming from the line of Brendan Jeffrey Nosal of Hardate Group. Your line is open. Brendan Jeffrey Nosal: Hey, good morning, everybody. Hope you are doing well. Maybe just starting off here on the retirement business. Can you unpack the decline in plan participants and AUA this quarter and help us understand why it is revenue neutral, as you pointed out in the release? Forrest Rexford Wilson: Yeah, Brendan, this is Forrest Wilson. Thanks for the question. I can say, since I got here, we have been putting effort into a much more aggressive approach to a growth strategy, really scrutinizing the mix of business that we take on more closely than ever and specifically looking at profitability, operational leverage, and complexity. In this past quarter, we were able to exit a large low-margin client that—[inaudible]—it was a legacy relationship that had significant assets that generated limited revenue. Both the size and—[inaudible]—added disproportionate operational complexity for our division. Coincidentally, additionally—[inaudible] Alan A. Villalon: Forrest, we are getting some feedback here. Can you start over? You are sounding a little muffled. Forrest Rexford Wilson: Yeah, sorry about that. Is that okay? Alan A. Villalon: Still muffled. That is okay, I can take it for us. Alan A. Villalon: Thank you. In regards to the drop in assets and participants for the quarter, it was driven by the exit of a large lower-margin legacy relationship and replaced with a new partnership that has much higher levels of profitability but lower levels of assets and participants. Forrest Rexford Wilson: Is that better? Sorry. Brendan Jeffrey Nosal: That is better. Alan A. Villalon: Alright. Sorry about that. Thanks, Katie. Katie A. Lorenson: No problem. Jim R. Collins: Yeah, as Katie mentioned, coincidentally we exited a large low-margin client that had significant assets, and we onboarded a very substantial new partnership that does have lower assets but is a much higher, more simplified business, which is in line with our strategy. So all in all, it was absolutely just an episodic event of this quarter, but it does reflect a deliberate focus on achieving higher-quality, more profitable business. It happened in the same quarter and is largely revenue neutral between the two. Brendan Jeffrey Nosal: Okay. That is helpful color there. I appreciate it. Maybe moving on to loan growth and demand. Can you spend a minute talking about what gives you confidence you will still hit the mid-single-digit growth guide for the year, just given the softer start to the year? Jim R. Collins: This is Jim Collins. We are staying the course. We started off a little slow on loan production, but we are moving out some investor CRE that does not fit our risk tolerance or is risk-rated credits that we are pushing out now. But our C&I pipelines are fairly robust in all markets except for ag. Our ag is relatively flat, which is fine with us. We still plan to hit single-digit growth for the year. We are still pushing out some credits in 2026 in the investor CRE buckets. Brendan Jeffrey Nosal: Okay. That is helpful. I am going to sneak one more in there. Just on the margin, Alan, I think you said the exit margin in the month of March was 3.65% versus the quarter’s reported 3.77%. Help us understand the evolution from the full quarter’s reported number to that exit margin. What were the puts and takes there? Alan A. Villalon: A lot of it had to do with deposit mix. We did see really good mix shift, especially on the deposit side, because we had good inflows there. We do expect lower purchase accounting accretion on a go-forward basis, hence why I wanted to give the exit rate. We are only anticipating 20 basis points of purchase accounting accretion in the second quarter, and it is probably going to step down from there because we continue to see accelerated payoffs that pull from the future into today. Those are the main puts and takes. Our cost of funds declined nicely too from the Fed cuts in the fourth quarter of last year. That is one of the big drivers along with the balance sheet repositioning. Brendan Jeffrey Nosal: Okay. Thanks, Alan. Appreciate you taking my questions. Alan A. Villalon: Thank you. Operator: Thank you. One moment for the next question. The next question is coming from the line of Jeffrey Allen Rulis of D.A. Davidson. Your line is open. Jeffrey Allen Rulis: Thanks. Good morning. Just circling back on the margin, Alan. To be clear, the 3.55% to 3.65%—are you excluding accretion? Alan A. Villalon: No, that is all reported numbers. That is for the full year. Jeffrey Allen Rulis: And you are including your expected accretion in that figure? Alan A. Villalon: Correct, but no accelerated payoffs for the remainder of the year. We do expect purchase accounting accretion to decrease as each quarter progresses. Jeffrey Allen Rulis: And I think you mentioned some adjustments in March, but that would imply flat to down. Is that margin compression going forward? What is the cautiousness there? Is it just easing of deposit benefits? Alan A. Villalon: Yes, partially easing of deposit benefits. We did see a couple of rate cuts late last year, but also in the second and third quarters we typically see outflows of deposits, especially from our public funds. That is going to put a little pressure on our deposit base because as we replace some of our lower-cost funding with higher-cost funding, that will put a little pressure on there as well. Jeffrey Allen Rulis: Okay. And, Alan, in the first quarter, were there any interest recoveries in the margin that impacted the 3.77%? Alan A. Villalon: No. Jeffrey Allen Rulis: Got it. One other question, to back into the loan growth side. Do you have gross production in the first quarter versus Q4? It sounds like you are pushing some credits out, but trying to get a sense for how that product looked on a core basis. Anything on production numbers quarter over quarter? Jim R. Collins: From a C&I standpoint, we had really solid C&I growth. I do not have the numbers in front of me per se, but we are driving mid-market C&I growth fairly well with full relationships. Some of the CRE that we put on the books two to three years ago—that is what we are moving off the books in the first and second quarters. You will continue to see the percentages of C&I grow quarter over quarter like you did last year. When you saw year-over-year 10% C&I growth, you will continue to see that through 2026 and 2027, as that has been our core focus the last three years. Jeffrey Allen Rulis: Would you say production in C&I was greater in the first quarter than in the fourth quarter? Jim R. Collins: No. I think it was a little bit lower than it was in the fourth quarter. Alan A. Villalon: I think the pipeline is building. The second and third quarters look very healthy. Operator: Thank you. One moment for the next question. The next question will be coming from the line of Nathan James Race of Piper Sandler. Your line is open. Nathan James Race: Hi, everyone. Good morning. Thanks for taking the question. Alan, going back to the margin discussion, if you strip out the accretion you mentioned in the quarter, that implies core loan yields are kind of 5.6% in 1Q. To get to your margin guide, I think that would imply a decent step down in loan yields, but it does not sound like there is anything unique in that core loan yield in terms of interest recoveries. I am trying to square the trajectory of loan yields, particularly within the context of what you mentioned in terms of new loan production coming on in the low- to mid-6%s. Alan A. Villalon: Thanks for that, Nate. Basically, we are just adding a little conservatism there. We still think our core margin will be in the mid-3%s. But as Jim could speak to as well, we are seeing competition pick up, especially on the deposit front. The benefit of those deposit cost-of-funds decreases is probably behind us right now unless we see another Fed cut in the future, because we are seeing more pressure on deposit costs in our footprint. Jim R. Collins: I would say in all markets, banks are focused on deposits just as we are. It is getting extremely competitive. It has been competitive the whole time. Everybody is sharpening their pencils, so that continues to tighten. Nathan James Race: Okay. That is really helpful. Thanks. Maybe a question for Katie on excess capital management. You are building capital at pretty strong clips, and even with some balance sheet growth returning, I think you are still going to be accruing capital quite nicely. How are you thinking about executing on buybacks as a more continuous capital management tool, particularly given valuation? Katie A. Lorenson: Yes, great question. Thank you. From a priority standpoint, consistent with previous quarters, we invest first and foremost in organic growth, but returning capital opportunistically—especially, as you mentioned, when valuations warrant it—continues to be a priority. We were active this quarter and intend to remain active in our buyback going forward. Nathan James Race: Really helpful. If I could sneak one more in on wealth management. Update on traction from the production-related hires you brought on over the last couple of quarters, and how you are thinking about that revenue line growing this year assuming some stability in equity market valuations? Jim R. Collins: We put on some hires at the end of last year, with a couple more coming at the end of this year. We are seeing some traction on new revenue from them, and we have additional hires we are looking to bring on in the back half of this year. We have had solid retention of clients as we put that platform on. If you recall last year, the first quarter was predominantly issues with the markets, but we should see generally good performance and additional revenue growth from new clients as we add new wealth advisers going forward. Nathan James Race: Okay. That is great color. I really appreciate it. Thanks, everyone. Operator: Thank you. If you would like to ask a question, please press 11 on your telephone. Our next question will be coming from the line of Damon Paul DelMonte of KBW. Your line is open. Damon Paul DelMonte: Hey, everybody. Hope you are all doing well today, and thanks for taking my questions. First, circling back on loan growth, it sounds like you still have some targeted CRE loans to work off the balance sheet. Thinking about the quarterly cadence going forward, should we expect flattish balances in the second quarter and then a nice jump in the third and fourth quarters to get to the full-year target? Jim R. Collins: I would look to that, yes. Damon Paul DelMonte: Great. Given the slower growth expected in the second quarter, should we model a very modest provision, especially given the sizable release of reserves this quarter? It seems like you feel you have rightsized your reserve given the credit profile. So should we expect a minimal provision that would just cover whatever charge-offs you have? Katie A. Lorenson: Damon, I think that is right. Going forward, our provision is going to be driven by loan growth and the macroeconomic factors. Damon Paul DelMonte: Okay. Do you feel like the mid-120s is a good ACL run rate over time, absent any macro deterioration? Katie A. Lorenson: When I look at our pooled reserve, we are north of 1%. I think 1.10% to 1.20% is a fair range, of course depending on what happens in the economy. Damon Paul DelMonte: Great. Lastly on expenses, Alan, did you say low single-digit growth for the full year off of last year? Alan A. Villalon: Yes, that is correct. Damon Paul DelMonte: Alright. Great. That is all that I had. Thank you. Operator: Thank you. We have a follow-up question from the line of Brendan Jeffrey Nosal of Hodei Group. Please go ahead. Brendan Jeffrey Nosal: Thanks. Looking at the mortgage banking segment, originations and sales were both seasonally down quite a bit, but revenue was actually up sequentially. I think you mentioned MSR fair value benefits. Can you size how much of a benefit the MSR was this quarter? Alan A. Villalon: Let me get that number for you. The other benefit was that in our pipelines in the fourth quarter, we had the rate cuts affecting our pipeline, so we actually had some mortgages in there that came in at higher rates, which allowed us to get bigger gain on sales. I would say that was the bigger driver for mortgage in the quarter, with less impact from the MSR. Brendan Jeffrey Nosal: Okay. And then one final one. You said in the prepared remarks that you continue to make progress on that one large nonaccrual loan still working through resolution. Can you offer a little more color on where you are on that credit, how you are reserved, and where ultimate loss content might end up? Karin M. Taylor: Sure, Brendan. We do continue to make progress and are currently negotiating a sale on that deal. We are getting more clarity around value as we go through that process, and so we actually decreased our reserve from about 17% in Q1 to about 8% in Q2. Brendan Jeffrey Nosal: Okay. Thank you for taking the follow-ups. I appreciate it. Alan A. Villalon: And, Brendan, to close the loop on the fair value mark, we are looking at a couple hundred thousand dollars for the MSR fair value mark. Brendan Jeffrey Nosal: Great. Thanks. Operator: Thank you. I will now be turning the call back over to Katie for closing remarks. This does conclude our Q&A session. Katie A. Lorenson: Thank you, everyone. I appreciate you all joining today. I want to take this opportunity to thank our team first and foremost. The results we discussed today reflect our culture, our talent, and our discipline across Alerus Financial Corporation. We have built a stronger organization in a relatively short period of time. I am very proud of how our teams continue to execute toward our long-term objectives. Over the past few years, the consistency of our fundamentals is evident. This quarter represents another pearl on the string—disciplined execution of our strategy that we have been articulating—and continued progress across earnings power, margin, funding, capital, and credit quality. Our overall credit quality has improved meaningfully. Trends in asset quality, criticized loans, and nonperforming assets continue to move in the right direction, and we remain confident that net charge-offs will normalize toward our long-term historical averages, which compare favorably to the industry. From a balance sheet and capital allocation standpoint, we are growing where we want to grow, with solid momentum in the verticals in which we have invested. We remain focused on consistent execution, and we feel great about the foundation we are continuing to build from, the momentum of the company, and we are grateful for all of the collaboration and hard work of our talented team members. Thank you again for your time today and for your continued interest in Alerus Financial Corporation. Operator: Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Operator: Hello, and welcome to the Green Brick Partners, Inc. First Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the conference over to Jeffery Cox. Please go ahead. Jeffery Cox: Good afternoon, and welcome to Green Brick Partners, Inc.'s earnings call for the first quarter ended 03/31/2026. Following today's remarks, we will hold a Q&A session. As a reminder, this call is being recorded and will be available for playback. In addition, a presentation will accompany today's webcast which is available on the company's Investor Relations website at investors.greenbrickpartners.com. On the call today is James R. Brickman, cofounder and chief executive officer, Jed Dolson, president and chief operating officer, and myself, Jeffery Cox, chief financial officer. Some of the information discussed on this call is forward-looking, including a discussion of the company's financial and operational expectations for 2026 and beyond. In yesterday's press release, the company detailed material risks that may cause its future results to differ from its expectations. The company's statements are as of today, 04/30/2026, and the company has no obligation to update any forward-looking statement it may make. The comments also include non-GAAP financial metrics; reconciliations of these metrics and the other information required by Regulation G can be found in the earnings release that the company issued yesterday and in the aforementioned presentation. With that, I will turn the call over to James. James R. Brickman: Thank you, Jeff. I am pleased to announce our first quarter results, particularly given that we achieved these results against the backdrop of ongoing and persistent affordability challenges faced by many consumers in the housing market, as well as increasing uncertainty and volatility for consumers caused by domestic and global events and trends ranging from increasing gas prices to job concerns in this new AI era. Despite these challenges, our team's effort and disciplined approach led to another excellent quarter for our business and our shareholders. Net income attributable to Green Brick Partners, Inc. for the first quarter was $61 million, or $1.39 per diluted share, on total revenues of $465 million. We delivered 908 homes in the quarter, only two less than in Q1 2025, and we had 1,037 net new orders. We achieved this despite, as we mentioned on our last call, losing about seven selling days in January due to inclement weather in DFW, our largest market. Orders have increased sequentially each month of the quarter, with market sales outpacing the same period in 2025. This was more in line with a normal spring selling season. We believe our aggressive, great balance sheet and low financial leverage provide us with the flexibility to navigate and take advantage of evolving market conditions. At the end of Q1, our homebuilding debt to total capital ratio decreased to 11.5%, and our net homebuilding debt to total capital ratio decreased to 5.5%, among the lowest of our public homebuilding peers. We also have $475 million in available liquidity. Our industry-leading homebuilding gross margins of 28.9% give us the flexibility to profitably adjust the pricing of our homes to respond to market conditions. We believe the foundation of our industry-leading gross margin starts with our commitment to owning and developing land. We remain highly disciplined in how we control land. One of the primary differentiators from many of our peers is that we do not engage in off-balance sheet, high interest cost land banking arrangements that can distort a builder's economic leverage and risk, and that can give a land banker indirect control over a builder's lot purchase timing. At the end of the first quarter, 77% of our approximately 49,000 lots are owned. We have 3,400 lots owned or under contract in four joint ventures with other homebuilders or landowners. These joint ventures account for 7% of our total lots owned and controlled and only 2.9% of our total assets. These joint ventures are evaluated with the same underwriting criteria as our other land investments to ensure that we remain focused on attractive risk-adjusted returns and protect shareholder value. As many of you who follow our company know, this disciplined approach to land acquisition and development is not a new philosophy for our company. We have always believed that a self-development-focused strategy provides us with better capital efficiency and returns, allowing us to make higher margins, lower cost, and enhanced inventory control so that we can better determine the pace of land and lot deliveries. We generated strong operating cash flows of $56 million for the quarter. In the last twelve months, we generated [inaudible] in operating cash flows, and returned $74 million to shareholders through repurchases. Even with our land-heavy balance sheet and macroeconomic headwinds, we delivered strong returns during the quarter of 9.6% return on assets and 13.1% return on equity, among the very best of public homebuilding peers. Our disciplined, returns-focused approach and our experienced team of operators position us well for future value creation. This quarter, we began reporting on financial services operations as a separate segment due to the strong growth of our wholly owned mortgage company. Rendrick Mortgage was founded in 2024 and funded its first loan in 2025. During 2025, Green Brick Mortgage grew rapidly, and by the end of Q1 2026, was serving all of our Texas entities. For the first quarter, revenues for Green Brick Mortgage increased from $1.3 million to $5.6 million year over year as the number of funded loans increased by almost 250%. Pretax income from our financial services segment increased year over year by 139% in Q1 to $4.3 million. While the macroeconomic landscape presents short-term headwinds for the entire industry, we believe the core strengths that have driven Green Brick Partners, Inc.'s success over the past decade will enable us to continue to navigate any challenges with confidence and flexibility. As always, we will focus on maintaining operational excellence, centered on our disciplined approach to land acquisition and development, to position us for future growth and ensuring we continue to build out our team of experienced, dedicated employees who drive our growth and provide a quality home and buyer experience for our customers. We believe we are well positioned to sustain our peer-leading return metrics and provide long-term value to our shareholders. We remain focused on growing our business, particularly our Trophy brand. Trophy's continued growth in DFW and Austin, combined with our first community opening in Houston in Q1, presents significant opportunities for sustained growth for the next few years. This expansion allows us to continue serving the critical first-time and first move-up buyer segments while further diversifying our revenue base and strengthening our presence in key Texas markets. With that, I will now turn it over to Jeff to provide more detail regarding our financial results. Jeffery Cox: Thank you, James. I want to take a few minutes to address the Form 8-Ks that were filed yesterday in which we concluded that certain closing cost incentives offered to our buyers had been previously incorrectly classified as cost of residential units, rather than as a reduction of the transaction price. After evaluating these issues under ASC 606, we determined that we will restate our previously issued audited consolidated statements of income for the years ended December 2024 and 2025 included in the annual report on Form 10-K, and the unaudited condensed consolidated statements of income for the quarters ended in 2025 and 2024, to reflect the reclassification of closing cost incentives as a reduction in revenue rather than as a cost of residential units. This reclassification of closing cost incentives will not impact any prior period's reported gross profits, operating income, net income, earnings per share, cash flow, debt covenant compliance, shareholders' equity, or the strong underlying economics of the company's operations and business. The impact will be a reduction in home sales revenues and associated average sales prices, and an improvement to our gross margins. We are currently in the process of completing the restatement of our prior period financial statements and expect to file an amended annual report on Form 10-K. However, our comments today reflect these changes for prior periods referenced. We have also filed an 8-K that sets forth our preliminary assessments of the impact of this reclassification for the years ended December 2024 and 2025 as well as each of the quarters in 2025 and 2024. Our first quarter 2026 results are not affected by the pending restatement. Net income attributable to Green Brick Partners, Inc. for the first quarter decreased 18.8% year over year to $61 million, and diluted earnings per share decreased 16.8% year over year to $1.39 per share. SG&A as a percentage of residential unit revenue for the first quarter was 11.7%, an increase of 80 basis points year over year, driven primarily by mix and higher discounts and incentives. Given the challenging economic conditions and oversupply of housing inventories in our markets, discounts and incentives increased year over year as a percentage of home closing revenue to 10.1% from 6.8%. Our average sales price of $493,000 was down 4.1% sequentially and down 6.9% year over year. Home closings revenue of $448 million on 908 deliveries declined 7.1% compared to the same period last year, and our homebuilding gross margins decreased 320 basis points year over year and 140 basis points sequentially to 28.9%. Sixty-three percent of our Q1 closings were sold during the quarter, driven largely by our Trophy Signature Homes brand. We started 979 new homes, an increase of 13% year over year and 11% sequentially due to increasing buyer demand in the quarter. Units under construction at the end of the quarter were 2,119, down 7.7% year over year but up 3.5% sequentially as we increased starts in Q1 to better match our sales pace. We ended the quarter with 419 completed specs, an average of 4.1 per community, a reduction of 13% from Q4. We will continue to monitor market conditions and seasonal trends, and align our starts with our sales pace to appropriately manage our investment in spec inventory. Our goal is to maintain approximately 1.5 months of supply of completed spec in our communities. Primarily due to adverse weather in January, we saw a 7.1% decline in traffic year over year during the quarter. Net new home orders during the first quarter were 1,037, down 6.2% year over year. Average active selling communities of 103 were down 1% year over year. As a result, our sales pace for the first quarter decreased slightly to 3.4 per month compared to 3.5 per month in the previous year. As noted in our prior call, we still expect community count to increase in the second half of the year. Our backlog at the end of the first quarter was 649 units with backlog revenue of $381 million, a 35% decrease year over year. We experienced a significant shift because Trophy Signature Homes represented 40% of our backlog units compared to 27% in 2025. As a result of the increased mix of Trophy orders in our backlog, along with continued elevated discounts and incentives across all of our brands, backlog ASP decreased 13% to $587,000. In Q1, we repurchased 114,000 shares of our common stock for approximately $7 million, with $160 million remaining in authorized share repurchases. We will continue to repurchase shares opportunistically as part of our disciplined capital allocation strategy and efforts to return value to our shareholders. During Q1, we terminated our secured revolving credit facility, and as of quarter end, we had no outstanding borrowings on our $330 million unsecured revolving credit facility. At the end of the quarter, we maintained a robust cash position of $145 million and total liquidity of $475 million. We believe we are well positioned to weather the challenging market conditions and ongoing volatility, to opportunistically deploy capital to maximize shareholder return, and to accelerate growth as the housing market improves. With that, I will now turn it over to Jed. Jed Dolson: Thank you, Jeff. We continue to see a challenging sales environment within all our consumer segments, but we are encouraged by the positive response we have seen from first-time homebuyers who are most impacted by affordability challenges and a weakening job market. Our team responded well to these conditions, as evidenced by our relatively strong first quarter sales volume and low cancellation rate of 7.7% during the quarter, which continues to be one of the lowest cancellation rates in the public homebuilding industry. We believe it demonstrates the creditworthiness of our buyers, the quality of our product, and the desirability of our communities. Rate buydowns remain a necessary tool to drive traffic and sales, especially with first-time homebuyers and quick move-in homes, and we helped address the affordability challenges faced by many consumers by providing our homebuyers with price concessions, interest rate buydowns, and closing cost incentives. Incentives for net new orders during the quarter were 9.9%, an increase of 320 basis points year over year although a decrease of 30 basis points from the prior quarter. With our superior infill and infill-adjacent communities and industry-leading gross margins, we believe we are strategically positioned to adjust pricing as needed to meet market demand and maintain our sales pace. While we recognize the importance of preserving our margins, we also recognize that our industry-leading margins provide us with significant pricing flexibility to compete effectively in a volatile market and drive sales pace when appropriate. We are also excited about the progress of our wholly owned mortgage company. During the first quarter, Green Brick Mortgage closed and funded over 300 loans. The average FICO score was 742 and the average debt-to-income ratio was just under 40%, consistent with the previous quarter. We completed the rollout of Green Brick Mortgage to all of our Texas communities in the quarter, and we expect to roll out Green Brick Mortgage to The Providence Group, our Atlanta builder, in the latter part of 2026. As Green Brick Mortgage continues to expand its service to most of our communities, we anticipate that by year end, its capture rate will range from 70% to 80%, which should generate additional revenue as we increase the number of loans funded through our mortgage company. We continue to reduce our construction cycle times, which were down 25 days from a year ago to under 130 days. Trophy's average cycle time in Dallas–Fort Worth was under 90 days, the lowest in their history, and a testament to the efficiency and quality of our construction teams and trade partner base. While labor availability remains relatively stable across all our markets, we are monitoring potential cost increases related to the rise in oil prices. We remain engaged with our trade partners to monitor potential cost pressures and will adjust as necessary. As part of our efforts to position ourselves for future growth, during the quarter, we invested approximately $89 million in land and lot acquisitions and $78 million in land development, excluding reimbursements. For 2026, we expect land and lot acquisitions of approximately $400 million and land development outflows of approximately $420 million, excluding reimbursements. We believe our superior land position provides a competitive advantage that will be the foundation for strong growth in subsequent years. Approximately 38,000 of our lots are owned, with approximately 11,000 lots under option contracts. Approximately 75% of our total lots owned and under contract are allocated to Trophy Signature Homes. Excluding approximately 25,000 lots in long-term master plan communities, our lot supply is approximately six years. With approximately 49,000 lots owned and under contract, we remain patient and selective with future land opportunities without compromising the ability to grow our business in the near and intermediate term. With that, I will turn it over to James for closing remarks. James R. Brickman: Thank you, Jed. In closing, we remain confident in our long-term outlook and our ability to continue to deliver excellent operational and financial results. Our land strategy, diversified product portfolio, and strong balance sheet continue to differentiate Green Brick Partners, Inc. from our peers and support attractive returns for our shareholders over the long term. Like the rest of our industry, we continue to navigate a challenging environment, but I am hopeful that the market is starting to find a more stable footing and normalization. I believe that 2026 will be a year that we lay a foundation so that we can execute our strategy and accelerate our growth in the coming years. With all of these challenges, I would like to recognize our team for their disciplined execution and resilience successfully navigating this market. Our results would not be possible without their focus, leadership, and commitment. This concludes our prepared remarks. We will now open the call for questions. Operator: Thank you. If you would like to ask a question, please press 1 on your telephone keypad. We ask that you limit yourself to one question and one follow-up and rejoin the queue if needed. Your first question comes from Ryan Gilbert of BTIG. Your line is open. Ryan Gilbert: Hey, thanks, guys. It is definitely encouraging to hear that demand improved throughout the quarter. Can you give us an update on how things are looking so far in April in terms of traffic and sales pace? James R. Brickman: Jed, why do you not take that? Jed Dolson: I would say April is looking very similar to March, so we are still on a strong spring season. Ryan Gilbert: Got it. And then just around your commentary about the challenging sales environment, but you are still seeing consumer response to the incentives that you are offering, I am just curious, James or maybe Jed, if you could expand on how long you think this can last, or if you expect a weakening labor market to pressure first-time homebuyers. It does not seem like that has been the case so far, but just looking ahead, what are you thinking? James R. Brickman: We are seeing strong demand. It is very elastic demand, meaning that the buyers are very educated, and a small movement in pricing can really accelerate sales velocity. One of the things we are very encouraged about is that because our pretax margins are so high—they are running around 17% or just under—we have tremendous flexibility if we need to get a buyer that wants a slight discount in the home even from current levels. Pretty much, we are not seeing that happening right now. We think that things may have bottomed, but if you can predict interest rates, I will tell you what our margins are going to look like, because they are highly correlated right now, and we are not getting a lot of relief from the interest rate front. Jed, do you have anything you want to add to that? Jed Dolson: I would just say the past week has been rough on mortgage rates, and that can cause—just a little change in mortgage rates can cause a 1% decline in gross margin for us. Ryan Gilbert: Okay. Got it. Thank you, guys. Operator: Your next question comes from Jay McCanless with Citizens Bank. Your line is open. Jay McCanless: Hey, good afternoon, everyone. First question I had: what are you seeing in the land market right now? Are land prices still continuing to go up, or are you seeing some areas where maybe you are getting a little bit of a break, or maybe land inflation is slowing down a little bit? James R. Brickman: That is a good question, Jay. What we are seeing is on C-minus and D-location lots, builders are wanting to peddle those. Obviously, the only buyer is other builders, and if a builder wants to peddle a lot in the C-minus or D-location, he wants to do it because he is not making margins. So it is really not attractive to another builder to buy, and it is not distressed enough to have us get interested. So that is what is taking place really in the perimeter locations—the further out perimeter locations. Interestingly, and conversely, high-margin land in the more infill or employment-centric areas is still in high demand. One of the things we are very excited about: we bought a large tract yesterday that we had been working on for—how long, Jed? Two years? Two years. It was complicated. It had a lot of moving parts. We are really excited about it because we have the balance sheet to take this down—other people do not. We have the management team to do the entitlement, sewer, water, and all of the other challenges that come with a large master plan property, and we feel really good about that because it is a barrier to entry. All these land-light guys just could not pull that kind of transaction off. Jay McCanless: Speaking of infill versus Trophy and some of your higher-end brands versus Trophy, which performed better during the quarter? Was it move-up? Was it entry level? What were you seeing in terms of demand between the different buyer segments? James R. Brickman: It was spotty, I think, is the best way to define it. Trophy was a star. We found that—and Jed can elaborate on that—there is a very large pool of buyers, sub-$350,000, and Trophy can meet that price point and still make really nice margins. Florida did good. Atlanta slowed down in its market. We were surprised because Atlanta was traditionally very strong, even in the infill markets. Jed, what do you want to add to that? Jed Dolson: I would just say that luxury continued to do well for us—and for us, that is homes priced in the $900,000-and-up range. We saw spottiness in, say, the $500,000 to $800,000 range where we had some good months, some bad months, depending on what submarket. We are really encouraged in Dallas that in March and April, we really hit good numbers with that buyer, which is typically a cultural buyer. To sum it all up, I would say we feel really good about luxury, and we feel really good about entry level, and the stuff in the middle is more challenging. James R. Brickman: And some of the stuff in the middle that Jed was talking about—this $500,000 to $800,000 price point—one of the reasons why we think it is so much slower are our immigration policies. Many of those homes are sold to physicians and higher-income people, and the current administration is making it uncertain for those people, and it is impacting housing as a result. Jay McCanless: Any concerns or issues with other builders maybe having built a little too much at that price point and having to be more aggressive on the discounting there? James R. Brickman: I think in some markets it is fairly isolated. Jed and I were talking about it this morning that it can affect some markets. Generally, I am not worried about it. And again, one of the reasons I am not worried about it is because if we are making a 17% pretax margin and we are competing against a builder that is making a 3% pretax margin down the street—that is land-light—those guys have given about all they can give, and we are just kind of waiting and seeing what happens. Jay McCanless: Congrats on Houston. Over time, how many communities do you think Green Brick Partners, Inc. can have in that market? And is it always going to be a Trophy market, or are you going to look to do some infill properties? James R. Brickman: Right now, strategically, what we want to do is enter any market that really has to be a top 10 to 12 city market because Trophy is going to be our scalable brand that goes into that market. To be effective, we are still going to self-develop, and we want to have a really experienced land team and a land acquisition team that has strategic advantages. That is going to make us really under larger markets. We are looking at San Antonio right now. I think the probability of us bringing other brands there is probably unlikely at this point, but you should never say never. Operator: Your next question comes from Alex Rygiel with Texas Capital. Your line is open. Alex Rygiel: Thank you. Given the mix of backlog of Trophy Signature Homes, should we model ASPs declining through 2026? Jed Dolson: I think it is a mix issue more than a backlog issue. As you know, we are seeing very strong demand at the entry level. If that becomes a bigger percentage of our sales, then ASP would go down. Alex Rygiel: And how do sales of the Houston market affect ASPs? Jed Dolson: Houston will continue to bring ASP down. When you look at the biggest markets based on Q1 starts, DFW is the largest, and Houston was the second, and there was a huge drop-off to Phoenix, which was third. Dallas was the third biggest by units, and we think we will probably end up being the second biggest this year by revenue, trailing only D.R. Horton. Those are really big markets, but to have really big markets, you need very affordable housing. So the ASP in Houston will be lower than Dallas, but those are two very strong markets. We are going to continue to grow our market share in Dallas, and we are excited about the early success in Houston. We look forward to, in the near future, being a more dominant player there. Alex Rygiel: And then as it relates to your comments about April being sort of in line with March, is that typical historically? Jed Dolson: We have gone and looked at a lot of historical trends recently, and so much of it correlates with what interest rates were for every April versus every March going backwards. For the most part, yes, what we typically see is April is just a little bit weaker than March, and then May—because of graduations and so forth and the beginning of summer—the spring season really concludes in May, and then you enter the summer season. Operator: Your next question comes from Rohit Seth with B. Riley Securities. Your line is open. Rohit, perhaps your line is on mute. Rohit Seth: Hey, thanks for taking my question. Just on sales pace—you had a good turnout in the first quarter. It looks like you have some levers with your strong margins. Do you think you can maintain the sales pace that you had in the prior year from 2Q to 4Q—kind of average about three homes per month? Jeffery Cox: Yes, Rohit, this is Jeff. I think that is very doable when we look at the historical trends that Jed mentioned earlier. We were about 2.97 last year in Q2 and 2.91 in Q3. When we look at how we performed this quarter compared to last year, we are down a little bit, but keep in mind, we did have that weather event that James referenced earlier in his remarks. So we tend to be trending generally for the same pace as last year. Rohit Seth: And could you remind me of the spread between Trophy Homes—I know there is a faster sales pace there—and the rest of the book? Jeffery Cox: Trophy was 51% to 52% of our sales in Q1, and we expect them to continue to increase that pace as we continue to grow the brand and expand in Houston and Austin. Seventy-five percent of our lots owned and controlled are allocated towards Trophy, so that will continue to increase over time. Rohit Seth: Is Trophy moving something like five units a month, something like that? Jed Dolson: It is really neighborhood dependent. I will answer it this way: we have some communities that have two different lot sizes where, in Q1, we averaged 20 sales a month. As defined by community count, that would be 10 sales. And then we had others where we averaged three or four. We can pull some better data for you for our next call on that. James R. Brickman: Some of our communities, particularly in the last phases where we have had success and are phasing out, we are milking margin intentionally and maintaining a slower sales pace. Rohit Seth: Is there maybe a margin floor where you are not willing to breach? James R. Brickman: No. We do not look at it that way. We are always modeling internal rate of return and sales pace and price. It is a little bit more complex than that because we also want to get our capital returned on our lots and look at the redeployment of that capital. So it is a little more complicated than just saying we will sell houses based upon margin. It is the sales pace that comes with the margin and the capital that comes in from that lot sale that goes into the calculus. Jeffery Cox: And obviously, when we are reporting 28.9% gross margins, and we have peers that are reporting 15% to 16%, we feel excited about the coming months and our ability to adjust prices as needed. Operator: This concludes the question and answer session. I will turn the call to James R. Brickman for closing remarks. James R. Brickman: Thank you, everybody, for attending our call. We are always delighted to have anybody call Jeff, Jed, or myself with follow-up questions and would really encourage you to do that. We can get into a little bit more detail about some of the master plan communities we are really excited about. Thank you for the call. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Welcome to Compañía de Minas Buenaventura S.A.A. First Quarter 2026 Earnings Results Conference Call. At this time, all participants are in a listen-only mode, and please note that this call is being recorded. I would now like to introduce your host for today's call, Mr. Sebastian Valencia, Head of Investor Relations. Mr. Valencia, you may begin. Sebastian Valencia: Good morning, everyone, and thank you for joining us today to discuss our first quarter 2026 results. Today's discussion will be led by Mr. Leandro Garcia, Chief Executive Officer. Also joining our call today and available for your questions are Mr. Daniel Dominguez, Chief Financial Officer; Mr. Juan Carlos Ortiz, Vice President of Operations; Mr. Aldo Massa, Vice President of Business Development and Commercial; Mr. Alejandro Hermoza, Vice President of Sustainability; Mr. Renzo Macher, Vice President of Projects; Mr. Juan Carlos Salazar, Vice President of Geology and Explorations; Mr. Jorge Navires, Chairman; and Mr. Raul Navidres, Director. Before I hand the call over, let me first touch on a few items. On Compañía de Minas Buenaventura S.A.A.’s website, you will find our press release that was posted yesterday after market close. Please note that today's remarks include forward-looking statements that are based on management's current views and assumptions. While management believes these assumptions, expectations, and projections are reasonable in light of the currently available information, you are cautioned not to place undue reliance on these forward-looking statements. I encourage you to read the full disclosure concerning forward-looking statements within the earnings results press release issued on 04/29/2026. Let me now turn the call over to Mr. Leandro Garcia. Leandro Garcia: Thank you, Sebastian. Good morning, and thank you for joining us today to discuss the quarterly results of the company. On Slide two is our cautionary statement, important information that I encourage you to read. Today, we will talk about our first quarter 2026 performance, our main achievements, and our priorities for the future. After the presentation, we will be available for the Q&A session, where our team will be happy to answer your questions. Next slide, please. I will start with a summary of our operational results for the quarter, followed by an update on our permitting status. Gold production was 30 thousand ounces, up 80% year over year, mainly due to the ramp-up operations at San Gabriel. As production volumes continue to ramp up, the company expects to begin recording sales in the second quarter of 2026. Silver production reached 3.9 million ounces, up 6% year over year, compared to 3.7 million ounces in the same period last year. This increase was mainly driven by higher production at El Brocal. The result is in line with the mine plan for the quarter. We focused on processing ore that had been previously classified as low-grade silver ore. Uchucchacua and Tambomayo also contributed to this result. At Uchucchacua, production increased due to higher throughput and higher silver. At Tambomayo, production improved as we prioritized higher-grade ore from the upper sections of the mine. Copper production in this first quarter reached 10.9 thousand tons, down 11% year over year. This decrease was mainly driven by lower production at El Brocal, as we focused on processing silver ore. Turning now to permitting, I will briefly review the permits received. During 2026, we received Stage one of the operating permit for San Gabriel. This approval authorizes us to start operations to process and commercialize the mine ore. Also at San Gabriel in April 2026, we received the water use license. This permit allows the storage and use of water at the Agani Dam. At Yumpag, the second ITS received in 2026 allows us to increase ore extraction to 12 thousand tons per day. In addition, we expect to receive the mine plan modification in 2026 as planned, which is required to achieve this level of production. At El Brocal, the first ITS approved in 2026 increases mine extraction capacity to 17 thousand tons per day, in line with the company's medium-term strategy. Finally, at Trapiche, the Environmental Impact Assessment was approved in 2026. This permit provides environmental certification for the construction and operation of the project. Overall, these permitting milestones help unlock capacity, support ramp-up, and increase operational certainty across our portfolio. Moving on to the next slide, I would like to summarize our first quarter results. Starting with revenues, total revenues reached $625 million in the first quarter, more than doubling year over year, reflecting stronger operating performance and a more favorable market environment. Looking at EBITDA from direct operations, we achieved $386 million, more than three times higher year over year, with margins improving from 41% to 62%. Stronger operations resulted in a net income of $355 million, a 142% year-over-year increase. On the capital allocation side, CapEx for this quarter totaled $81 million, mainly focused on San Gabriel alongside sustaining Trapiche, aligned with our growth priorities. After the quarter end in April 2026, Compañía de Minas Buenaventura S.A.A. received $59 million in dividends from our stake in Cerro Verde. Total dividends received year to date 2026 amounted to around $157 million. Finally, all of this is reflected in our balance sheet strength. The quarter ended with a cash position of $760 million and a total debt of $[inaudible] million, resulting in a net cash positive position. Moving on to cost applicable to sales. Starting with the corporate cash, changes are mainly explained by developments at El Brocal, where we see higher personnel costs. These are mainly driven by increased workers' profit sharing provisions, reflecting improved profitability. In addition, higher cement consumption and foreign exchange impact affected costs. These effects were partially offset by improved commercial terms. Silver cash increased due to higher personnel costs, together with higher commercial deductions related to escalates mainly at Uchucchacua and Julcani. Gold cash increased versus the same period last year due to higher personnel costs, lower throughput reducing scale efficiencies, and higher operation costs at Orcopampa and Tambomayo. On the next slide, we highlight our strong free cash flow generation in 2026. Solid operating performance supported by dividends received allowed us to close the quarter with a cash position of $760 million. To conclude the presentation, I would like to share a few final thoughts. First, San Gabriel entered the ramp-up phase during 2026 and began contributing to Compañía de Minas Buenaventura S.A.A.’s results in line with expectations. Second, we continue to make progress on permitting and regulatory approvals across the portfolio, supporting the disciplined execution of the company's long-term strategy. Third, execution across the portfolio remained consistent, delivering predictable results and reinforcing balance sheet strength and financial flexibility. Finally, cash generation remained robust and well diversified across direct operations and affiliate companies, supported by continued dividend inflows from Cerro del Rey. Thank you for your attention. I will hand the call back to the operator to open the line for questions. Operator? Operator: Please go ahead. Thank you. We will now begin the question and answer session. To ask a question, dial in by phone and press star then one on your telephone keypad. Make sure your mute function is turned off, and if you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question today comes from Carlos De Alba with Morgan Stanley. Your line is now live. Please ask your question. Carlos De Alba: Thank you. Good afternoon, everyone. So I have three questions, if I may. The first one is, can you provide more color and details on how San Gabriel ramp-up is going? What are the challenges, maybe bottlenecks that you are facing at this stage? And what is expected output for the second quarter at San Gabriel? The second question is on El Trapiche strategy. Clearly, you got now the environmental approval. You have a very strong balance sheet. Have you decided if you are going to pursue this project and build it on your own, or if doing it together with a partner is more likely? And then finally, on dividends, what are the expectations for further dividends from Cerro Verde in addition to the ones that you have received to date, including the $59 million in April? Thank you. Leandro Garcia: Thank you, Carlos, for your questions. Well, beginning with the first question about San Gabriel, as you know, we are in the first stage of the ramp-up. We have some challenges, but up to now, we are in line with expectations. Maybe Juan Carlos Ortiz can give you more details about how we are going with San Gabriel. Please, Juan Carlos. Juan Carlos Ortiz: Sure, Leandro. Thank you, Carlos, for your question. The projects that we have in the first quarter in San Gabriel were related to the conclusion of the commissioning, the training of our team, and starting to run all the machines as a sequence, as a system, right? It is crushing, milling, cyanidation, filtration of the tailings. So we have some progress on that regard. We are almost finishing with all the commissioning part, the mechanical assurance that everything is in place. Now we are training our people and starting the fine-tuning of every single circuit. For instance, we have some challenges with the high moisture of the ore getting stuck on the conveyor belt for the crushing circuit. This is going to be solved in the coming weeks, first, because we are entering the dry season, and second, because we are changing the system to remove the clays in the screening of the crushing circuit. Then in the milling circuit, we had some malfunction of an electronic device. We already found the trouble and we switched that part with a new one, so we are running okay right now with the grinding mill weight. In cyanidation, from the mechanical point of view, we have small challenges like the speed of the pumps and some resizing of some small boxes to avoid any potential spilling of the slurry. And in the filtration part, we are pretty much at 50% delivery from the vendor. We finished all the commissioning part, and now we are putting the filter presses to filter the tailings. With a 50% product, we are running with eight bars of pressure, and we are moving step by step up to reach the 14 bars that are considered in the design. From the progress in the processing plant to the tailings dam, we are starting right now in May. We will start putting the tailings out of the temporary reservoir, start to dry the tailings, and probably in June, we will start placing the tailings in the tailings dam. That is going to be the first time we do that in San Gabriel. We need to speed up; we anticipate some training process to be transferred to the team from the team of Tambomayo to the team of San Gabriel to do exactly what we learned to do in Tambomayo: how to dry the tailings, how to reduce the moisture, how to place the tailings in the tailings reservoir, and how to compact those tailings. So that is exactly the agenda of the second quarter. We are expecting to solve most of the, or the majority of, the most sensitive issues from the throughput and from the mechanical availability of the processing plant in the second quarter. And as we anticipated earlier in the previous conference call, the main constraint will be the area that we have available in the tailings dam. It is a narrow valley and we are starting working at the bottom of the valley, so we do not have that much area available. Every single lift that we compact, we gain additional area. So gradually, we increase tonnage as an average. We expect to finish at 2 thousand tons per day by December 2026 and reach full capacity, 3 thousand tons per day, by 2027. So that is pretty much what we are doing right now, Carlos. Leandro Garcia: Thank you, Juan Carlos. Going back to your second question about Trapiche, we are far from that decision if we go alone or we call for a partner to post-develop that project. We are in a stage of investigating all the geotechnical aspects and more drillings we need. Maybe Renzo can help us with what we are facing this year and the following two years until we reach the feasibility study. Please, Renzo, go ahead. Renzo Macher: Sure, Carlos. We are going to be continually de-risking the project in regards to acid consumption, acid pricing, and acid logistics. That is going to be one of our main goals. We continue exploration of the primaries, and we are going to be starting, as we finish the Environmental Impact Assessment study, with the next permit or the next social permit, which is the previous consultation permit in this case. Leandro Garcia: Thank you, Renzo. Going back to your question about dividends from Cerro Verde, well, we foresee an excellent year for Cerro Verde. The operations are going as planned. They do not have a dividend payment policy, but I think this year cash generation will be extremely good. We have some expectations. Daniel, please. Daniel Dominguez Vera: Thank you, Leandro, and thank you, Carlos, for your question. Yes, as Leandro was saying, Cerro Verde will generate a lot of cash this quarter or this year, considering that the price of copper is over $12 thousand per ton. We expect Cerro Verde to generate in excess of $2.5 billion of EBITDA. They have small CapEx, $350 million to $400 million. In taxes, they should be paying around $1 billion. They do not have any debt. So the free cash flow for this year in Cerro Verde, considering the current prices for copper, should be in the order of $1.2 billion to $1.3 billion. They already have cash in their balance, the minimum cash required for the operations. So they should be distributing around $200 million to Compañía de Minas Buenaventura S.A.A., from which they have already distributed $160 million from January to April. Operator: The next question comes from Tanya Jakusconek with Scotiabank. Please go ahead. Tanya Jakusconek: Great. Thank you so much for taking my questions. Good afternoon, everybody. I wanted to follow back on San Gabriel. I appreciate all of the hard work you are doing on getting the ramp-up, and there is always something going on mechanically and otherwise. But I must say I am surprised about the clay in the ore. I did not realize that there was clay in the ore. Can you just remind me what exactly, what mineral do you have, and how are you removing this? And are you surprised you have clay in the ore? Juan Carlos Ortiz: Yes, we do have two types of clay. I do not know how to pronounce it properly, but this is montmorillonite or a kind of expansive clay that we have in the deposit. It varies from 1% to 8% in different places of the deposit. When we transport the ore from the mine, when we strike the ore from the mine, we usually have between 4% to 5% moisture, no more than that. But when we put the ore in the stockpiling surface, during the rainy season, the moisture can go up to 40%, only from the rain coming down into the stockpile. And this clay, because it is an expansive or swelling clay—I think that is the technical term—generates a lot of problems in the crushing circuit because it is very sticky. It starts getting into the boxes in between the transfer point of the crusher into the conveyor belt, or at the end of the conveyor belt in the stockpile, or from the stockpile into the feeder to the mill. Solutions to that: there are two things that we are analyzing. One is using a screen where you use water so we can spray water on top of the ore while it is passing through the surface of the screen to remove the fine fraction. That is one option. It is not going to take that much time. And the other is using what we use in Brocal, what we also use in Colquijirca. That is a drum where we have screen around the surface of the drum so we can wash the ore as it travels through the drum. That is something that we have been using for many, many years when we process the ore from the open pit, and also we use that in Colquijirca because the ore underground also has, depending on the area, a high content of clay and complicated questions. That is going to be the solution for the clay areas underground for the next rainy season that starts in December–January next year. Tanya Jakusconek: Is this clay consistent throughout the ore body, or is it just in patches? And have you seen, once you get it through the crushing circuit and through the conveyor, does it negatively impact your recoveries? Juan Carlos Ortiz: No, it is not impacting negatively the recovery. We need to make a little adjustment in the density of the slurry in order to reduce the viscosity. If we go to 1.4 thousand grams per liter, the viscosity goes too high, so we need to go down to 1.32 thousand grams per liter in order to have a fluid slurry that has all the rheological properties as designed, and then the interaction between the cyanide, the gold, and the activated carbon works as planned. So it is not a sensitive issue. It is something that we need to find a way to operatively treat whenever we are bringing that material into the processing plant. Tanya Jakusconek: Okay. And sorry, did you answer if it is all the ore body or is it in specific areas? Juan Carlos Ortiz: We are studying that because we do not yet have a detailed distribution of the clay. We have information, but we have not developed a model of clay distribution in the deposit. We have a distribution of gold, silver, carbon, organic carbon, but we do not have a distribution of clay. So we are on that because we have the information in the logging record. We are building that model in order to make a proper blending and try to avoid being over, let us say, 6% total clays into the feed of the processing plant. Right now, we have certain days where we are at 8% and maybe sometimes 9% clays. That is when we start getting problems along with the rainy season. Today, in the dry season, this is not going to be a problem. Tanya Jakusconek: Thank you for the explanation on that. And the second item, maybe someone can answer for me. As you are aware, with the volatility of oil prices and other things going on around the world, I just wanted to understand how you in Peru are managing supplies coming into the country, and I just want to understand whether you are seeing any constraints in getting supplies into the country and/or to your mine sites, like we did in COVID times. Are you having to increase your working capital or stockpile selective consumables? So maybe just where are you seeing any pressures on the supply chain front for your company, if any? Daniel Dominguez Vera: Thank you, Tanya. We have not seen any major disturbance or problems in the supply chain. Diesel has increased in price rather than being difficult to get more diesel. The price has increased 50%, and also this component, diesel, is around 5% of the total OpEx that we have, so the percentage of increase in our costs is around 2% to 2.5%. We think that this will be the case for the entire year. Regarding other supplies like cyanide or sulfuric acid, we do not see any problems in the supply of these reagents or supplies. We have in our mines a one-month stock for continuous operation, and also in Lima, in the Port of Callao, we have an additional three months for our critical supplies. So we do not foresee any problems with any supplies. Tanya Jakusconek: So, Daniel, it is not a supply issue getting to site; it is more a cost issue of it is just going to cost you more. Daniel Dominguez Vera: Yes, exactly. Tanya Jakusconek: Okay. And then my final question, if I can, and someone in the team wants to take this. Maybe for us sitting in North America, just a flavor of, with the elections going on, what is happening in Peru from both fiscal regime and maybe social as well with a new leader in place. Can someone give us some insights into the politics of Peru? Leandro Garcia: Thank you, Tanya. Well, finally, the two candidates that will pass for the ballot are not finally defined. Keiko Fujimori is for sure there, but they are still counting the votes for Rafael López Aliaga and Roberto Sanchez. The important thing here is the new composition of the Senate and the Deputy Chamber. If you see those results, you will appreciate a decision that is more center and center-right. We do not foresee any changes in legislation. Of course, there will be some demands, but we feel comfortable with how this new Congress has been elected. That will warrant some kind of peace in terms of new ideas or things that normally social unrest can ask, no? The campaign has been quite easy; there have not been many problems in the regions. So we are confident that business area and business performance will go ahead well in the following years. Tanya Jakusconek: So can we assume that there are no changes to taxes and/or royalties? Leandro Garcia: There should be some voices that would ask, but I do not think that the composition of the new Congress will pass that call. Tanya Jakusconek: Okay. And what about on the permitting front? Is there the potential for this new government to make permitting and getting permits a lot easier? Leandro Garcia: Well, it depends on who is finally the winner. We try always to communicate the difficulty and the bureaucracy and the length that it takes to be granted a permit. It is a common ask from the mining sector and the investor sector to facilitate the granting of permits, right? Tanya Jakusconek: Yeah, we all hope, right? Thank you. Thank you for taking my questions. Leandro Garcia: Thank you, Tanya. Operator: The next question comes from Cesar Perez-Novoa with BTIG. Please go ahead. Cesar Perez-Novoa: Yep. Going back to the San Gabriel contained clay, if I heard correctly, when you install the screen mesh panel, which I think is what you are going to use, will that have an impact over OpEx at the mine, and will this have any additional CapEx spend? I guess not, but I want to confirm if this is technically feasible or not. Juan Carlos Ortiz: We are in the stage of developing the options. As I mentioned, we have two options: to have what we call a banana screen—that is something that has a shape with a higher slope at the beginning—and then you wash water on top. That machine costs in the order of $300 thousand. Probably, at the rule of thumb, three-to-one installed, the CapEx for that piece of machinery working on-site is around $1 million. That is going to be the additional capital we need to include to be sure that clay is not going to be a problem in the crushing and grinding circuit in the future. From the operating point of view, maybe, I do not know, $0.10 per ton. That is a very, very small additional cost that we expect to run these additional circuits in San Gabriel. So it is more the CapEx of the year, an additional $1 million, to add this component to the flow sheet of the processing plant. Cesar Perez-Novoa: Okay. No, that is very clear. Thank you very much. It is essentially an irrelevant cost for the incremental spend. Thank you. Juan Carlos Ortiz: Thank you. Operator: Ladies and gentlemen, with that, we will be concluding today’s audio question and answer session. I would like to turn the floor back over to Sebastian Valencia, Head of Investor Relations, for any webcast questions. Sebastian Valencia: Thank you, operator. The fourth question comes from Jordan Rosano from Calpasap: Have you seen some cost pressures related to personnel expenses? Is this something you expect to continue through the year? And could you provide more color on the main drivers behind this increase, and whether it is related to wage adjustments, higher headcount, contractor costs, or the ramp-up of San Gabriel? Daniel Dominguez Vera: The increase in the costs related to personnel is coming from the higher workers' profit sharing. As we are having higher profits in Compañía de Minas Buenaventura S.A.A. and in El Brocal, we have to pay more for workers' profit sharing. It has increased from $2.5 million last year to almost $19 million this year. Most of this goes to the cost of sales for each mine, and also it goes to administrative expenses. In terms of wages, there have been no major increases; we have increased only with the inflation rate. And in terms of headcount in the mines, specifically El Brocal, we have additional operators for new equipment, but these have not made a big difference compared to last year. So basically, the difference is due to the higher workers' profit sharing. Sebastian Valencia: Thank you, Daniel. And the final question comes from Jaime Yalde from Cinno R Capital: Is Compañía de Minas Buenaventura S.A.A.’s corporate policy still to remain unhedged in copper, gold, and silver? Daniel Dominguez Vera: Yes, Sebastian. Yes. Our policy right now is that we can hedge, but we prefer not to hedge. We will go with the market. As probably everybody is aware, we had a lot of problems with Tornado in the past for some hedging, and as far as I know, any audit from Sunat of the mining companies is positive. We prefer not to hedge for the time being. Sebastian Valencia: At this time, there are no further questions. I would like to turn the call over to the operator. Operator: That concludes the question and answer session of today’s conference call. I would like to turn it back over to management for closing remarks. Leandro Garcia: Thank you. Before we finish, I want to thank Alejandro Hermoza, our Vice President of Sustainability. This is his last conference call with us. He has been with us almost 25 years. He has been an important pillar of this team. And of course, we foresee Alex to continue being part of our family. The doors always are open, and we will miss a couple of coffees with you. Thank you, Alex, for all your effort, and the best for you in this new stage. And to all who were with us today, I would like to thank you for your time and effort dedicated to joining us. You are greatly appreciated. Thank you again and have a wonderful day. Operator: Ladies and gentlemen, that concludes Compañía de Minas Buenaventura S.A.A.’s first quarter 2026 Earnings Results Conference Call. We would like to thank you again for your participation. You may now disconnect.
Operator: Hello, and thank you for standing by. Welcome to Roku, Inc. First Quarter 2026 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, please 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. I would now like to hand the conference over to Conrad Grodd, Vice President, Investor Relations. You may begin. Good afternoon. Welcome to Roku, Inc.'s first quarter 2026 earnings call. Conrad Grodd: Joining us on today's call are Anthony J. Wood, Roku, Inc.'s founder and CEO; Dan Jedda, our CFO and COO; Charlie Collier, President, Roku Media; and Mustafa Ozgen, President, Devices. On this call, we will make forward-looking statements which are subject to risks and uncertainties. Please refer to our shareholder letter and periodic SEC filings for risk factors that could cause our actual results to differ materially from these forward-looking statements. We will also present GAAP and non-GAAP financial measures. Reconciliations of non-GAAP measures to the most comparable GAAP financial measures are provided in our shareholder letter. Unless otherwise stated, all comparisons will be against our results for the comparable 2025 period. With that, operator, our first question, please. Operator: Thank you. Please press star 11 on your telephone, then wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Brent Nabaughan with Bank of America. Your line is open. Brent Nabaughan: Good afternoon. Thank you. Maybe just to start, can you explain some of the drivers for the strong first-quarter results and help us bridge that to your second quarter and full-year guidance, especially given all the momentum you have and political in the second half? Then as a follow-up, can you also discuss the impact rising memory prices are having on the devices segment and how you are thinking about total device segment investment? Thank you so much. Anthony J. Wood: Hey, Brent. Thanks for your question. I will turn it over to Dan in a second to answer your question directly, but let me say a few things. First, I am very happy with the trajectory of our business. We are on a great path, and I am excited about how things are going. We delivered an outstanding quarter and are executing against our monetization initiatives. For example, advertising revenue grew 27%, and our third-party partnership strategy is working. Adoption of Ads Manager is growing, and overall we are building a highly performant connected TV ad platform. Subscription revenue grew 30%, driven by premium subscription sign-ups, and we are expanding our tier-one partners in premium subscriptions. We recently added Apple TV in March, and this week we announced Peacock. We also recently passed 100 million streaming households, which is a huge milestone. We are focused on execution and are very well positioned. Dan will take your exact question. Dan Jedda: Thanks, Anthony, and thanks for the question, Brent. As Anthony mentioned, Q1 was an outstanding quarter for us. Platform revenue grew 28%, coming in ahead of our outlook, benefiting from the Olympics and the Super Bowl, which contributed to an increase in subscription and M&E spend. EBITDA margins more than doubled year over year to nearly 12%, and our $148 million of free cash flow for the quarter was our second-highest free cash flow on record with free cash flow margins of nearly 16%. Regarding the bridge from Q1 to Q2 and to the full year, keep in mind a few things. First, we start to lap the Friendly acquisition in Q2. Excluding Friendly in Q1, subscription revenue growth was 23%. Second, Q1 had the easiest comp with advertising growing 12% year over year in Q1 of last year. That growth stepped up to 19% in Q2 of last year, and we are comping this higher growth rate for the rest of the year in advertising once you back out political in 2025. Third, as I mentioned, Q1 benefited from the Olympics and the Super Bowl. All that said, we expect Q2 platform revenue to grow at a strong rate of 20% year over year, and I expect subscriptions and advertising both to be around this level of growth. For the full year, we increased our platform revenue guidance by over $100 million, or approximately three points of growth, to nearly 21%. We are increasing our EBITDA and EBITDA margins, and I fully expect free cash flow to again be above adjusted EBITDA for the full year. We have much stronger visibility into Q2 versus the second half, given the macro environment. As we gain better visibility into political and other initiatives, we will provide updated guidance for the second half. We are being a little conservative on our second-half outlook. Anthony, you want to start on the second question? Anthony J. Wood: Your second question was about memory prices in our devices segment. First, I want to highlight that the Roku, Inc. TV operating system uses significantly less memory and storage than competing platforms. We spend a lot of effort building a highly customized OS designed specifically for television, with bill of materials cost as a major focus. One way we achieve lower bill of materials cost is using less memory and being more versatile in the types of memory we can use. In the TV business, every dollar matters. It is a hugely price-competitive market. So although memory prices are going up—something we need to manage in our first-party business—most of our business is actually third-party products. As memory prices go up, the bill of materials advantage we have versus competitors gets bigger, which attracts TV OEMs and retail partners. That helps us win more accounts and retail placement. While there are issues around memory that we have to manage, it is generally good for our business because our cost advantage widens. Dan will talk more about the specifics. Dan Jedda: The most important thing to know is that we remain confident in our ability to keep expanding EBITDA margins in 2026 and beyond. We have confidence in growing our platform revenue double digits while managing our device investment across both gross profit and operating expenses. Device revenue is generated from the sale of our players and first-party TVs. It does not include revenue from the sale of third-party Roku, Inc.-made TVs by our OEM partners, which is the largest portion of our overall device unit volume. We look at total device investment across both device gross profit and distribution costs, which sit in sales and marketing. Despite expectations for elevated memory costs in the second half of this year, the amount of our overall device investment and unit sales factored into our full-year outlook has not changed from last quarter. Our prior outlook already accounted for increasing memory prices. We maintain strategic flexibility to optimize the mix of units across players, first-party TVs, and third-party TVs. No one knows what will happen to memory prices beyond this year or how the CTV market will react. Even if memory prices remain elevated beyond this year, we are confident that strong platform revenue growth and our device and operational flexibility put us in a position to continue to expand our EBITDA margins. Operator: Thank you. Our next question comes from the line of Sean Diffely with Morgan Stanley. Your line is open. Sean Diffely: Great. Thanks very much, team. I was hoping you could talk about what you are seeing with your third-party DSP strategy and Amazon in particular. I think you extended the partnership with them earlier this year, so I was hoping you could elaborate on what you are seeing there. Anthony J. Wood: Hey, Sean. Charlie will take your question. Charlie Collier: Hey, Sean. Appreciate the question. I will talk a little about Amazon, but stepping back, all of our DSP partnerships are important and serve different customers and segments. Our strategy is to be open and interoperable and deeply integrated with every major DSP so that when clients want to transact, we meet them wherever they choose to transact—whether on the Amazon DSP or, for example, through the extension of our DV360 deal with Google. We aim to be everywhere buyers want to transact. Strategically, our medium-term goal is to be the most performant CTV ad platform in the industry. While I will not break out specifics, first quarter results show our third-party DSP strategy is working. The majority of our video delivery is now through third-party programmatic partners, and we are growing quickly. These take time to ramp. We feel very good about how Amazon is doing and how our other partnerships are going. You are seeing the results in Q1 and in our compounded share of programmatic revenue. Combined, Amazon DSP, The Trade Desk, Yahoo, FreeWheel—all of them—advertisers can now access our premium inventory through virtually every major buying platform. Our job is to drive outcomes and performance for marketing partners, and we are bullish on our position as the open and interoperable partner in a marketplace with so many walled gardens. Operator: Thank you. Our next question comes from the line of Justin with KeyBanc. Your line is open. Justin Patterson: Great. Thank you very much, and congratulations on the 100 million household milestone and the Laguna Beach special. Conrad looked pretty excited repping that hat at Nasdaq. Two quick ones if I can. First, I was hoping to hear about how you are thinking about the role of Roku, Inc. Originals today. Second, we have seen many companies achieve meaningful productivity improvements from GenAI tools. How are you thinking about the pace of product innovation, improvements to discovery and recommendations, and what guardrails you have against rising token costs? Anthony J. Wood: Thanks, Justin. Charlie will take the question on originals and then I can take your second question on AI. Charlie Collier: Thanks, Anthony. Justin, first of all, that was a great hat, and we are really happy with Laguna Beach—he looked great. On content and specifically originals, our overall strategy in the content ecosystem is differentiated and has been honed over the years. Our original programming strategy has not changed. It is a targeted and powerful part of our offering, but remains a relatively small part of the overall content budget. In the upfront we say Roku, Inc. has the hits and the habits. The hits are ours—like the Laguna Beach 20th reunion, which became our largest unscripted series ever—and everyone else’s are on the platform. The habits are the massive daily viewing that makes up so much of U.S. TV viewing. With 100 million households and nearly half of streaming happening on our platform, our scale as a programmer is meaningful to every type of partner. Specifically for originals, we program across four pillars. We complement everyone’s hits and build the lead-in to their hits. We program against sports—an important vertical—and serve as a lead-in to major sporting events. We program seasonally—custom holiday movies with sponsors, World Cup specials, and similar. And we do UI programming—when Wicked launched on demand, we had original programming in our UI and brought Demi Lovato to do a concert on a Roku City rooftop. We also just launched a UI original, Roku City Dash, an interactive game. While the majority of our spending builds daily reach—because we see our viewer 25 days a month—we love when our originals take advantage of that. Anthony? Anthony J. Wood: On AI, at the highest level, AI is a big opportunity for Roku, Inc. It is a powerful tailwind for our business. We are integrating it across our entire technology stack. In our products and platform, we use AI to improve discovery and increase engagement, improve advertising performance, and unlock new monetization opportunities. We have used AI in the platform since the beginning, but over the last year or two we have been moving algorithms to modern generative approaches, improving performance. The more we personalize the experience, the more engagement we get, the more ad viewing we can drive, and the more subscription sign-ups we can drive. On engineering, we are rapidly adopting AI. It is accelerating feature development and enhancing engineer productivity. In content, AI is lowering the cost of content creation for both entertainment and ads, which should drive more engagement on our platform. On the advertising side, generative AI is helping us build the most performant connected TV ad platform—our big goal. We are leaning into performance across integrating AI, team and hiring, and product. Ads Manager is only possible because of generative AI. It opens an entirely new market of performance advertisers and SMBs. That product is built end-to-end on generative AI, including creative video generation. We also use AI across the company to drive operational efficiency and productivity. It strengthens our platform, improves monetization, and enhances performance. In terms of controlling costs, we are watching carefully. AI-driven efficiencies improve productivity and will show up in OpEx. Costs are very manageable at this point. Operator: Thank you. Our next question comes from the line of Vasily with Cannonball Research. Your line is open. Vasily Karasyov: Dan, I have a question about subscription revenue and how we should be thinking about forecasting it. You have given us five quarters now. Are there factors we should keep in mind when looking at quarter-on-quarter growth throughout the year? Any seasonal factors? Are there bumps from adding tier-one apps into The Roku Channel? Anything to help frame the trajectory would be helpful. Thank you. Dan Jedda: Thanks for the question, Vasily. There is some seasonality to subscriptions. During sporting seasons—like the NFL—there will be a jump in subscriptions. Price increases are also positive for partners and for us. But the most important factor is scale: we monetize tens of millions of subscriptions, so seasonality does not move the needle much quarter to quarter. What is most impactful from a revenue perspective is launching not just tier-one, but also tier-two and tier-three premium subscription partners, which we are doing very well. That brings incremental subscribers and revenue as we continue to launch new partners. As Anthony said, we recently launched Apple and Peacock. We will have more launches in the future. We also launched premium subscriptions in Mexico and will launch more countries. We think the subscription growth rate is being driven by adding more tier-one, tier-two, and tier-three partners. We are also adding new features and new subscription products that will help over time. The growth rate we see is indicative of the success in premium subscriptions and our direct-to-consumer subscription business. I believe this growth rate is sustainable given the pipeline. Vasily Karasyov: Thank you. Can you give an example of tier one versus tier two—how you classify that? Dan Jedda: We do not have a strict definition. Think of the largest content partners as tier ones. We will mention some larger launches—Peacock, Apple; Paramount+ is a premium subscription partner; we launched Apple in Mexico. There is also a relatively long torso and tail in this business. We monetize tens of millions of subscriptions across our subscription business, and all are growing well for us. Premium subscriptions are just growing faster. Operator: Our next question comes from the line of Michael Nathanson with MoffettNathanson. Your line is open. Michael Nathanson: Great. Thanks for the added disclosure—it is really helpful. On that line, if you look at gross margin on advertising, it has picked up nicely—probably an all-time high. What is driving that and is it sustainable, maybe even higher from here? And for Anthony, I would love to dig into first-party versus third-party OEMs. Are there differences in monetization or performance? Why would you not lean more to third party if it is more efficient? Anthony J. Wood: Thanks for your question. Dan will answer on advertising gross margin, then I will talk about OEMs. Dan Jedda: Advertising gross margin at just over 60% was very strong in Q1—up over 400 basis points year over year. We feel very good about advertising gross margins. We focus on growing revenue and improving gross margins. We have many tools: higher-margin ad products coming to market—think home screen monetization, like adding video—have been very positive. We are efficient in how we deliver campaigns. We continually optimize to maximize gross margin alongside revenue. On sustainability, I believe this level is sustainable for the rest of this year and thereafter. It could potentially come up. We have ongoing optimizations and new ad products that help margins. We are focused on both overall advertising revenue and GP. I believe it will sit at this level, maybe even come up. Anthony J. Wood: On first party versus third party, to level set, first-party products are our streaming players and streaming sticks—products we build, sell, distribute, and market ourselves—as well as first-party TVs sold under the Roku, Inc. brand and the Hero brand. Third party means working with other OEMs like TCL and Hisense, among many others. In terms of monetization, they are pretty similar. There are slight differences by retail channel because different retailers have different customer mixes, which can result in slightly different monetization. TV size also affects monetization a bit—bigger TVs monetize slightly higher—and players versus TVs differ somewhat, but none of these are particularly large. We would not focus on it. Why not lean more into third party? We already lean into third party a lot. The vast majority of Roku, Inc. TVs sold are third-party TVs. We do both because TV distribution is complex—different countries, regions, retailers, brands, models, features, price points. Offering a variety across third party and first party gives us maximum flexibility to maximize distribution and gives retailers options. For example, Hero is currently exclusive to Target, which helps distribution there. There are many similar reasons. Operator: Thank you. Our next question comes from the line of Richard Scott Greenfield with LightShed Partners. Your line is open. Richard Scott Greenfield: Hi, thanks for taking the question. A couple. One, you have been expanding tests of a new home screen—looks like half the screen is content boxes, apps pushed down, and a persistent video box on the right. How soon does this roll out more broadly, and what are you seeing early in terms of impact on subscription uptake or advertising? Any business impacts would be great. Two, there is talk from Antenna that Audi hit 1 million subscribers. Whether or not that is true, Audi is clearly bigger than expected. How big can Audi be? Do you need original programming? The future of Audi would be great to hear. Anthony J. Wood: Thanks, Rich. On the home screen, we have been testing the new design for a while. It is a big change—every Roku, Inc. customer will get the new home screen when it rolls out, so we want to ensure customers are happy and prefer it. It is easy to get most customers to like it more, but we aim for almost all customers to like it more. We have focused on improving monetization—subscriptions and ads—and engagement, and preserving our iconic look. Most connected TV platforms look similar; our home screen looks unique and more delightful, and we do not want to lose that. The test is in a fairly large number of homes and will roll out to everyone soon. Results are encouraging: more engagement, improved viewer satisfaction, increased monetization. For example, the marquee ad is visible on first launch in the new design—previously you had to scroll—driving higher click-through rates and making the unit more valuable. Making content more prominent is something consumers want; it drives engagement and allows us to promote subscriptions and ad-supported content. We are also making app tiles more user-friendly—more likely to see the app they want near the top. There are many detailed changes to improve satisfaction and monetization. It is going to be a good change for us. On Audi: for those who may not know, Audi is our owned-and-operated subscription streaming service. Our main O&O service is The Roku Channel, which is free and ad-supported and is the number two app on our platform with over 6% of all streaming viewing in the U.S. Audi is newer and not as big as The Roku Channel, but it is doing extremely well. It is an ad-free SVOD at $3 a month—very affordable. It targets a segment not well served today as services have raised prices and increased ad loads. We intend to stay focused on that affordable segment, which we think is very large. The content will keep getting better as we grow, enabling more investment and a positive flywheel. I think it can be very large. On originals, we do not have plans right now for big-budget originals. Those are expensive and generally require a more expensive service. That said, as we improve content quality and the audience grows, we will likely have originals someday. We do have Roku, Inc. Originals today—like Laguna Beach—which tend to be unscripted rather than big-budget scripted. For now, we are focused on improving content quality and promoting it in our UI and off-platform. We recently launched on Amazon Prime and in Mexico, and those are doing really well. Operator: Thank you. Our next question comes from the line of Peter Supino with Wolfe Research. Your line is open. Peter Supino: Hi. Question on your DSP relationships. If you could discuss the growth contributions you are seeing in the context of this great acceleration of ad sales. Could you rank order the growth contributions from The Trade Desk, Amazon, and others? And I believe your relationship with DV360 is somewhat different than with Amazon. If that becomes a contributor, should it have a different impact? Thank you. Anthony J. Wood: Hey, Peter. Thanks for the question. Charlie will take it. Charlie Collier: Thank you. I answered some of this earlier. Each relationship is different and important, and we start with the customer. Customers want to transact in different ways and have different goals, so our strategy is to serve them by being open, interoperable, and deeply integrated with every major DSP, meeting clients everywhere they want to transact. On top of that, our goal is to be the most performant CTV platform. On DV360, we expanded in ways that are slightly different—each DSP relationship is different. We signed up with Campaign Manager 360, which matters for three reasons. First, Roku, Inc. is the first streamer to participate in Publisher Match—we like being an early mover. Second, it enables holistic management of YouTube for the first time, which means advertisers can activate Google's first-party data and their own first-party data on Roku, Inc. Media inside DV360—audiences that previously only worked on YouTube in isolation. Third, Campaign Manager 360 measures Roku, Inc. Media regardless of where the advertiser's buy lands, providing proof of Roku, Inc.'s outstanding performance up and down the marketing funnel. As we seek to be known as the most performant CTV platform, this further proves it across all sources of advertising platforms. Operator: Thank you. Our next question comes from the line of John Hodulik with UBS. Your line is open. John Hodulik: Maybe talk about subscription revenue gross margin. It looks like, different from advertising, you saw some pressure over the last few quarters on gross margin there. What is driving that? Is it mix shift? Any outlook on that margin would be great. And I see that non-M&E ad spend on the home screen reached 30%. Where can that number go, and what categories are having success on the home page? Anthony J. Wood: Dan will take that. Dan Jedda: Thanks, John. On subscriptions, at just north of 40%, subscriptions gross margin is down, and it is mix-driven. We have different subscription activities that mix to higher revenue growth but slightly lower gross margins. I expect it to stay at the 41% to 42% level for the rest of this year. We also have higher-margin activities that we think will grow in Q2 and for the rest of the year. Premium subscriptions are driving margins down a little, but I expect it to level off here. Along with advertising margin at just north of 60%, I think platform gross margin will be closer to the high end of the 51% to 52% range. I do not expect it to go down from there—if anything, maintain or come up a little. On non-M&E, non-M&E brands represented nearly 30% of the Roku, Inc. Experience advertising revenue in Q1—an all-time high and a deliberate outcome of years of demand diversification work. Adding video to the home screen has been important, and the new home screen—which collapses the left nav—has the ad unit front and center on launch, increasing impressions and effectiveness. This diversification lets us expand availability of that unit, a positive for both revenue and gross margin. There are other home screen areas to monetize as well, but that unit is particularly impactful. Charlie Collier: To add, as I look at M&E now, when the M&E market is healthy, there is a tailwind for Roku, Inc., and when it is soft, the rest of Roku, Inc.'s book now carries us. That is a major difference between this year and prior years. Operator: Our next question comes from the line of Laura Anne Martin with Needham. Your line is open. Laura Anne Martin: Hi. I have two. First, you are aggregating the most expensive content—film and TV—and we are hearing from Netflix that they will add lower-cost content, maybe high-quality YouTube influencers. What is your vision for aggregation and driving engagement long term, which may take different kinds of lower-cost content? Second, on devices: device revenue is down 16% with a negative 14% margin. Does it matter whether that is sticks versus your Roku, Inc.-branded TVs? Or did Walmart buying Vizio affect shelf space? Could you go granular into what is driving the downdraft on the device line? Anthony J. Wood: Hey, Laura. On content, we talked about the Netflix announcement—they will do clips. We do have that kind of content in many places. We are primarily a distribution platform for third-party services; we carry YouTube, which has a lot of lower-cost content. In our own services, we distribute clips—from Saturday Night Live to movie trailers to sports highlights from multiple leagues. We have a “best of clips” strategy in our owned-and-operated services. We are not trying to compete with YouTube; we carry YouTube and it is a great product. With Audi, we are focused on offering a low-cost service, so we look for both high-quality more expensive content and high-quality lower-cost content, including content made lower-cost through AI production and unscripted formats. We are focused on a broad array of content, including lower-cost content. Dan Jedda: On devices, what is driving revenue and margins down is primarily ASPs in streaming players continuing to come down, along with higher memory costs. That impacts overall margins. From a unit perspective, we are on track with where we expected to be for total units across all devices. To be clear, we are not kicked out of Walmart. We still sell a lot of units at Walmart—third-party units and first-party TVs. First-party TVs are growing quite well year over year. It is not a volume issue per se; it is ASP pressure and higher memory pricing, especially in the back half, consistent with our guidance. Mustafa Ozgen: We feel good about diversifying our distribution and are on track with overall device unit sales targets for the year. We recently surpassed 100 million streaming households worldwide, a major milestone highlighting our scale and momentum. In the U.S., we are in more than half of broadband households. Customers love our products and experience, and retailers want to sell them. We continue to have a great relationship with Walmart—our products fit well for their customer base, and shoppers love them. We are successfully broadening and diversifying retail distribution. We grew our presence at Target—Anthony mentioned the Hero brand TVs supporting that partnership. We are growing at Best Buy, Amazon, and regional retailers, and we expect to add more retailers in the second half. We are actively expanding and diversifying TV OEM licensing agreements, including with long-term partners TCL and Hisense. Increasing memory costs across the industry are helping us—we are becoming more attractive to OEMs and retailers. We expect to see the impact of updated partnerships in second-half sales. Overall, we are well positioned. Our portfolio—streaming sticks, first-party TVs, third-party TVs—gives us flexibility to lean into products based on market and cost conditions. Roku, Inc. TV unit sales may go up or down quarter to quarter, but overall we expect to continue growing our scale. Operator: Thank you. Please stand by for our next question. Due to the interest of time, our final question will come from the line of David Carl Joyce with Seaport Research Partners. Your line is open. David Carl Joyce: Thank you. As you continue to deepen your integrations with DSPs and maybe add a few more, what could that do to the cadence of the advertising gross margin? I know you talked about overall where you think it could be, but what might the impacts be over the next few quarters? Anthony J. Wood: Thanks, David. Dan will take your question. Dan Jedda: The way we integrate with demand-side platforms impacts the volume of impressions we get depending on where the advertiser wishes to transact, but not margins—with one caveat. Amazon, where it is at the platform level, will be positive. The remaining DSPs—where we integrate and adopt their identifiers like hashed email—do not impact our margins either way. What impacts margins is how we fulfill: the ad units we have—like the home screen—and how we complete campaigns internally. We are very good at optimizing fulfillment, and we keep getting better. That is not a function of how demand comes in; it is a function of how we fill it with our platform. Operator: Thank you. Ladies and gentlemen, at this time, I would like to turn the call back over to Anthony for closing remarks. Anthony J. Wood: Thanks. It was an outstanding quarter. I would like to thank our employees, customers, advertisers, and content partners, and thanks to all the listeners for joining. Operator: That concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the Empire State Realty Trust, Inc. First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce Suzanne Lu, SVP, Chief Counsel, Real Estate. Thank you. You may begin. Suzanne Lu: Good afternoon. Welcome to Empire State Realty Trust, Inc. First Quarter 2026 Earnings Conference Call. In addition to the press release distributed yesterday, a quarterly supplemental package with further detail on our results and our latest investor presentation were posted in the Investors section of the company's website at esrpreit.com. During today's call, management's prepared remarks and responses may include forward-looking statements within the meaning of applicable securities laws. These statements reflect management's current views and assumptions, and are subject to risks and uncertainties that could cause actual results to differ materially. Empire State Realty Trust, Inc. extends no obligation to update any forward-looking statement in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements in the company's filings with the SEC. During today's call, we will discuss certain non-GAAP financial measures, such as FFO, modified and core FFO, NOI, same-store property cash NOI, EBITDA, and adjusted EBITDA, which we believe are meaningful to evaluating the company's performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the company's website. Now I will turn the call over to Anthony E. Malkin, our Chairman and Chief Executive Officer. Anthony E. Malkin: Good afternoon, everyone. Yesterday, we reported Empire State Realty Trust, Inc.'s first quarter results. We began the year with solid earnings, steady execution across our portfolio, and continued contribution from the Observatory. We acquired a high-quality retail asset on North 6th Street with recycled investment as part of our concentrated effort to reallocate our balance sheet capacity towards growth, and completed financings which address our debt maturities all the way into 2028 and maintain balance sheet flexibility. Today's environment presents a wide range of macroeconomic outcomes, some of which could adversely affect our business. That said, as we have said consistently, we do not seek to predict the weather. We have an arc. From that arc, we operate from a position of strength and with great latitude. We derive our revenue from diverse income streams and a broad tenant base. A substantial portion of our revenue is from long-term leases, and we maintain high leased percentages, all supported by our balance sheet. We navigate freely and act decisively when opportunities arise. Pages five through nine of our investor presentation available at esrtreit.com highlight our ongoing program to trade into opportunities which provide better prospects for growth at our desired capitalization and levels of risk. Cash flow growth is key to our focus. The Manhattan office leasing environment remained healthy and active for our top-of-tier product. Tenant demand is strong and diverse, availability of high-quality space remains limited, and there is no new construction at our price point. Ryan will provide highlights on occupancy, leased percentage, and what we expect to achieve by year end. Much has been written about AI as a disruptor of office demand. In New York City, our leasing pipeline remains active, tour volume is strong, and tenants across industries continue to make long-term commitments to high-quality space. Office leases executed this quarter averaged over 10.5 years in term. Our commercial portfolio is 93.2% leased. Our leasing pipeline is healthy, and we expect occupancy gains for the full year. We are delighted to have leased the first floor at our 130 Mercer Street acquisition and have a strong pipeline of leases in negotiation which will hit in February, about which Ryan will speak. We achieved our nineteenth consecutive quarter of positive mark-to-market rent spreads in our Manhattan office portfolio, which reflects sustained demand for our best-in-class buildings. We continue to see an upward trajectory in net effective rents, and our portfolio is well positioned to deliver strong operating performance. Our iconic Empire State Building Observatory deck remains a market leader and a meaningful contributor to cash flow. NOI was $10.6 million in the first quarter, our seasonally lightest quarter. Revenue per capita increased approximately 1% year over year excluding gift shop license fees. Visitation from international and budget-conscious tourists, centric pass programs, remains soft and impacted our results. Against this backdrop, we focus on our domestic and direct sales program which support higher revenue per visitor and better margin performance while we await the return of our traditional international demand. Empire State Realty Trust, Inc. has been a leader in sustainability for more than a decade. The Empire State Building was the first building in New York State to achieve LEED version 5 Platinum status. We focus on measurable business outcomes which drive energy savings, operational efficiency, and high-performance buildings for our tenants and reduce risk for our shareholders and stakeholders. Our sustainability leadership attracts tenants and is part of their satisfaction when they renew and/or expand. Our entire organization remains laser focused on the company's five priorities: lease space, sell tickets to our Empire State Building observation deck experience, manage our balance sheet, identify growth opportunities, and achieve our sustainability goals. These priorities are directly aligned with long-term shareholder value creation. Christina, Ryan, and Steve will provide more detail on our results and outlook. Christina? Christina Chiu: Thanks, Jane. I will provide an update on our Observatory business and capital markets activity, which includes a high-quality retail acquisition on North 6th Street as part of our capital recycling and $184 million of financings that result in no unaddressed debt maturities until 2028. Our iconic Empire State Building Observatory continues to be a highly differentiated component of our platform, characterized by low capital intensity, strong operating margin, and dynamic pricing capability that helps mitigate inflationary pressures over time. We recognize we are in a period of heightened uncertainty with the potential for macro risks and geopolitical tensions to weigh on economic growth and tourism. As Tony mentioned, the first quarter is historically our seasonally lightest, which makes it difficult to draw meaningful conclusions from results this early in the year. The balance of the year typically represents approximately 85% of our annual NOI, with approximately 60% coming from the second half of the year. Our focus remains on the levers within our control: run the operations well, cultivate our brand, enhance the guest experience, broaden our marketing reach, control expenses, and be transparent with the market as external factors play out. Longer term, the Observatory has proven resilient through cycles and has attractive cash flow characteristics. CapEx is low, and a high proportion of NOI flows directly to our bottom line. Shifting to our investment activity, at the end of the first quarter, we acquired 4155 North 6th Street, a newly constructed, currently vacant prime retail asset at the corner of 10th and North 6th Street in Williamsburg, for $46 million, comprising approximately 22,000 square feet. This acquisition, together with our purchase of 80–90 North 6th Street in mid-2025, completed the redeployment of investment capacity from the December 2025 disposition of Metro Center without recognition of a taxable gain. In aggregate, we exited our last suburban commercial property and reinvested in approximately 37,000 square feet of prime retail on North 6th Street: one redevelopment asset on a strategic corner anchored by a key long-term lease we executed last year and one newly developed asset ready for lease. Our North 6th Street portfolio now totals 124,000 square feet and continues to perform strongly and in line with our expectations. These transactions reflect our strategy, as outlined on pages five through nine of our investor presentation, to rotate capital into opportunities with stronger growth prospects at our desired capitalization and risk profile. We built this position over approximately 2.5 years for roughly $300 million, all without leverage, which uniquely positions us to curate tenant mix, drive leasing momentum, and enhance long-term value across our holding. We built on Empire State Realty Trust, Inc.'s core strength in urban retail and achieved meaningful scale. We now own a dominant position and control four key street-corner locations in a sought-after, supply-constrained, and otherwise fragmented ownership market with a premium mix of tenants and significant mark-to-market opportunity over time. On our balance sheet, year to date, we have executed $184 million of financing. In mid-April, we announced the issuance of $130 million of senior notes in a private placement at a rate of 5.99% which will fund in mid-July and mature in 2032. Proceeds will be used toward paydown of existing debt, including our line of credit. We also closed on a $53.5 million mortgage refinancing for 10 Union Square East. The 10-year interest-only loan carries a fixed interest rate of 5.3% and replaces a $50 million loan that matured on April 1, 2026. With these financings, we have no unaddressed debt maturity until January 2028. Our balance sheet is a key strength. From our continued proactive approach to balance sheet management, we have enhanced flexibility and durability, reduced risk, and are in a position to capitalize on attractive investment opportunities as they emerge. We maintain ample liquidity, lower leverage versus sector peers at 6.3 times net debt to adjusted EBITDA, and a well-laddered debt maturity schedule providing significant financial flexibility. Our 100% owned asset portfolio with limited secured debt also provides capital structure optionality. We continue to underwrite new investments across New York City office, retail, and multifamily, evaluate strategic capital recycle opportunities that are accretive to long-term cash flow growth, and assess opportunistic share repurchases. New York City's strength is its underlying property fundamentals, and Empire State Realty Trust, Inc. is a pure-play New York City REIT aligned with live, work, play, and visit demand drivers. We continue to look for ways to further enhance the quality of our portfolio and grow cash flows through disciplined, value-driven capital allocation. I will now turn the call over to Ryan to review our leasing activity. Ryan Kass: Thanks, Christina. Good afternoon, everyone. In the first quarter, we signed 113,000 square feet of new and renewal leases. The average lease term for office transactions during the quarter was 10 years. We currently have approximately 280,000 square feet of leases in negotiation, up from the 170,000 square feet we cited in our fourth quarter call, and tour activity continues to be robust. In today's bifurcated market of haves and have-nots, Empire State Realty Trust, Inc. firmly is in the have category. Demand continues to concentrate in high-quality, modernized, amenitized, transit-oriented buildings owned by well-capitalized landlords with proven operating platforms. Our best-in-class portfolio enables us to capture this demand as reflected in our leasing pipeline. Last quarter, we highlighted that we will see fluctuations in our lease percentage during the year due to known move-outs. We also said that due to our number of larger space availabilities—we have 29 spaces to lease today, of which 16 are full floor—our lease percentage changes will likely be lumpy. Importantly, we remain confident in our year-end occupancy guidance of 90% to 92%. We started the year at 93.6% leased. We have approximately 210,000 square feet of known vacates through the balance of the year, and our present leasing plan will more than cover those vacates, and we will end the year above the year's starting number. Our office portfolio is currently 93% leased, which marks the thirteenth consecutive quarter above 90%. As of today, approximately 15% of our available office space is held off market for consolidation into larger availabilities. The first quarter marked our nineteenth consecutive quarter of positive mark-to-market lease spreads in our Manhattan office portfolio, underscoring our sustained pricing power. We achieved mark-to-market spreads of 6.8% in Manhattan office, which demonstrates our ability to grow rents and lock in long-term cash flow. Average lease duration was 12.2 years across the commercial portfolio. Notable leases signed during the quarter include a 13-year, 60,000-square-foot new office lease with Steve Madden for the entire third and fourth floors at 501 Seventh Avenue, and a 20-year, 22,000-square-foot retail renewal lease with JPMorgan at 1 Grand Place. New York City's leasing market remains strong and provides a favorable backdrop for execution. Demand is broad-based across industries, including finance, professional services, TAMI, and consumer products. Subsequent to quarter end, in April, we signed a 10.5-year, 38,000-square-foot new office lease for the entire third floor at 130 Mercer with a financial services tenant. This brings our lease percentage from 70% at acquisition to 80%, and we have two full floors left to lease. We launched our marketing campaign in January and are encouraged by the early traction, which supports our underwriting and is ahead of completion of our planned capital improvement. Activity remains strong, supported by the scarcity of institutional-quality space in the supply-constrained submarket. We are pleased to see our business plan take hold. Lastly, our multifamily portfolio continues to deliver solid performance. Same-store NOI increased 9% year over year, and net rents increased 6%. We ended the quarter at 96.4% occupied due to the vacancies in units which rolled out of 421a at Hudson Landing during the slower winter months, and we are now over 98% leased. Thank you. I will now turn the call over to Steve. Steve? Stephen V. Horn: Thanks, Ryan. For the first quarter of 2026, we reported core FFO of $0.20 per diluted share. Same-store property cash NOI, excluding lease termination fees, increased 5.5% year over year. The increase was primarily attributed to growth in base rent and tenant reimbursement income, as well as approximately $3 million of nonrecurring items recognized in the first quarter of 2026, which predominantly consisted of lease modification revenue and insurance recoveries. These increases were partially offset by operating expense growth. Adjusted for these nonrecurring items, same-store property cash NOI increased 1.3%. Our observation deck generated approximately $10.6 million of NOI in the first quarter, which is generally our lightest quarter. Excluding the gift shop, this represents a year-over-year decline of approximately $3.5 million. As discussed last quarter, the timing of gift shop revenue will be more heavily weighted to the fourth quarter due to a COVID-era license amendment that both reduced our fixed payments and lowered the thresholds for percentage-based payments to us. This provides us with upside tied to the recovery of international visitation. Revenue per capita increased by approximately 1% year over year excluding the aforementioned gift shop revenue. Turning to funds available for distribution, core FAD for the first quarter was approximately $33 million, up significantly from approximately $1 million in the first quarter of 2025 and above the $31 million we generated in the fourth quarter of 2025, despite the first quarter being seasonally light for the observation deck. This improvement reflects our meaningful reduction in FAD CapEx, which was approximately $22 million this quarter as compared to $53 million in the first quarter of 2025. As a reminder, the elevated levels of CapEx in 2024 and early 2025 reflected spend related to a significant lease-up we executed since 2021, which drove our commercial portfolio to over 93% leased today. Lastly, our guidance for full year 2026 remains unchanged. This concludes our prepared remarks. We will now open the call for questions. Operator: We will now be conducting a question and answer session. One moment please while we poll for your questions. Our first questions come from the line of Manus Ibekwe with Evercore. Please proceed with your questions. Manus Ibekwe: Yes, great. Thanks for taking the question. Christina, maybe starting with you. If you could touch a little bit on the opportunities you see in the market for 2026 that you are currently looking at underwriting. Obviously, I understand you cannot talk about details, but would be interested to get an update with a little bit more detail on the opportunity set that you are observing right now. Anthony E. Malkin: Could you repeat that question? We did not understand. Christina Chiu: 2026. Okay. Anthony E. Malkin: Yeah. Christina Chiu: Yeah. I think one thing that we have long discussed is we have been surprised by the lack of distress. We were hoping for more of a basis reset. We do sense that more recap opportunities may come online. A lot of the extensions of loans have already taken place, and the question will be, at some point, you have to deal with the maturity wall and predominant extension. So that can be a source. And in other instances, we look for opportunities where people are either at the end of fund life, want to wrap up their investment, and we can be part of the solution. As I mentioned, we continue to actively look at office, retail, and multifamily. And we will look for situations where we can extract and add value and be able to generate good return. Manus Ibekwe: Got it. Perfect. Thank you. And maybe one follow-up question on an item that was mentioned in the prepared remarks in terms of the 15% of space that is available that is held back for further consolidation of space. I was wondering if you could clarify a little on the leasing strategy there and how we should think about timing. Ryan Kass: When we spoke previously, that number was actually higher at roughly 20%. Because of the success of the Steve Madden transaction, and also we have been able to bring the portion of the One Grand Central large-block space online, we have been able to bring that down to 15%. There are four or five large blocks and full floors that we work to create over the next weeks to months, and that space will come online as quickly as possible. Manus Ibekwe: Okay. Thank you. That is it for me. Operator: Our next questions come from the line of Blaine Matthew Heck with Wells Fargo. Please proceed with your questions. Blaine Matthew Heck: You all have done a particularly good job of leasing spec or prebuilt suites within your portfolio over the past few years. So I wanted to ask whether there was a significant difference in demand for that type of space versus full floors. It just seems as though you are leaning a little bit more towards full floors with your existing vacancy, but maybe I am reading that wrong. Ryan Kass: The prebuilt portion of our portfolio is doing extremely well. Right now, we have single-digit prebuilt available, and we are actively showing it, in offers, and continuing to negotiate on those plans. What we do is, for every space, every floor, we have a master plan for the building and the floor, and we evaluate everything on a case-by-case basis—what will yield the best ROI for the portfolio. What we have found is right now, based on the current market demands and the conditions of the spaces, it makes sense to move forward with some of the consolidations that we spoke about previously. Christina Chiu: And I think I would not read too much into the commentary. At 130 Mercer, we happen to have three full floors, one of which we executed on leasing a full floor. So we seek to optimize availability. The common link in our leasing activity is we provide top-tier space in our price point and emphasize service, quality, and the experience at this segment of the market, and we provide that whether it is full floor or in prebuilt spaces. Ryan Kass: Agreed. And when we look at it, it is a healthy mix within our current pipeline of that 280,000 square feet. The prebuilts also act as a great opportunity to build a relationship and work with our tenants long term to renew and expand them, and that is a testament to the over 3 million square feet of expansions that we have done in the portfolio over time. Blaine Matthew Heck: Got it. Thanks. That is very helpful commentary. And then second, can you just talk a little bit more about the strategic rationale of buying a vacant retail property at this point versus maybe continuing to reinvest in your existing portfolio through share buybacks? Was that just more of a function of needing to reinvest your proceeds for the 1031 exchange? Christina Chiu: Yeah, sure. As we have mentioned, in our capital allocation, buybacks are definitely a part of the consideration. Very specifically, on the last two North 6th Street acquisitions, that represented a deployment of the Metro Center assets. If you think about it, we wanted to avoid recognition of gain, which would be leakage of proceeds. We wanted to exit out of a market where, although there can be rental and tenant demand, it requires meaningful CapEx and fundamentally does not have rent growth. In contrast, North 6th Street provides a combination of both current yield as well as outlook for continued cash flow growth over time, especially as that corridor continues to strengthen amid strong underlying property fundamentals and great demographics. So for us, that was a very specific capital recycling trade. It does not mean we will no longer do share buybacks. It is something that is most beneficial for shareholders if we were to deploy in that manner. And, separately, we have great liquidity where we can also do share buybacks over time. Blaine Matthew Heck: Okay. Great. Thank you. Operator: Our next questions come from the line of Seth Eugene Bergey with Citi. Please proceed with your questions. Seth Eugene Bergey: I just wanted to go back to the Observatory. With visitation trends down about 18% for the first quarter, I understand it is a seasonally weakest quarter, but what gives you confidence to achieve the guide for the rest of the year, and any color you can add on what you are seeing in April? Anthony E. Malkin: Of course, we update by quarter, so we appreciate your question for April. What we have seen to date is, in our slowest period, an impact from factors which are, we believe, significant to the market in general. We are aware that other attractions have done poorly in the first quarter. We have folks who disclose, and we have other folks through whom we have either information sharing or access to information. As we go forward, 85% of the year is in front of us, and so that is really where we hang our hat. Let us see what happens in this quarter. If you recall last year, we did look at things after the second quarter on the basis of what was accomplished there. What we see at this point is we still have a war on. We still have reduced travel into the U.S. We still have significant disruption in delivery of things like aviation fuel and gasoline and diesel for both people to travel internationally and locally. We are keeping a close eye on things. We think that changes there could drive changes in general for the year. It is not correct for us to make a change based on 15% of the year to date. We will keep a strong weather eye. Seth Eugene Bergey: Great. And then maybe just as a follow-up on 130 Mercer, now that you have executed some additional leasing on the building, how does the project compare to your initial underwriting? Ryan Kass: Overall, the lease is supportive of our underwriting. Net effective rents are in the high 90s for the transaction that we just completed. TIs are consistent, and the free rent is a little bit better. The transaction occurred faster than we had underwritten, and it is before the start of our capital improvement program. We launched the marketing in June. We are encouraged by the early traction and, again, completing a transaction ahead of our planned capital improvements. Activity is strong. There is scarcity of institutional-quality space down there. We are a differentiator for our large floor plate, the amenities, our financial stability, and our service. So, excited. Seth Eugene Bergey: Great. Thank you. Operator: Our next questions come from the line of Dylan Robert Burzinski with Green Street. Please proceed with your questions. Dylan Robert Burzinski: Hi, guys. I joined late, so I might have missed it. But did you share the yield-on-cost estimates for the recent retail acquisition? Christina Chiu: You missed it because we did not say it. On North 6th Street, we have said for our portfolio—the other assets we acquired—we acquired at high 4s to 5%, and we expected to be around 6%. That includes lease-up of some vacancy and delivery of storefronts under development. Given this is a lease-up—newly built, newly constructed, and ready for lease—we would expect yields higher than that, and we will provide more as we continue to make more progress. This is more of a value-add as compared to other existing income properties. Dylan Robert Burzinski: And just maybe going back to you being opportunistic on acquisitions in terms of property type. As you look at the market today, are you seeing more opportunities within any given property type? I know in the past it was likely office, but given office fundamentals in New York continue to be very strong, is that changing at all? Just trying to get your sense for what you are seeing in terms of opportunities out there today. Anthony E. Malkin: What we hear more about today is different capital structures have begun to reach the end of the road. There was the wall of maturities, there were extensions—kick the can down the road—and now we hear more about situations where the capital structure is broken, people do not want to put more money in, and they look to resolution. Most of what we hear about is in office. Different situations which we have seen and on which we have passed have come back. We will keep our eyes open. Interestingly enough, there is really more debt out there than there is equity, and the debt tends to end up getting involved or needing to be involved at more of equity-type returns and equity-type risks. We do not think that really works for a lot of these assets. So again, we keep our eyes open and remain omnivorous opportunivores. Dylan Robert Burzinski: Great. Thanks for the color, Tony. Operator: We will now turn the call back over to Anthony E. Malkin, Chairman and CEO, for closing remarks. Anthony E. Malkin: Thanks, everybody, for joining us today. At Empire State Realty Trust, Inc., we remain focused on a clear and consistent set of priorities: lease our space, drive Observatory performance, maintain a strong and flexible balance sheet, reallocate capital towards growth, and maintain our leadership in sustainability. These priorities keep the organization focused and aligned as we drive the business forward. With our high-quality portfolio and strong financial foundation, we are well positioned to execute in the quarters ahead and create long-term value for our stakeholders. Again, thanks for your participation in the call today. We look forward to the chance to meet with many of you at non-deal road shows, conferences, and property tours in the months ahead. Onward and upward. Operator: Ladies and gentlemen, thank you so much. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
Operator: Good day, and welcome to the Crocs, 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 Abigail Ritter, Investor Relations and Strategic Finance for Crocs, Inc. Please go ahead. Abigail Ritter: Good morning, and thank you for joining us to discuss Crocs Inc. First Quarter 2026 results. With me today are Andrew Rees, Chief Executive Officer; and Patraic Reagan, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions, which we ask you limit to one per caller. Before we begin, I would like to remind you that some of the information provided on this call is forward-looking and accordingly is subject to the safe harbor provisions of the federal securities laws. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially. Please refer to our most recent annual report on Form 10-K, quarterly report on Form 10-Q and other reports filed with the SEC for more information on these risks and uncertainties. Certain financial metrics that we refer to as adjusted or non-GAAP are non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. All revenue growth rates will be cited on a constant currency basis unless otherwise stated. At this time, I'll turn the call over to Andrew Rees, Crocs, Inc. Chief Executive Officer. Andrew Rees: Thank you, Abby, and good morning, everyone. Thank you for joining us today. We delivered a better-than-expected first quarter, fueled by broad consumer relevance for both of our brands. Patraic will discuss our quarterly performance in more detail. But first, I will share a few financial highlights and a review of our brand strategies. For the first quarter of 2026, we delivered better-than-expected enterprise revenue of $921 million, with the Crocs brand down 2% and HEYDUDE brand down 13% as we work to return both of our brands to growth. Healthy direct-to-consumer growth, including Crocs brand up 11% despite pulling back on promotional activity and HEYDUDE up 8% despite lower performance marketing spend. International revenue for the Crocs brand was up 7% on a reported basis, consistent with our expectations despite an unanticipated impact of the war in the Middle East. Best-in-class inventory management with total footwear units down high single digits and overall inventory turning up more than 4x. Our powerful value creation model continues to support meaningful return of cash to shareholders in the form of repurchases. With second quarter repurchases now underway, quarter-to-date, we have bought back 800,000 shares. Now turning to a discussion by brand and starting with Crocs. We had a strong start to the year as consumers responded positively to product newness across all categories. We continue to make excellent progress against our 5 strategic pillars. First, we are driving brand relevance globally as the clog market share leader. During the quarter, our focused clog franchises, Crocband, Crafted and Echo performed well, enabling diversification of our overall clog portfolio. The reintroduction of Crocband has been well received with strength seen across channels, colors and iterations. The Crafted franchise is building globally and consumer response has been strong with canvas and floral embroidery uppers. We continue to scale our existing Echo franchise with new Echo RO colorways and expanded distribution. Within our Classics franchise, we are prioritizing maintaining tight inventory control and driving further segmentation across our key partners in North America. Second, we are scaling our product pillars outside of clogs through new category expansion. Our sandal business started the year off strong, and we expect this pillar to approach $0.5 billion in revenue this year, up double digits from 2025. Our 3 core style franchises, Getaway, Brooklyn and Miami are capturing incremental shelf space and winning with consumers. Earlier this spring, we introduced our personalizable 2-strap Saturday Sandal across channel and saw exceptional response from both consumers and retailers. Moving beyond sandals, we launched the Classic Ballet flat, which saw a notable sellout globally. In response, we're chasing supply, and we further strengthened our assortment within this trending style. Momentum was further amplified by our first quarter LoveShackFancy collaboration, which sold out completely. Our broader personalization pillar saw standout performance within bags and accessories during the quarter, led by the Disney collaboration featuring Mickey Mouse on a number of products. We also saw continued strength in elevated Jibbitz during the quarter. Third, we are fueling consumer engagement through disruptive social and digital marketing. In February, we kicked off a multiyear global partnership with the LEGO brand by launching the highly disruptive LEGO Brick clog, which quickly became one of our best-performing partnerships on social media and drove significant consumer engagement and digital traffic. Also in February, we released Charmed To Meet You, our first micro drama mini-series on RealShorts, a platform where Gen Z consumers are increasingly spending time consuming bite-sized content. The launch drove over 10 million views, reinforcing our ability to engage with consumers through bold, innovative and disruptive channels. Fourth, we continue to create compelling consumer experiences across all channels. Beginning with social commerce, we continue to scale and deepen our consumer touch points across both digital and social. In fact, Crocs was recently awarded Top Seller of the Year on TikTok Shop for 2025, underscoring our ability to continue to reach consumers on their preferred social channels. In March, we activated at the NBA All-Star week and introduced our updated Echo Clog, the Echo 2.0, a key second half product launch this year. We also released the Ripple, a bold silhouette designed to engage the sneaker community through a number of events from ComplexCon in Hong Kong to our SoHo store in New York City. Globally, we continue to expand our presence on TikTok Shop as this is a critical social selling platform over the medium to long term. During the quarter, we scaled meaningfully in the U.K. and Malaysia. And looking forward, we'll be launching in Japan, landing Crocs as the first major footwear brand on the platform in the country. Fifth and finally, we're continuing to gain market share across the world in our international markets. In the first quarter, we saw broad-based strength across our Tier 1 markets, led by direct-to-consumer channels. We saw outsized growth in our high-priority markets, China, India, Japan and Western Europe. In China, we hosted our first ever Super Brand Day on Douyin, which not only outperformed our expectations, but also drove strong consumer touch points through celebrity live streaming. In India, performance was led by growth in our digital traffic stimulated by Let Them Talk campaign, which introduced the Echo RO for a local cricketer and celebrity KL Rahul. In Japan, performance was driven by strengthening brand presence in Tokyo Retail with high consumer affinity for personalization in our DTC channels. Lastly, Western Europe saw notable growth across the U.K., France and Germany, led by digital marketplace performance. Sandal started the year strong in the region, and we see meaningful opportunity to scale this category going forward. During the quarter, we opened approximately 40 mono-brand stores in kiosks, including 6 owned and operated stores internationally. To strengthen our international opportunity further, on April 1, we converted our Malaysia distributor business to a directly owned and operated, which resulted in the absorption of 21 highly productive retail stores. We see this as an opportunity to take further share in this vibrant market in 2026 and beyond. Now turning to HEYDUDE. The first quarter came in ahead of expectations tied largely to outperformance in DTC despite significant reduction in performance marketing spend as we continue to deliver against our 3-pillar strategic plan. First, we are building a community laser-focused on our core consumer. During the quarter, we launched several relevant collaborations, including our partnership with the Houston Rodeo. This was supported by retail presence at the rodeo for the third consecutive year as we continue to drive authentic connections with our core HEYDUDE consumer. In addition, we released collaborations with Chevy, Jelly Roll and Naruto, while accelerating the growth of our HEYDUDE community through scaling social commerce. In fact, during the quarter, HEYDUDE received the Top Growth Seller of the Year award on TikTok Shop, and nod to the progress and commitment we've made to scale this strategic channel. Second, we are building the core and thoughtfully adding more. We're building our leadership within the slip-on category, led by our icons, the Wally & Wendy. Stretch Sox continues to drive our core business, and we are seeing momentum building in our newest Stretch Jersey franchise. This style, which we fondly refer to as a T-shirt for your feet, launched in all channels during the quarter and outperformed expectations. As we look into spring, we're seeing our sandal business start to gain material traction with key highlights, including the Maui Breeze franchise and sandal extensions of some of our already successful lines, the Austin Slide and the HEY2O Flip. Beyond sandals, we continue to see strong response to our work offering led by the Wally Comp Toe, and we are excited to expand further into this category as we move throughout the year. Third, we are focused on stabilizing the North America marketplace. Our first quarter outperformance signals a meaningful step in our journey to return the brand to growth in the back half of this year. During the quarter, direct-to-consumer revenues increased 8%, led by strength in digital marketplaces. Wholesale declined as anticipated, while we remain laser-focused on managing our in-channel inventory levels. Wholesale sellouts, while still below our aspirations, improved sequentially versus the fourth quarter. Importantly, we're receiving positive feedback from our key partners around new products like our HEY2O work and sandals offering as well as our core products like Stretch Jersey franchise and new introductions of our Stretch Sox platform. Turning back to the enterprise. I wanted to address the conflict in the Middle East as it relates to our business. As of today, it's too early to fully quantify the impact. However, we see this affecting Crocs in 3 ways: One, reduction of revenues from our Middle East distributor business, which has been contemplated within our annual guidance; two, increased raw material and transportation costs associated with elevated oil prices; and three, a broader impact to the global macro economy, which is uncertain at this time. Patraic will speak to our guidance later in the call, which we feel prudently captures the current environment to the best of our ability. Before concluding, I wanted to highlight the publication of our 2025 Crocs Inc. Comfort Report being released today. This annual report highlights our commitment to and progress against our purpose to create a more comfortable world for all. To conclude, we are focused on executing our near-term initiatives to drive diversified growth across both brands, DTC and wholesale as well as domestic and international markets. We believe we have compelling strategies to grow both brands enabled by a clear consumer focus, innovative product and marketing and our global go-to-market capabilities. I will now turn the call over to Patraic. Patraic Reagan: Thank you, Andrew, and good morning, everyone. During the quarter, we made continued progress against both brands strategic initiatives, which I'm confident will continue to lay the groundwork for sustainable long-term growth. We're off to a good start in 2026, finishing Q1 slightly ahead of our expectations on both the top and bottom line. And while we're encouraged by the positive start to the year, we recognize work remains to return the business to growth. Now let's move to our results. For the first quarter, we delivered enterprise revenue of $921 million, down 2% to prior year on a reported basis or down 4% on a constant currency basis. Our results were led by the direct-to-consumer channel for both brands as consumers responded favorably to new product offerings across categories. This was offset by planned wholesale declines as we continue to optimize and manage this channel for long-term profitable growth. For the quarter, Crocs brand revenue of $767 million was down 2%. Results were led by our International segment, up 7% on a reported basis, including strength in China, India, Japan and Western Europe. North America was down 6%, including DTC up 5% despite a meaningful reduction in promotional activity, offset in part by wholesale declines. The HEYDUDE brand delivered revenue of $154 million, down 13% to prior year. D2C was up 8%, driven by outsized digital marketplace performance and new store opening contributions. Notably, this growth was delivered against a continued lower level of performance marketing spend, thus driving higher profitability. The wholesale channel was down 26% as we continue to carefully manage our inventory to sell-through levels, consistent with our return to growth plan. I'll now move to adjusted gross margin. Enterprise adjusted gross margin of 56.9% was down 90 basis points to prior year, driven by 100 basis points of incremental tariff impact as well as product mix, offset in part by brand mix. As Andrew mentioned, we saw accelerated success in our new product offerings in both brands. This success is an important driver of top line performance and is key to our diversification strategy. As a reminder, select new products come with slightly lower product margins. Crocs brand adjusted gross margin was 59.5%, down 120 basis points, and HEYDUDE brand adjusted gross margin was 44.5%, down 210 basis points. Moving to expenses. Adjusted SG&A dollars were flat to prior year as we recognized the partial benefit from our 2025 and 2026 cost savings initiatives, offset in part by choiceful direct-to-consumer channel investments aimed at driving revenue. Adjusted operating margin of 22.3% was down 150 basis points to prior year. This excludes $5 million of specific costs related to the implementation of our cost savings initiatives. Adjusted diluted earnings per share of $2.99 was ahead of our expectations and flat to prior year, and our non-GAAP effective tax rate was 18%. Now turning to a discussion of our strong balance sheet and exceptional cash flow. We ended the quarter with $131 million of cash and cash equivalents and over $800 million of borrowing capacity on our revolver. Our inventory balance as of March 31 was $398 million, up 2% to prior year, including the impact of higher tariffs. Inventory footwear units were down high single digits to prior year, reflecting our actions to manage inventory flow into the marketplace. Enterprise inventory turns were above our goal of 4x on an annualized basis. While we ended the quarter with $747 million remaining on our existing share repurchase authorization, our powerful value creation engine has enabled our second quarter repurchases to be underway. Quarter-to-date, we have repurchased 800,000 shares for $74 million, and we continue to deliver against our commitment to return meaningful cash to shareholders. Net leverage ended the quarter at the low end of our target range of 1 to 1.5x. Now moving on to our full year 2026 outlook. Based on our better-than-expected first quarter results, we now expect enterprise revenue growth for the full year to be up 1% to down 1% on a reported basis, assuming currency rates as of April 27. Our updated guidance also reflects the country-specific impact from the war in the Middle East as well as related pressure from elevated distribution and logistics costs. Moving on to revenue guidance by brand. For the Crocs brand, we continue to expect revenue to be flat to up 2%, led by international growth and offset in part by declines in North America. Our guidance continues to anticipate direct-to-consumer outperforming wholesale globally as evidenced by our first quarter results. For HEYDUDE, we now expect revenue to be down approximately 5% to 7%, an improvement from our previous guidance of down 7% to 9%. This revenue range embeds our increasing confidence in both direct-to-consumer and wholesale channels returning to growth in the second half of the year. We continue to expect adjusted gross margin for the year to be slightly up versus last year despite the impact of tariffs, which are partially offset as a result of cost-saving initiatives, primarily in our supply chain. Adjusted SG&A dollars are implied roughly flat to prior year, in line with our prior guidance as we recognize the benefits of our previously announced cost savings programs while also investing in growth drivers for the business. Taken together, we continue to expect adjusted operating margin to expand modestly from the 22.3% level we reported in fiscal year 2025. This excludes approximately $25 million of nonrecurring costs. Moving to tax. We expect the underlying non-GAAP effective tax rate, which approximates cash taxes paid to be 18% and the GAAP effective tax rate to be 23%. We are raising our expectations for adjusted diluted earnings per share to be in the range of $13.20 to $13.75. Consistent with our previous guidance policy, this range does not assume any impact from future share repurchases. For the year, we continue to expect capital expenditures to be in the range of $70 million to $80 million. Regarding capital allocation, as I highlighted earlier, we are committed to, first, investing behind both of our brands to fuel long-term growth; and second, returning our significant free cash flow to shareholders through share repurchases. Now turning to our second quarter outlook. For the second quarter, we expect revenues to be down slightly at currency rates as of April 27. Within this, Crocs brand revenues are expected to be up 1% to 3% and HEYDUDE revenues are expected to be down 12% to 14%. Adjusted operating margin is expected to be approximately 24.7%, which embeds adjusted gross margin down approximately 150 basis points to prior year, driven by the impact of tariffs, consistent with the commentary on our last call. Adjusted diluted earnings per share is planned to be in the range of $4.15 to $4.35. Finally, before closing, I want to provide an update on the February Supreme Court rulings on tariff refunds. While we believe we are well positioned to collect refunds on the incremental tariffs we paid in 2025 and into this year, we have not currently embedded any upside from this within our guidance. To close, while we are pleased that our first quarter results exceeded our expectations, we continue to remain focused on managing the business for long-term profitable growth while generating and deploying our exceptional free cash flow enabled by our best-in-class value creation model. At this time, Andrew and I are happy to take your questions. Operator? Operator: [Operator Instructions] Unknown Analyst: Can you hear me? Operator: Yes. Unknown Analyst: Okay. Great. Andrew, could you talk more about the recent trends you're seeing in sell-through for the Crocs brand in North America in both channels? And how are you thinking about DTC and particularly looking forward here? And do you see any risk that momentum slows as you get past the core sandal season? And then, Patraic, just more broadly, the financial outlook as you get closer to the embedded second half ramp in revenue and profitability. Just can you highlight the factors that are giving you confidence in the second half projections here? Andrew Rees: Thank you, Jonathan. So let me kick that off. So I think -- look, I think the biggest and most important thing, I'll address it for Crocs, but it frankly is also true for HEYDUDE, right, is newness -- the consumer is responding to newness. As we've introduced newness, and I'll keep my comments focused on Crocs for a second, and I'm sure we'll get to HEYDUDE. As we've introduced newness in sandals, in clogs, and I think we've talked also in our prepared remarks around Ballet flat and other styles, we definitely see the consumer responding. We see them responding here in North America with accelerated demand and strong sell-through. And frankly, we're also seeing response for the Crocs brand and those same new products in many of our international markets. So I think that gives us some strong underlying confidence. And I would emphasize, as you kind of alluded to here in question, in your question, some of that newness is in sandals, but some of that is outside of sandals. It's in clogs and it's in other silhouettes. So I think that's really important. I also think from a relative -- from a DTC perspective, we're also continuing, as you would hope any company would continue to get better about how we execute our DTC business, whether it be digital, whether it be stores, whether it be selling on TikTok and social selling. That's been a nice driver of consumer engagement. And I think there's evidence of some of our marketing activations, some of our storytelling relative to Gen Z or younger, more influential consumer is working. So I think what I would say is we have a lot of confidence around our newness, around the trajectory of our business despite some headwinds that we do see in the global marketplace. And then I'll let Patraic talk a little bit more to the specific elements of the guide. Patraic Reagan: Yes, Jonathan, Great question. And let me kind of level this up and start just from a strategic standpoint. So we've now effectively communicated the 5 strategic pillars for Crocs and the 3 strategic pillars for HEYDUDE over the course of the last many quarters. And I think if you look into what is inherently in that, it is appealing to our consumers, driving product newness within those pillars. And a key component of that is diversification, which ultimately, from a product standpoint, translates into new products both within Crocs and within HEYDUDE. And so we're seeing that really come to life in terms of green shoots within both businesses beginning in Q4 of last year and accelerating into Q1. And so that's really kind of gives us the basis of confidence in terms of the second half. Now while we feel great about that, the second component is really going back to last year. And if you recall, during the second half of last year, the team took several strategic actions but very painful in the moment to pull back on promotions, pull back on paid search, pull back on inventory going into the marketplace for both Crocs, particularly in North America and HEYDUDE more broadly. And in the second half, we start to lap those actions. And as we lap those actions, those also provide a tailwind for us as we get into the back half of the year. So if you take those 2 together, number one is continuing on our product newness and diversification strategies. And then secondly, combine that with starting to anniversary the actions that we took last year, we feel really confident in terms of where we're headed from a second half perspective. Operator: And the next question comes from Rick Patel with Raymond James. Rakesh Patel: Can you unpack the impact of higher costs that you alluded to? First, how do we think about how much of a drag freight surcharges could be presenting on gross margins for the year? And second, does guidance contemplate an impact from higher resin costs given the increase in oil prices? Or do you see this as more of a 2027 event? Andrew Rees: Yes. I think maybe -- I think you're obviously alluding -- you're driving at the impact of high oil. Maybe I'll just kind of start off by setting this up is with what I see as the impacts of the sort of the Middle East conflict on our business, which are threefold, right? Number one, we do see some drag in revenue associated with selling directly to our Middle East distributors. They simply can't take further receipts at this point, right? And so we have embedded that in our guidance. So our -- if you like, if you think about our kind of Crocs, and that really only impacts Crocs, we're maintaining our guidance despite some negative impact from revenue that we anticipated in the Middle East that we have no longer put into our future forecast. Number two is increasing costs. At this point, the biggest impact of increasing cost is really transportation. So it's fuel surcharges relative to inbound freight and outbound freight in all of our key markets. And that cost is embedded in the guidance we have provided, right? The third impact that is -- we don't really see today, but if this drags on for a sustained period of time, it is inevitable, it will happen, right, is a slowdown in the macro global economies, right? Our global economies are not built to sustain $120 oil, and that will have an impact. We don't really see that impact today. As we look closely at our consumer behavior here in North America, in Europe and in Asia, we're not seeing a discernible trend relative to, I think, what is reported as a weak consumer confidence. We're not seeing a discernible trend. But obviously, that risk and concern remains. Patraic Reagan: And then, Rick, just to jump in and add a little bit more color and context. First and foremost, any -- as Andrew mentioned, any impact from Middle East is fully contemplated in the guidance that we provided today. And so I think within that, a couple of things. One, really, Crocs, we pride ourselves on being both agile and resilient. And I think what you see happening with us right now is we're leaning into that agility. We're leaning into that resiliency as we kind of read and react to what's happening in that part of the world. Everything Andrew said in terms of the 3 buckets, obviously, absolutely true in how we're thinking about it. The only thing I would add is that within our supply chain, we're really on an always-on offense in supply chain to continue to create and seek out efficiencies that we can either drop to the bottom line or potentially reinvest back in the business. And then the second component I would say is you heard us talk over the last couple of quarters about some of the cost efficiencies that we're putting in place and going after both within SG&A as well as within COGS. And at the time, we talk about choices that we make within that in terms of accelerating our business or dropping dollars to the bottom line. But it's actions like those that we take that give us the ability to be able to continue to raise our guidance that we did today despite the fact that we see unanticipated conflicts like the Middle East. So I think it goes in testament to who we are as a company and our ability to be both agile and resilient. Operator: And the next question comes from Adrienne Yih with Barclays. Adrienne Yih-Tennant: I guess the first is just a quick clarifying question on the tariffs. So what level of tariffs are you still embedding in the rest of your guidance? I know that the statutory is collecting 10% right now. So just the differential between collecting 10% on the, I guess, Section 132 and then what's embedded in the overall guidance. And then in terms of inventory into the channel, are you seeing any changes in either conversations or the willingness to buy on the forward order book? Andrew Rees: Adrienne, I'll take your second piece first, and then Patraic will give you chapter and verse on tariffs, which is continues to be an interesting and complicated situation. So inventory into the channel, I would say, very consistent with exactly what we said last quarter and the quarter before. We have put a tremendous amount of time, effort and money into cleaning up our inventory in channel for -- this is primarily in North America for both of our brands. We feel really good about where we are. In terms of their posture, we find most of our major wholesale customers being appropriately prudent, right? So their biggest controllable is inventory, and they're managing their inventory closely, and they're certainly not being very assertive with their plans. They are looking to brands to support them with at-once inventory. But we feel great about where we are relative to our inventory levels. And certainly, they are responding to newness and chasing and reordering newness that's selling well. Patraic Reagan: And Adrienne, moving on to the question about tariffs, as Andrew said, chapter and verse on this, quite a few chapters. And we -- frankly, we continue to see the tariff landscape evolving. And what we're trying to do is, again, as I mentioned on the response to the question earlier, we're trying to continue to adapt and lean into our mentality of being agile and resilient and responsive as we continue to manage it. That being said, where we are right now, speaking specifically to Q2 we're essentially managing through a blended rate. If you think about how tariffs have evolved over the past year, it's -- we've had a few chapters in terms of how they've been announced, how they've evolved, how they've landed, then we had the Supreme Court ruling, then we had a response. And so what we're trying to do is just be extremely agile in terms of managing our way through that. So what we do have is we have a bit of a blended mix that's in front of us right now. As we get into second half, though, what we feel better about, although around tariffs, we don't feel great about anything. But what we do feel better about is that tariffs now become part of our base. And that's really important. It's really important because it takes down the degree of variance that we're managing through because we have those costs now at least embedded in our base. And so as we think about the second half and as it relates to tariff, while I'm not providing any guidance specifically right now, I mean, how you can think of it as a high level is that if we get some good news related to tariff from the administration, we'll have a bit of tailwinds. If we get more challenging news in terms of escalation, then we'll have a little bit of headwinds. And I think though, the more important thing around this is that everything that we know today that is included within tariffs and is embedded in our outlook is embedded in our guidance, and as we continue to see more clear direction coming through, we'll update and make sure that we're providing clarity to the investment community. Hopefully, that helps. Operator: And the next question comes from Kendall Toscano with Bank of America. Kendall Toscano: So the return to growth in North America D2C for the Crocs brand was obviously a very positive surprise. It sounds like a lot of that was driven by a strong response to new product offerings. But curious now how you're thinking about the balance of the year and whether that level of growth, 5% for North America D2C is something that continue -- could continue. Andrew Rees: Yes. I mean what I would say, Kendall, we're obviously not guiding channels by country, et cetera. in terms of giving you specific numbers on that. But what I would say is, look, I think the underlying drivers of that performance, and we agree, it was great to see it as an important signal of what we're doing as a brand from a product marketing and distribution perspective, an important signal that it's working. We feel like that they're at the fundamental level and should continue, right? So the drivers of the DTC performance, as I kind of alluded to in an earlier question, were, I think, introduction of newness and it's broad-based newness. It's clogs, it's sandals, it's new products. It's personalization, it's accessories. And we do believe that DTC will continue to outperform wholesale. And I think there is also some element of effective execution within that as well, right? So we feel good about it. We think it's an important signal, and we hope it continues but we're not providing specific guidance at that level. Kendall Toscano: Got it. Okay. That's helpful. And then other question was just on gross margin. And so the first quarter came in down 90 basis points versus the expectation for flat year-over-year trends. It sounded like the tariff headwind came in, in line with the 100 basis points that you expected. So curious what kind of drove the downside? Was it all in relation -- or was it mostly in relation to new product offerings you called out carrying a lower gross margin? And if so, how should we think about the impact of that for the remainder of the year? Patraic Reagan: Yes, Kendall, it's a bit of that, and let me elaborate just a bit. So I think first and foremost, we were really happy with Q1 performance in both brands. And a lot of it really goes back to talking through what we discussed earlier in terms of new products and the green shoots that we're seeing and consumers responding favorably. As it gets into the gross margin results for the quarter, there's really 2 components that were driving that. Number one is new product mix, as you alluded to. And important from a strategic standpoint, and I want to make sure that I emphasize this, extremely important from a strategic standpoint as we execute on our diversification strategy that new product is hitting for us. From that, we can start to look into profitability of new product, et cetera, over the longer arc of time. But first and foremost, from a growth standpoint, important that we're landing from a new product and innovation perspective. And so that turned out to be a little bit more headwind than we thought it was going to be when we planned the quarter but not necessarily a bad thing. The second component is related to brand mix. And so during the quarter, as it relates to what we thought 90 days ago, we saw the HEYDUDE brand outperform our expectations in the quarter, which, again, although a drag on gross margin rate within the quarter, it is very much aligned in terms of our return to growth strategy within HEYDUDE and gave us the confidence to actually raise our guidance on HEYDUDE revenue growth for the balance of the year. So as you think about the 2 key components of the margin performance versus what we talked about last -- in our last quarter call, those are the 2 key drivers in the quarter. Operator: The next question comes from Tom Nikic with Needham. Tom Nikic: I wanted to follow up on North America wholesale. And I recognize that you're not guiding by channel, geography, et cetera. But obviously, it's been negative for quite a few quarters in a row. And I think by the end of this year, depending on how the rest of the year shakes out, it will be something like 30% below peak. But do you feel that given some of the improvements that you've seen in the DTC business that potentially you've got line of sight into the North America wholesale business stabilizing potentially over the near to medium term? Andrew Rees: Yes. So I think the short answer is yes, right? So we feel like the North American wholesale business is exactly where we expected it to be at this point in time, right? So the work that we've been doing with our partners in the channel is, I would say, moving along exactly as we thought it would, which is rightsizing inventory in the channel, making sure that inventory is turning at the appropriate rate, introducing newness, whether it be sandals, clogs or other styles and then also working with them effectively on what they're going to prebook and making sure that we have kind of appropriate inventory to be able to capitalize and maximize at once. So we think it's playing out exactly as we thought it would. And the short answer is we definitely see it stabilizing. And as we continue to build the brand, diversify the brand and provide more and more reasons for consumers to purchase, we're quite confident we can grow the business for Crocs in North America. Operator: And the next question comes from Brooke Roach with Goldman Sachs. Brooke Roach: I wanted to follow up on Rick's question on the Middle East. Is there any way you can unpack your expectations for input costs if higher oil prices persist? If oil remains at this level, how long would it take you to begin to see those higher product costs flow through the P&L? Can you frame the magnitude of the potential cost headwind that you might see? And then lay out the key levers that you're thinking about to pull to protect profitability? How important would price be in this situation relative to other levers of opportunity? Andrew Rees: Okay. That's a very detailed question, Brooke. So -- and we're not going to provide all that detail. So -- but we can give you some qualitative input that hopefully helps you to understand it a little bit, right? So what I would say is that absolutely, high oil prices for a sustained period of time does provide some upward cost pressure to the resin component of the business. I actually probably might point you to transportation as a bigger cost pressure to be quite honest, because if you look at transportation, both in and out, I think that's potentially a bigger impact. But I would say we have a very well-diversified supply chain sourcing engine, transportation contracts, relationships, et cetera. We are very well equipped to manage this. There are some components that will provide upward cost pressure. But I would also say we've been extremely proactive over a couple of years -- a number of years now, and we'll continue to be proactive about looking for opportunities to save costs in our supply chain, whether that be cost of goods based on country of origin, whether that be tariff optimization due to tariffs -- differential tariffs by country, whether that be investing in automation and robotics within our DCs. We have lots of strategies to mitigate cost. So what I would say is that I think Patraic mentioned earlier, we've kind of baked all of that into the guidance we're providing, and I think we're well able to manage this. Patraic Reagan: Yes, Brooke, just to kind of add on to Andy's comments, as you said at the tail end, everything that we know today has been fully contemplated into our guidance, which is why we alluded to it in prepared remarks. And I think the other thing to think through is as we've gone through the last year in terms of leaning into our agility, flexibility within how we manage the business, we've now got a track record of being and having very demonstrable success in terms of squeezing out efficiencies within both supply chain and within SG&A. And so while we don't necessarily want to be leaning into those areas based on what's happening in the Middle East, we know that we can. And so I think we're in the same boat as a lot of other companies where we're anxiously waiting to see what happens over the next 30, 60, 90 days or so, and we'll continue to adjust accordingly. So -- but I think the big message here is that all that we know today is reflected in our guidance for 2026. Operator: And the next question comes from Anna Andreeva with Piper Sandler. Anna Andreeva: We wanted to follow up on international wholesale at Crocs. It's come in softer for the past couple of quarters now, and you guys have mentioned controlling the sell-in. Can you just elaborate on that? Is there any door rationalization that's taking place internationally? And just how should we think about the progression in this channel in '26? And then just a follow-up on gross margin. Should we expect the Crocs brand to continue to pull back on promotions in DTC? You will lap the beginning of those actions, I believe, next month. Obviously, a lot of the newness you guys talked about that's resonating. So just additional color on that. Andrew Rees: Yes. Yes. Thanks, Anna. So what I would say about our kind of Crocs International business is it remains very strong, right? So our overall Crocs International business, we see growing strongly for the remainder of the year. And frankly, we see a multiyear pathway for continued growth in our significant international markets. I was just recently in both Japan and China and really pleased with how our brand is performing in those markets, and we highlighted that in our prepared remarks, very strong growth in both of those markets and obviously, 2 of the largest international markets. DTC growth has been stronger than wholesale. And some of that is a result of the countries where we're seeing the most growth because some of the countries where we're seeing the most growth rely on a DTC-driven distribution model and have very strong digital penetration. The consumers have -- the overall digital penetration is really high in those markets. And in most places where we're operating on digital, we manage that ourselves and have DTC revenue. I think the wholesale business has been exactly on track with where we expected it with one exception. We do see impacts for the Middle East, right? So our business into the Middle East, it is a distributor business, that was a wholesale sale for us. So that's a drag. It was a small drag in Q1 and that it will be a drag through the remainder of the year, and we've anticipated that and built that into our guidance. And then -- so I think those are the things that I'd probably highlight from an international perspective, okay? I'll let Patraic address your additional question on gross margin. Patraic Reagan: Yes. From a gross margin standpoint, as it relates specifically to promotional cadence and overall promotionality. And what we're seeing in -- maybe more broadly in the marketplace is we're still seeing that the consumer is stressed and that retailers are leaning into promotions as a way to drive both traffic and sales. Now as it relates to us, slightly different in terms of where we are. So as we think back to second half of last year, we made conscious decision in really both of our brands to pull back on discrete promotional components within both Crocs and HEYDUDE. We are still on that journey as we kind of go through the first half of this year. We expect that as we get into the second half of the year that we'll continue to kind of function at a more what we call normal level of promotionality, which is what we're executing on today. And so I think the way to think about it is we've been on this journey, which is a multi-quarter journey in terms of pulling back second half. We also feel that effect in the first half of this year, which also has an impact on revenue compares on a year-over-year basis, and we'll start to see that more normalize as we get into the second half of this year. Operator: And the next question comes from Peter McGoldrick with Stifel. Peter McGoldrick: Andrew, you discussed consumer resilience in Europe, Asia and North America despite Middle East disruption. And in the past, you've given some really helpful commentary around the consumer backdrop. So this commentary sounds like things are holding up better than anticipated. So I'm curious if you could tell us how the consumer backdrop has evolved to today and what's embedded -- any changes that are embedded in the outlook, if any? Andrew Rees: Yes. Thanks, Peter. Yes. I think what I said, and I'll just reiterate that, we don't -- I wouldn't say resilience is quite the right word. I said we don't see a discernible negative trend is probably the way I would say it, right? So given that, I think how our potential to succeed, to do well, to drive sales and profitable sales, I think, is good, right? So we -- in an environment when the consumer is not discernibly negative, we believe we offer incredible value to the consumer. We have a great roster of new product introductions that are clearly gaining traction with the consumer. And if we offer them a great value, a compelling new product, new colors, new colorways, new augmentations, the ability to personalize their products, we can get them to transact and purchase. So we do feel good about that. I think sustained $120 oil does provide a drag -- a differential drag on some different markets. I think the ones that we are most concerned about or thinking a little bit, I would say, observing closely would be kind of Western Europe and some parts of Southeast Asia, where we see governments putting in place some degree of energy control measures. So what I would say is that, look, they do appear to be holding up, right? We see that here in North America. We see that in many of our markets, and we continue to succeed. So I think we're focused on doing what we need to do to succeed in this consumer environment. Operator: And the next question comes from Aubrey Tianello with BNP Paribas. Aubrey Tianello: I wanted to follow up on Crocs International. Is the 10% revenue growth for the year that you guided to 90 days ago still the right way to think about it? And then what does guidance assume in terms of FX? I think it was about 100, 120 basis point benefit at the enterprise level last time you guided. Patraic Reagan: Yes, I'll take that question. So let me just kind of level it up a little bit to -- on the international basis. So international is -- as we continue to talk about is a key strategic pillar for us. It's a key growth area for us. And within 2026, it will be the first year that Crocs Inc. is predominantly an international-driven company. So our revenues will be slightly more in international this year for the first time than North America, and we feel great about that. From an international perspective, before I get into guidance, I just want to also just reiterate that we feel like we had a really strong quarter from an international perspective. When we think about our Tier 1 growth countries like China, Japan, et cetera, we're double-digit growth in our key Tier 1 countries. So we continue to see and believe that we've got a lot of white space in those areas. As it relates to guidance, I think roughly about a quarter ago, we guided to 10%. And I would say that we're still very much in the high single digits to approaching 10% within international. The only area that I would say has given us a little bit of friction is what Andrew alluded to earlier is Middle East. And I think that's how we're thinking about it. So we're very bullish on international and continue to be bullish. The other example I would say, just from a quarter standpoint is you see our continued commitment in terms of the takeback of our Malaysia distributor business. And I was actually in the market towards the end of last year and got to see a number of the over 20 stores that come with that takeback. And we're really excited about this, very productive, very profitable business in an area of the world that has got a high affinity for Crocs. And so I think if you think about those few components, Peter (sic) [ Aubrey ] we feel really good about where we are. And as it relates finally to FX in terms of where we are today versus 90 days ago, the FX is slightly worse but it's not impacting our guidance and outlook on the year in a meaningful way. Operator: And the next question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: Just on the flat SG&A dollars guide, that includes the cost saving program. Maybe speak to some of the areas you're reinvesting in and some of the benefits you're seeing? And then how we should think about your willingness to reinvest more if you see a return? Or on the flip side, are there areas where you could still pull back? And then on wholesale, you talked to your retail partners doing more at once. Maybe just speak to your supply chain flexibility in the case that there is more demand and your ability to meet that. Andrew Rees: Yes. So what I'd say -- so I think the most important thing from an SG&A perspective is the couple of different rounds of cost-saving initiatives that we've talked to you about have all been completed, right? So we have attained those cost saving goals. Some of those are in SG&A and some of those savings are in cost of goods or in COGS relative to go up in gross margin. So we've achieved those cost savings. That has given us some flexibility as we go into the year to invest in some critical areas. Those areas are generally some of our DTC capabilities, whether that be physical stores or more likely -- or more importantly, sorry, digital selling. So we're investing in a higher proportion of DTC sales, which carries more SG&A and -- but also carries some strong gross margin and strong operating profit. We're also investing in marketing for both brands to make sure that we create future demand for a lot of those new product introductions that are working. So I think -- and in terms of supply chain flexibility, look, I think this is a bit of a balancing act. We're really good at managing our inventory and managing our supply chain. We keep lean inventories, which I think is an overall strength for the company. It allows us to flow a lot of our operating profit through to cash flow and use that to reward shareholders. And -- but we do also try and forecast some of our newer products and best-selling items to have some backup inventory to lean into at-once. And frankly, that's on both brands. I think our entire conversation this morning has been on Crocs. Nobody has asked a single question about HEYDUDE. But those capabilities apply to both, and we are able to capture some nice additional business based on our at-once performance. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Andrew Rees: Thank you. I would just like to thank everybody for their great questions, their attention and their interest in our incredible company. So much appreciated. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to Four Corners Property Trust, Inc.'s first quarter 2026 financial results conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Patrick L. Wernig. Patrick, please go ahead. Thank you. Patrick L. Wernig: During the course of this call, we will make forward-looking statements which are based on our beliefs and assumptions. Actual results will be affected by known and unknown factors that are beyond our control or ability to predict. Our assumptions are not a guarantee of future performance, and some will prove to be incorrect. For a more detailed description of some potential risks, please refer to our SEC filings which can be found at fcpt.com. All the information presented on this call is current as of today, 04/30/2026. In addition, reconciliations to non-GAAP financial measures presented on this call, such as FFO and AFFO, can be found in the company's supplemental report. Please note that if you are a research analyst, you have been emailed a meeting ID, which is 865913566. We will repeat that at the end of our prepared remarks. That PIN will allow you to ask questions during the Q&A session. With that, I will turn the call over to William. Good morning. Following his initial remarks, Joshua will comment on our investment activity and I will discuss financial results and capital. William Howard Lenehan: Q1 marked a continuation of the momentum from 2025 and a strong start to 2026. AFFO per share grew by 3.4% versus the prior-year period, continuing our focus on steady risk-adjusted growth. During Q1, we acquired $26 million of net lease properties at a 6.8% blended cash cap rate, equivalent to a 7.3% GAAP cap rate. This is marginally lower volume versus the start of 2025, but I would emphasize we are seeing a lot of attractive opportunities and feel good about the strength of our pipeline. Seasonally, we tend to see fewer deals close in Q1 versus later in the year, and Q2 is shaping up that way so far. Over the last twelve months, we have acquired $288 million of properties. We are also excited to have closed on a new $200 million term loan with seven-year tenor earlier this month. The term loan all-in rate is 4.9%, which represents 200 basis points of spread to historical acquisition yields. We will be able to invest that money accretively. Our rent coverage in Q1 was 5.1x for the majority of our portfolio that reports this figure. This remains amongst the strongest coverage within the net lease industry. The rent coverage figure for our Garden properties specifically is 5.8x. We have been very consistent, remaining above a very lofty 5x for the past three years. As a reminder, the first tranche of lease maturities is due to send us extension notices by October. While we cannot know the outcome with certainty, barring a material change in the operating performance of lease sources, we would expect a very high renewal percentage for the spin-off portfolio in the coming years. To that end, our largest brands, Olive Garden, LongHorn, and Chili's, continue to be leaders within the net lease tenant universe. Most recently, Brinker reported Chili's same-store sales growth of 4% for the quarter ended March 2026 after a 31% increase a year ago. Olive Garden and LongHorn reported same-store sales growth of 3% and 7%, respectively, for the quarter. Remarkable results for the three brands that represent 40% to 47% of our portfolio rent combined. To bring that point home, I will call out a new slide on page seven of our investor deck that shows the strong outperformance of our publicly traded tenants versus the generic all-restaurant index. The key takeaway is portfolio construction is extremely important. By being selective with our tenant partners, we are building what we believe is a fortress portfolio brick by brick. Our lead restaurant tenants appear to be taking market share and have not shown signs of slowing down. To that end, our portfolio has avoided some of the more problematic lease sectors experiencing long-term macro headwinds. This includes theaters, pharmacies, and experiential retail more generally. We benefit from our strong portfolio construction with a low basis, fungible buildings operated by tenants and sectors that are e-commerce and recession resistant. We have had no major tenant credit issues, leading to very low bad debt expense and very little vacancy in our portfolio. On this topic, we would like to provide a brief update on our Bahama Breeze properties. As a point of clarification, we own 10 Bahama Breeze properties, which is 1.3% of our ABR. That said, Darden is planning to convert six of these locations to other brands they operate—Yard House, Olive Garden, LongHorn, Cheddar’s, etc. They would like to convert more, but they are limited by already having nearby existing locations in some cases and co-tenancy restrictions. So the remaining four properties are 50 basis points of ABR, and we already are actively negotiating letters of intent with new tenants to backfill these locations. Based on the figures we are negotiating, we expect to recover or possibly even exceed the prior rent paid by Darden, although the timing and final economics will ultimately depend on the outcome of these negotiations. It takes a few months to negotiate a lease, and we should have further updates on timing at the Q2 earnings call. But overall, we are in very good shape. Remarkably, I would like to point out that it has been less than three months since starting to announce the brand closures; for us to have potential solutions across the board for all 10 locations so quickly just highlights how our focused strategy, strong underlying real estate, and replaceable rent levels will benefit us long term. In any case, we will continue to collect rent throughout the backfill process as Darden is still obligated to make rent payments on these now for all 10 locations for at least one and a half years, and in some cases up to four. That provides us flexibility as we work through the preferred backfill tenant options. Shifting gears, we continue to diversify our portfolio. Thirty-seven percent of our rent is now from key tenants outside of the casual dining subsector, including automotive service at 13%, medical retail at 11%, and QSR restaurants at 11%. We are actively exploring new retail categories and property types as we look to expand the top of our funnel for investments. As when we developed our automotive service and medical retail property strategies, prior to investing in a new sector we evaluate the business resiliency and AI disruption risk, availability of creditworthy tenants, real estate quality, and pricing attractiveness. That said, for us, the limiting factor in these sectors’ deals is typically sellers' lofty pricing expectations. Finally, and this is a very exciting point, I would like to mention that Michael Friedland has joined our board. Michael recently retired from JPMorgan and brings 30 years of Wall Street experience in real estate finance and corporate credit to Four Corners Property Trust, Inc. We have known Michael a long time, and we are really impressed and glad he has joined our board. Welcome, Michael. Over to you, Joshua. Thanks. Joshua Zhang: I will start with a review of Q1 activity and then touch on our investment pipeline. In Q1, we acquired 10 properties with a weighted average lease term of 10 years for $26 million at a blended 6.8% cash cap rate, or a 7.3% GAAP cap rate. This represents an average basis of $2.6 million per property, extending our strategy of partnering with creditworthy operators while focusing on fungible, low-cost basis assets to help mitigate downside risk. We were really happy with the asset selection this quarter, and as William noted, Q1 is typically a lower volume period for us. And the ending volume for the period lined up well with our internal expectations. That said, Q2 is shaping up to be consistent with our typical seasonal volume ramp. Q1 acquisitions were composed of 46% restaurant, 28% auto service, and 26% medical retail properties. On the credit side, all of our properties acquired in Q1 were leased to corporate operators, the only exception being a McAlister’s Deli in Michigan, which is leased to Southern Rock, the largest McAlister’s franchisee with 178 locations across 13 states. Our team continues to partner with leading operators in each of our chosen retail subsectors. Coupled with our low-basis rent filtering, we have a proven track record of building a resilient and long-standing portfolio. In the meantime, our team continues to actively explore all avenues for investment—both large portfolios and small granular deals—in addition to assets in new subsectors, as evidenced in Q4 2025. While we are expanding the top of our investment funnel, we will continue to maintain our discipline in acquiring low-basis investments leased to best-in-class operators at pricing accretive to our cost of capital. Patrick, back to you. Patrick L. Wernig: Thanks, Joshua. I will start by talking about the state of our balance sheet and an update on our capital sourcing. Including our recently closed term loan, we funded $50 million of the new incremental $200 million term loan in April, and the balance will be used to fund acquisitions in Q2 and Q3. Term loan credit margin is 125 basis points over SOFR, for an all-in rate of approximately 4.9%. We fully hedged our current outstanding term loan balance of $640 million as of April 30 at a blended SOFR rate of 3.1%, or approximately 4% all-in, with that rate steady through November 2027. Our supplemental disclosure includes a detailed pro forma hedge schedule. We also continue to benefit from full capacity under our $350 million revolver. With respect to leverage, at the end of Q1, our net debt to adjusted EBITDAre was just 5x. It is our seventh consecutive quarter of leverage below 5.5x, and at the bottom end of our stated leverage range of 5x to 6x. Noting that our term loan closed after quarter end, but after fully funding and investing the proceeds, estimated run-rate leverage will be 5.4x. Our fixed charge coverage ratio remains a very healthy 4.8x as of quarter end. Turning to debt maturities, once factoring in the extension options for our existing term loan, we have no debt maturities until December, when just $50 million of private notes come due. We plan to address this in due course closer to the maturity date. Our staggered maturity schedule will ensure we do not face a significant maturity wall at any point thereafter. Now turning to some of our earnings highlights for Q1. Net flow per share was $0.45, representing 3.4% growth versus prior year. Cash rental income was $70 million, representing 10% growth versus prior year. Annualized cash-based rent for leases in place as of quarter end was $266 million, and our weighted average five-year annual cash rent escalator is 1.5%. Cash G&A expense was $4.9 million for the quarter, representing 7% of cash rental income, compared to 7.7% for the prior year—a 70 basis point improvement in operating leverage—and flat cash G&A compared to the prior year. This illustrates our continued efforts at achieving efficient growth and the benefits of our rising scale. Following our Q1 results, we are reaffirming our guidance range for 2026 cash G&A of $19.2 million to $19.7 million. We have also continued to make progress, with 27 of the 42 leases originally expiring in 2026 extended. Recapture rate on these locations is 6% above prior-year rent. We are currently negotiating to re-tenant two of those properties, and the remaining 13 now represent just 1% of ABR, down from 2.6% at the beginning of 2025. Our portfolio occupancy remains very strong at 99.6% today, which benefits from releasing some of our very limited number of vacant sites. We collected 99.7% of base rent in Q1 and, last quarter, did not see any material changes to our collectability or credit reserves. As an aside, during this call, we have referenced two of our new disclosure updates, which I will highlight again now. First, going forward, we plan to disclose GAAP cap rates along with the cash cap rate figure we have always provided. We have very low default rates historically, and our intention is to hold our properties long term. Therefore, the data related to those expected long-term returns is another helpful metric for our investors. Our presentation includes a new slide that has GAAP cap rates going back to 2023, showing that historically they have averaged about 70 basis points higher than our initial cash cap rates. Second, we are updating the way we show the AFFO per share growth, calculating without the impact of two-decimal rounding. Based on our share count, rounding can be impactful in this figure, particularly for quarterly comparisons. Our updated approach will allow us to quote a more accurate growth figure. We continue to aim for ways to improve transparency with the investor community and believe these changes are aligned with that focus. With that, we will turn over to questions for the Q&A session. And just a reminder, the meeting ID is 865913566 if you would like to ask a question. Thank you. Operator: We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. We ask that you pick up your handset when asking a question to allow optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from Michael Goldsmith from UBS. Michael, go ahead. Michael Goldsmith: Thank you. It is Michael Goldsmith from UBS. Thanks for taking the question. First question is, I know you do not provide discrete guidance, but maybe this $200 million term loan is shadow guidance in that you have talked about fully drawing that down in the second and the third quarter. So as we think about acquisition activity, you have got the $200 million there, consensus at $275 million in acquisitions for the year and that stepping down to $250 million next year. Just trying to get a sense of your liquidity, the acquisition market, and now you kind of have clear line of sight into acquisitions of, let us say, $200 million through the third quarter. Should you be able to exceed that and continue to acquire healthily into next year? And as a follow-up, I appreciate the new slides in the presentation—I think pages seven and eight. Can you just kind of walk through what you are trying to show here? I think you are indicating that the Four Corners Property Trust, Inc. portfolio—or the tenants that you have—are outperforming maybe the general overall restaurant industry. And then separately, your GAAP cap rates are exceeding your cash cap rates. Maybe you could just provide a little bit more detail about the point that you are trying to make with both of these. Joshua Zhang: Thanks. William Howard Lenehan: So, Michael, you know our business well. I think the answer might be hidden in your question. We are very particular about how our press releases are drafted, and I think we gave more specific timing guidance than we have in the past. I would say it is always curious that analysts seem to have declining acquisitions for us, which is unusual in the space. I do not think there are other companies where that is the case. I am not sure why. It is not what has been in the historical record. On your follow-up, great question. We had an investor show us our stock price versus some generic index—I think it might have been MSCI or Morgan Stanley—some generic restaurant index. You had to be a little cute with the start date to get it to line up, but there was a pretty high correlation. They were making the point, do we trade like a restaurant index? We think that is a silly concept on its face. But if we were going to trade like a restaurant index, at a minimum, you should weight the index by our rent and look at the stock performance of our tenants weighted by our rent. If you do that, you get the yellow line, which shows how strong Darden and Chili’s have been and that we do not have companies that have fallen into distress. Our tenant roster is really strong. On the GAAP cap rate, we have a competitor, Agree, that we admire—it is a great company. They have historically used GAAP cap rates. We have gotten questions about where our cap rates are versus theirs. There seemed to be some investor confusion that people were comparing our cash cap rates against their GAAP cap rates. Both numbers are perfectly legitimate ways of looking at it, but sometimes we felt our cash cap rates were being compared against their GAAP cap rates. So we just did the math and showed you the data so you can pick and choose the way you want to do it. I will handle the last new disclosure you did not ask about—rounding. We just thought this is a more accurate way of doing it. Not surprisingly, sometimes comparing rounded to rounded versus more closely actual to actual would have a higher growth rate some of the time and a lower growth rate some of the time. We just thought this was a better way of showing it. There seems to be a lot of focus on growth today, and we wanted to give you the most accurate number we can. If you have more questions about that—it is a pretty technical calculation—I would recommend you reach back out to Patrick after the call on the rounding issue. Michael Goldsmith: Thanks so much, guys. Good luck in the second quarter. Joshua Zhang: Appreciate it. Thanks, Michael. Operator: Your next question comes from the line of BMO Capital Markets. Please go ahead. Analyst: Hey, good morning. Thanks for taking my question. Just given your strong relationship with Yum and Brinker, are there any identifiable acquisition opportunities as Yum expands on its Taco Bell platform and Brinker expands on its Chili’s platform, just given the strength and same-store sales there—whether it is on the acquisition front or potentially a development opportunity? Thank you. And then just on the bad debt side of things, could you talk about anything that has been realized year to date and how you are thinking about bad debt for the remainder of 2026? Thank you. William Howard Lenehan: Thank you. We are always working on those. The one comment I would make is Taco Bell tends to trade for very, very tight cap rates. But we are always working on things like that. Being aligned with strong brands where we can play offense and not have to be licking the wounds of prior investment mistakes is a huge advantage. But I would say that both of the brands you mentioned trade at very, very competitive cap rates on the secondary market. On bad debt, the number is zero for the year to date. We have over 1,300 leases, so we are always monitoring something in the portfolio, but we have not had any bad debt this year and the portfolio continues to perform really strong. You probably saw Brinker’s results yesterday and recent prints by Darden as well. The brands we have aligned with are weathering any sort of macro headwinds very well. There are going to be some brands that do not, but we try to pick our horses very carefully so that we avoid that. Analyst: Alright. Thank you for the time. Appreciate it. Operator: Your next question comes from the line of Baird. Wes, please go ahead. Wesley Golladay: Thank you. Hey, good morning, everyone. Can you go back to that comment on the expirations? I think you said 42 have been renewed. I believe you said 6%. I would have thought maybe it would have been a little bit lower with the contractual rent extension. How should we think about that going forward? Okay. Thanks for that. And then when we look at the pipeline going forward, is there a bigger percentage of that in the new category that you are evaluating, or are you looking to enter those new categories a little bit more methodically? William Howard Lenehan: I would not overemphasize it. I think we had a positive quarter. Our typical rent growth is 1.5%. If you are modeling our company, I think that is a good place to go. There might be a quarter where it is better, might be a quarter where it is not as good, but 1.5% is a good place to start and finish. I would also just emphasize that Justin and his team have done a terrific job on asset management and releasing. That is a new capability for us in the last couple of years. Justin has really aggressively restructured his team and has done a terrific job. We are more on top of that as a company than we have ever been by far. On the pipeline, we are really score-focused. We are not emphasizing one category over another. We are trying to find the assets that score the best and make sure those rise to the top with appropriate pricing. We are looking at some new sectors as we talked about last quarter and leaning into building relationships, finding what tenants we want to emphasize, etc. So the aperture is bigger than it has ever been. Operator: Your next question comes from the line of Wells Fargo. John, please go ahead. John Kilichowski: Hi, good morning. Thanks for taking my question. First one for me—William, thanks for the color on Bahama Breeze. To expand on that, you mentioned the positive mark on the other assets that were not being converted. Is there going to be downtime there? Will there be rent loss before the mark, or do you think there will be no net credit loss there? And then just quarter-to-date, if we kind of run the numbers here, it looks like the average blend is about 20 bps higher than what you closed in Q1. I know that is early based on what you have released. Is there any sort of upward creeping yields that you are seeing driving that, or is that just small sample size driving that move? William Howard Lenehan: No, I do not think there will be downtime. Darden is responsible for a year and a half at the minimum, up to four years for the handful that we are converting to other tenants. To the extent that there is rent growth or capital provided, all that is baked into our comments. We feel really good about being able to release these to strong tenants, and Darden is taking a lot of them too. It is a good diversification move. I think it shines a light on the Bahama Breezes that we sold a number of years ago for really high prices—that we did a good job managing our value-at-risk with any one particular tenant. It could be a good result. On the quarter-to-date yields, small sample size. Patrick L. Wernig: I would just add to that, as William said in his comments, we are talking about four stores and 50 basis points of ABR. It is a small amount. John Kilichowski: Okay. Got it. Thank you. Operator: Your next question comes from the line of Citizens Bank. Mitch, please go ahead. Mitchell Bradley Germain: Thank you. William, you mentioned looking at a couple of new industries. I think it was capital that you allocated to a rental operator and a grocer. What sort of education do you and your team undertake in reviewing the sector? What are the attributes that made those assets or sectors interesting for you? And does that change the TAM in terms of how you allocate capital? Is that the way we should be thinking about this now? And last one for me: Are you seeing any real changes in the competitive landscape within the investment sales market? For quite some time, there was a lot of competition sitting on the sidelines, and some of that appears to be back. Is that shifting any way that you are approaching underwriting and bidding on properties? William Howard Lenehan: I think that is a good way of thinking about it. We use what we call the triple filter: Is this something that we know enough to buy? Do we have permission from our investors to buy it? And would we buy it with our own money? While those sound very high level, that is a very challenging gauntlet for an asset class to get through. I personally would not buy a pickleball facility with my own money, so that makes it pretty easy not to buy pickleball facilities. I would not buy a Carvana with my own money, so that makes it pretty easy. Do we have permission from our investors? That is a harder one. We tend to take it pretty gradually to make sure that we are bringing our investors along with us. Pretty clearly, our investors do not need Four Corners Property Trust, Inc. to buy a Class A office in New York City; they have other ways to get that exposure. The “do we know enough” is manifest in writing white papers for our board, going to conferences, meeting and talking with tenants, walking the floors. I would say, humbly, that a lot of these sectors are things that I have experience with in the past, pre–Four Corners Property Trust, Inc. When I was at Tralee/Trailion and on Gramercy’s investment committee and other things I worked on, we bought outdoor industrial storage and we bought grocery, so I have a familiarity and I am bringing the team along with me. On the competitive landscape, where we are on the onesies and twosies—we obviously look at portfolios and have closed on several in our existence—I think we are really well competitively positioned. We can build a portfolio throughout a year that we are proud of doing onesies and twosies. We have the scale to do bigger things as well. We read a lot in the news about private credit and the private credit firms creating a discount to NAV, questioning of their marks—will that cause them to pull back? I do not think we have evidence of that yet. Certainly, recently there has been a lot of corporate M&A activity. I think there is a lot of shadow corporate M&A activity. There is a lot of things to work on now. Operator: There are no further questions at this time. I will now turn the call over to William Howard Lenehan for closing remarks. William, go ahead. William Howard Lenehan: Great. Terrific, and glad to land the plane on the 30-minute mark. Ultimately, existing portfolio strength is compelling for us to focus on offense, where many of our peers are playing defense. Our $200 million term loan gives us a direct line of sight for funding between now and Q3. The attractive pricing we are seeing in the debt markets should give us even more access to low-cost funding later this year at scale. The acquisition market is stable and, with a bit larger aperture for our property types, we expect another successful year of building our portfolio brick by brick. Our team will be at ICSC the week of May 18 and NAREIT in New York the week of June 1. As many of you know, we host a cocktail party in conjunction with ICSC. We would love to meet with you in person at either of these events, so please reach out to Patrick or myself to coordinate schedules. Thank you all, and we look forward to continuing to see many of you in person this year. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Thank you for standing by, and welcome to Jones Lang LaSalle Incorporated Q1 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Sean Coghlan, Head of Investor Relations. You may begin. Sean Coghlan: Thank you, and good morning. Welcome to the First Quarter 2026 Earnings Conference Call for Jones Lang LaSalle Incorporated. Earlier this morning, we issued our earnings release, along with a slide presentation and Excel file intended to supplement our prepared remarks. These materials are available on the Investor Relations section of our website. Please visit ir.jll.com. During the call, as well as in our slide presentation and supplemental Excel file, we reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of non-GAAP financial measures to GAAP in our earnings release and slide presentation. We also reference resilient and advisory revenues previously referred to as transactional revenues, which we defined in the footnotes of our earnings release. As a reminder, today's call is being webcast live and recorded. A transcript and recording of this conference call will be posted to our website. Any statements made about future results and performance, plans, expectations and objectives are forward-looking statements. Actual results and performance may differ from those forward-looking statements as a result of factors discussed in our annual report on Form 10-K and in other reports filed with the SEC. The company disclaims any undertaking to publicly update or revise any forward-looking statements. Finally, a reminder that percentage variances are against the prior year period in local currency, unless otherwise noted. I will now turn the call over to Christian Ulbrich, our President and Chief Executive Officer, for opening remarks. Christian Ulbrich: Thank you, Sean. Hello, and welcome to our first quarter 2026 earnings call. This morning, I'm pleased to report a very strong quarter for JLL to start 2026. The combination of our market-leading advisory businesses and resilient revenue base drove record levels of first quarter revenue and earnings. Robust growth across our core advisory businesses was broad-based, led by momentum in the office and industrial sectors in leasing advisory as well as growth across nearly all sectors and geographies in Capital Market services. Our data and AI advantage is driving productivity gains, increased market share and strong financial results across these businesses. Increased revenue and our disciplined operating rigor are unlocking strong profit growth and margin expansion. Adjusted EBITDA increased 24% and adjusted EPS was up 56%. Tailwinds for outsourcing and strong demand for project management supported the continued organic growth rate of our resilient revenues, which were collectively up high single digits during the quarter. The transformation of our Property Management business is also progressing, and we have now strategically exited or repositioned nearly 60% of the targeted contracts in Asia Pacific. Overall, we are building scalable, tech-enabled businesses with an advisory-led approach. We expect the revenue and profit of our resilient businesses to steadily grow over time, strengthening the through-cycle performance of the overall company. At our investor briefing in March, we introduced our Accelerate 2030 strategy, long-term financial targets and approach to advance value creation. This strategy is underpinned by a decade of progress, which has resulted in a resilient foundation, strong financial profile and a unique structural advantages. We have established scale in large, growing and complex end markets through our integrated global service offering. We have the balance sheet, strong cash generation and capital strength and agility to execute targeted capital deployment with a focus on ROIC. And our investments in proprietary data and AI capabilities over the past decade are expanding JLL's competitive advantage. These are strategically critical and differentiating levers that uniquely position us to build on our strong market position. With this as a backdrop, we've got high conviction that we have the strategy, talent, data-led approach and culture to drive synergistic scale, further increase our resiliency and deliver compelling value creation through the 6 imperatives of our Accelerate 2030 strategy. During the investor briefing, we highlighted the revamped strategy of our Investment Management business, LaSalle. LaSalle strategy is focused on achieving 2 primary objectives: investment outperformance for our clients as well as profitable growth and margin expansion for shareholders. We have been in the investment management business for over 45 years, operating various fund strategies globally with an attractive performance track record. We're strategically investing in LaSalle to accelerate growth of a resilient revenue base while also generating synergies with the broader JLL portfolio. LaSalle is uniquely positioned to differentiate and innovate with new products through the collective relationships, expertise, platform and technology from across JLL. In many ways, the strategy is embodied by the first close of our global decarbonization fund, Lp3F, during the first quarter. In partnership with Shell's business lines, the fund will execute a retrofit-led approach, spanning deep retrofits of vacant buildings, light retrofits and ground-up developments to address the growing scarcity of high-quality, energy-efficient properties. We have the expertise and capabilities to execute this strategy globally, including across energy, sustainability, project management and property management. Last year, we invested $100 million of incremental growth capital into one of LaSalle's flagship U.S. funds, JLL Income Property Trust, as we saw an opportunity to leverage our competitive advantage and potential to scale. Today, we are announcing the commitment of an incremental EUR 100 million investment in the LaSalle Encore+ Fund, one of our flagship European products to support its next phase of growth. This is a compelling organic investment opportunity for JLL with attractive risk-adjusted returns aligned with the strategic and financial objectives of our capital allocation framework. We continue to assess a pipeline of innovative investment opportunities with considerations for LaSalle's strategic growth plan as well as other capital allocation priorities across JLL. Our capital deployment decisions during the quarter reflect our capital allocation principles, balance sheet agility and through-cycle lens on leverage. We are committed to executing our Accelerate 2030 strategy with discipline and rigor aligned to our capital allocation framework. We repurchased $300 million of shares at an average price of approximately $301 during the first quarter, inclusive of the $200 million accelerated share repurchase plan. This reflects our stated commitment to be active on share repurchases with $2.7 billion remaining in our expanded authorization. With that, I will now turn the call over to Kelly Howe, our Chief Financial Officer, who will provide more details on our results for the quarter. Kelly Howe: Thank you, Christian. The robust first quarter growth on the top and bottom line is a product of our competitive position, focus on enhancing operating rigor and positive business momentum. Revenue increased 11%, inclusive of a 200 basis point foreign currency benefit and was almost entirely organic. We also generated healthy margin expansion over prior year. Commentary to follow is in local currency to articulate underlying operating performance. Our financial strength coming into the year allowed us to return meaningful capital to shareholders during the quarter, as Christian just described. This reduced our share count by nearly 2%. Looking ahead, we maintain considerable financial flexibility and are well positioned to drive significant stakeholder value as we fully activate our Accelerate 2030 strategy. Now a review of our operating performance by segment. Beginning with Real Estate Management Services, the revenue increase was led by Workplace Management and Project Management. Within Workplace Management, mandate expansions and, to a lesser extent, new client wins drove high single-digit growth. Higher volumes in the U.S., including from new data center wins delivered double-digit Project Management revenue growth, inclusive of a high single-digit management fee increase. Healthy underlying core business growth within Property Management was tempered by the elevated contract turnover we continue to action and discussed in prior quarters with management fees declining mid-single digits. As Christian mentioned, we have now strategically exited or repositioned nearly 60% of the targeted Property Management contracts in Asia Pacific. A portion of the contracts have been successfully renegotiated, partially limiting the revenue headwind, but also lengthening the time line and negotiations with clients. For full year, we expect the financial impact of contract churn to be largely offset by tailwinds from healthy core business growth and new wins in the Americas. Within Software and Technology Solutions, high single-digit software revenue growth mostly offset the continued pullback of discretionary technology solutions spend from certain large existing clients. For the segment, we are targeting mid- to high single-digit revenue growth for the full year with variances by business line and weighted to the second half. Workplace Management contract renewal rates are stable and our pipeline is strong, albeit second half weighted. Client activity within Project Management remains healthy, particularly in the U.S., positioning us for continued momentum over the near term. We continue to balance investing to drive long-term profitable growth with near-term business performance and sustained annual margin expansion. Moving next to Leasing Advisory. Revenue growth was led by continued momentum in the office sector, an acceleration in industrial and a meaningful contribution from data centers. The office leasing revenue growth notably outpaced the 1% decline in market volumes. On a 2-year stacked basis, Global Leasing Advisory revenue growth was 29%, and reflective of strong ongoing and broadening demand. The Leasing Advisory adjusted EBITDA and margin expansion was primarily driven by revenue growth, partially tempered by the impact of higher commission tiers being achieved earlier this year and business mix. We expect the commission tier headwind to moderate over the course of the year. Looking ahead, our leasing pipeline remains healthy. GDP growth outlook continues to be constructive and business confidence as measured by the OECD has improved even despite the fluidity of the macro environment, thereby providing optimism for continued growth in the near term. For the full year, we are targeting high single-digit revenue growth. We continue to invest in our talent and to augment our proprietary data advantage to drive long-term profitable growth. Shifting to our Capital Market Services segment. Investor bidding activity remains resilient, underpinned by robust liquidity [ and ] debt markets, a continued uptick in transactions of scale and stable pricing. Investment sales revenue grew 27%. Debt advisory revenue increased 30% and equity advisory revenue increased 75%. The continuation of the business momentum in the quarter is reflected in the 2-year stacked growth rates for investment sales and debt advisory of 42% and 81%, respectively. Our Investment Sales revenue growth in the quarter notably outpaced global market volumes, which is consistent with recent history and in part attributable to the strength of our people, global platform and proprietary data. Revenue growth as well as lower loan-related expenses versus prior year drove the increase in the adjusted EBITDA and margin expansion in the quarter. Looking ahead, our global investment sales, debt and equity advisory pipeline remains strong and underlying market fundamentals remain healthy. For the full year, we are targeting low double-digit top line growth and see meaningful runway for continued growth over the long term. Turning to Investment Management. Growth in advisory fees largely attributable to our capital raise activity over the prior 12 months was offset in part by the effects of meaningful disposition activity in Asia Pacific. As it takes several quarters to deploy new capital raised, we expect advisory fee growth to gradually pick up as the year progresses, driving low single-digit growth for the year. Additionally, we anticipate full year incentive and transaction fees to be towards the lower end of historical range and weighted to the fourth quarter. Shifting to free cash flow, balance sheet and capital allocation. Higher cash earnings were largely offset by growth-related working capital headwinds, particularly within net reimbursables. An increase in CapEx in part due to timing, more than offset the improvement in operating cash flow leading the seasonal outflow of free cash flow to be largely in line with a year ago. For the full year, we are targeting a free cash flow conversion ratio consistent with our long-term target of over 80%. Our cash generation over the trailing 12 months contributed to a reduction in net debt, which along with higher adjusted EBITDA led to an improvement versus a year ago in reported net leverage to 1.0x at the end of the first quarter, typically our seasonal peak period. Capital deployment priorities remain focused first on driving organic growth and productivity across business lines, weighted to areas of highest return on capital and long-term growth potential within our core services. Organically, we are continuously and diligently enhancing our platform and service differentiation as well as investing in our people strategy. Our acquisition pursuits remain focused on augmenting organic initiatives that enrich our capabilities as well as deepen our client relationships across multiple business lines, provide synergistic scale and enhance our enterprise resiliency. Returning capital to shareholders remains a top priority. As Christian described, the 275% increase in our share repurchase authorization to $3 billion, along with the $300 million of share repurchases during the quarter, reflects our commitment to returning capital to shareholders as well as the value we see in our shares. The majority of the shares associated with the $200 million accelerated share repurchase were delivered during the quarter at an average price of approximately $290. The remaining shares under the program will be delivered in the second quarter. Looking ahead, we intend to be programmatically active on our repurchase authorization. The total annual amount of repurchases in a given year will depend on the broader operating environment, our leverage outlook and valuation as well as relative returns to other investment opportunities inclusive of M&A. Regarding our 2026 full year financial outlook, we are encouraged by the continued strength in our pipelines and underlying business fundamentals. Considering our ongoing focus on driving operating leverage and the segment top line growth targets I mentioned earlier, we are targeting an adjusted EPS range of $21.80 to $23.50 for the year, reflecting 20% growth at the midpoint. This aligns with the adjusted EBITDA range we provided last quarter. The strong first quarter results put us on a trend towards the upper end of the range, though the current fluidity of the macro environment limits late-year visibility into our more economically sensitive businesses. Going forward, we intend to provide segment revenue and adjusted EPS as our primary annual targets as they better encapsulate how we holistically measure our business performance. Christian, back to you. Christian Ulbrich: Thank you, Kelly. Before closing, I would like to address the ongoing conflict in the Middle East. We have been growing our business in the Middle East for over 20 years with operations anchored in Saudi Arabia and the UAE. Today, this business represents a low single-digit percentage of revenue with strong growth potential. Since the onset of the conflict, our top priority has been the safety of our people and supporting our clients with operations in the region. From a commercial perspective, there has been no material impact on our consolidated results to date, and our pipelines have continued to build throughout and following the first quarter. That said, we have intentionally taken a conservative approach to leverage and are prepared for a wide range of outcomes. We are focused on first and second order risk to our businesses globally across a variety of scenarios to the extent tension persists and become a meaningful headwind to the global economy. I would like to take this opportunity to thank all of our colleagues around the world for their perseverance and focus. On the heels of the launch of our Accelerate 2030 strategy, we are excited by the significant runway for JLL to deliver long-term growth and value creation for stakeholders. Operator, please explain the Q&A process. Operator: [Operator Instructions] And your first question comes from the line of Anthony Paolone with JPMorgan. Anthony Paolone: My first question relates to the guidance. If I kind of back into what growth might look like for areas like leasing and capital markets later this year. It seems like it would be either consistent or maybe even a little bit inside of what you guys outlined at Investor Day for the next 5 years. So I guess, one, is that right? But then two, should we take that as just being conservative given the uncertainty in the environment? Or do you think that Capital Markets and leasing has basically recovered back to a normalized level here at this point? Kelly Howe: Thanks for the question. I'm happy to address that. Our guidance obviously reflects a range of scenarios, as I noted. We are, at this point, trending towards the high end of our guidance. As it relates to leasing and capital markets, our outlook is roughly in line with where we would expect growth rates to be over a longer-term period and in line with what we articulated at Investor Day. That said, as we look at the back half of the year, 2 things. One, we've got very strong comparables because we had very strong quarters for leasing in the fourth quarter, and we had very strong quarters last year for Capital Markets in the third and the fourth quarter. And so our guidance for this year reflects some proportion of lapping those very tough comps. And then if you look at the 2-year stack basis for those businesses, actually, the growth rate is very strong, including our guidance. And then I do think from a macroeconomic perspective, as Christian noted, we're seeing very little impact in our business today, but we are monitoring the situation very carefully. And if there was to be impact, it would come in the back half of the year, and that is reflected in the range of the guidance that we have provided you. Anthony Paolone: Okay. And then my follow-up is on Encore+. You noted the EUR 100 million investment there. But maybe can you step back and just give us a sense like how much capital has been raised there? What are you looking to raise there? Just trying to understand how important that is in sort of jump starting AUM and LaSalle and also the order of magnitude of maybe further co-invest to kind of get capital raising going across that? Christian Ulbrich: The overall capital raising environment has been relatively muted in the first quarter. The specific capital for Encore+, what we're expecting there, the team will provide you in a moment. What I would say is that there has been an ongoing trend, which has developed over several years now that when you, as a fund manager, kicks out those funds with your own investment that drives a lot of confidence into the product and that usually then brings a couple of other investors coming alongside and you have this jump start, which you want to see to a considerable kind of momentum in your capital raising. Team, do you have the numbers specifically for Encore+? Kelly Howe: Yes. So we're investing EUR 100 million. This is a core European fund. It's an open-ended fund. And so we do expect meaningful third-party capital raise. I don't have a specific number to provide you at this moment. Operator: And the next question comes from the line of Stephen Sheldon with William Blair. Stephen Sheldon: First, I just wanted to see if you could talk more about what you're seeing in capital markets. And specifically, have you seen any pushout in deals or delays given rate volatility and sort of continued geopolitical or macro concerns. So yes, just curious momentum there has kind of continued early into the second quarter. It sounds like it has based upon your comments, Christian, but I just thought it was worth asking. Christian Ulbrich: Well, Capital Markets started the year with really very significant momentum across the globe and which is reflected in our first quarter numbers. And this momentum also has continued in the second quarter. The U.S. market is pretty much unimpressed by the geopolitical environment so far. The European market, we have seen some deals being canceled. We have seen some deals being delayed. But the overall momentum was still so strong that, that is just taking away an additional outperformance, which we would see otherwise. And that is also pretty much the case in Asia Pacific. You may recall that Asia Pacific was relatively weak in 2025. They have very strong momentum, a lot of large transactions going on. We haven't seen those pausing, but you probably wouldn't see it in our numbers anyway. It's just what this conflict does, it takes away additional outperformance, which we would have seen otherwise without that conflict. Stephen Sheldon: Very helpful. Makes sense. And then as a follow-up in leasing, how should we be thinking about the potential range of incremental margins over the rest of the year? It sounds like the first quarter was bogged down by producers hitting higher commission tiers as you expected. So should we be expecting kind of better incremental margins there looking forward as kind of tiers were set? I know it can be volatile quarter-to-quarter, but just generally, how are you thinking about it over the rest of the year? Kelly Howe: Yes. Thank you for the question. My first advice is not to look at incremental margins on a quarterly basis, but really on a kind of 12-month trailing basis. That said, in the first quarter of this year, as you noted, our producers have hit higher commission tiers earlier in the year than we expected. That is due to the strong performance of the business and also kind of the geo mix of where the business is coming from. We expect the commission headwind to moderate through the year. That said, we continue to make investments in that business around talent and technology and data. And we expect for this year, 2026, our overall margin rate for the business to be relatively flat versus prior year. Operator: And the next question comes from the line of Jade Rahmani with KBW. Jade Rahmani: Just to confirm your last comment, the relatively flat margin rate, that's on Capital Markets. Is that right? Kelly Howe: That's on leasing, to be clear. On leasing. Yes. In Capital Markets, we, as Christian noted, have a strong pipeline. The momentum is good in Capital Markets, and we expect a strong incremental margin for Capital Markets this year for the full year. Jade Rahmani: Okay. Still in the 35% to 40% range? Kelly Howe: Yes. I'd say mid-30s is generally where we expect to be for incremental margin for Capital Markets. Jade Rahmani: Okay. I wanted to ask about AI and how you're managing the rollout because there are some concerns about potential disintermediation in this space down the road. And then I know that keeping data in a closed loop system is centrally important. So could you give any color on how you're approaching it with respect to what percentage of the sales teams are currently using AI and how you expect to manage that going forward? Christian Ulbrich: Sure. Well, as you know, we have been investing into technology and especially into our data platform now for over a decade. And we believe that we have by far the best data platform within our industry. All our products are tied into that data platform. So every data goes into that platform and we can bring all the data back to whatever type of product or agent we have created. The adoption rate within our organization is incredibly high. There's a lot of excitement amongst our colleagues to really use these new large language models. And so on that end, we feel real momentum. There are several agents becoming live per week on the citizen development side. And then we are working from a corporate central perspective on some very interesting approaches to really drive additional productivity, but also to change how we are getting to market and how we are solving a topic. To your second part of your question, point around disintermediation. I mean, we spoke about that at length during our Investor Day. For now, we are not concerned about any potential disintermediation. In fact, for now, we are very clear that AI is a tailwind for our organization, first and foremost, because we have this very, very rich data platform, which allows us to provide a lot of proprietary data to the benefit of our clients. And that data platform is growing with every transaction we are doing, with every service we are providing to our corporate clients. And then over and above that, even in those areas where people are speculating that there could be potential disintermediation, what has been mentioned the most is the value and risk advisory business, at the end of the day, there's also a very important aspect who is confirming the potential valuation where the brand aspect is absolutely significant, and we believe that the JLL brand will go a very long way on that end as well. So in summary, for now, we don't see any risk of disintermediation. Kelly Howe: And maybe just to follow up with a couple of data points for the first part of the question that Christian addressed. We spoke about this a bit at Investor Day, but we see 75% adoption across JLL across our core enablement products. And we've got -- we monitor this closely. We've got 25,000 employees who are working on our enterprise AI applications every day. We've seen a 60% year-over-year increase. We expect that to continue to grow. Jade Rahmani: Lastly, on the capital management side, what are your expectations for full year share repurchase given the accelerated repurchase late in the quarter? Kelly Howe: Yes. Thanks for the question. As I think both Christian and I noted around our capital allocation strategy and priorities, organic investment, return of capital to shareholders and strategic M&A are the 3 things that we're constantly balancing. We're very committed to returning capital to shareholders. As you noted, we did a $300 million capital return in the first quarter, $100 million of that is what we would consider to be programmatic, and we look to continue our programmatic share repurchases throughout the year and into the coming quarters beyond that as well. The $200 million was more opportunistic relative to market conditions. The exact amount of the programmatic repurchase in any given quarter or any given year is going to vary a bit depending on the operating environment, the external market, what other opportunities that we're looking at and returns on those opportunities. But we do intend to have a fairly programmatic approach to share repurchases as we go forward. Operator: And the next question comes from the line of Julien Blouin with Goldman Sachs. Julien Blouin: I appreciate the comments on the fluid macro, but I just want to understand your comments. I think if I understood correctly, you think the impacts of the conflict, if they were to come, would likely be felt in the back half of the year. I guess why is that the case? I would think that the impact would come quicker than that. And just comparing it to Liberation Day last year, which was similar in timing, though obviously a completely different issue. The impact was felt in 2Q. And then by the time we got to the second half of the year, sort of capital markets were back off to the races. Christian Ulbrich: Yes. Thanks for that question. I wouldn't necessarily compare the 2 things. The imposement of tariffs was an immediate kind of load to the economy and an additional cost. Here, we have a conflict. If the conflict would have been solved within 4 to 6 weeks, I would have said the impact outside of the Middle East would have been almost unnoticeable. But with every week, this is continuing. We have these higher energy prices and all the other implications around lack of fertilizers impact on the chemical industry, you name them. And so what people have stored, which helps them to bridge that impact is kind of fading away. And at some point, they all have to pay for that higher energy. Look at the airline industry, you have some airlines who have secured the pricing for this aircraft fuel they need and others don't. And those who don't are immediately feeling that impact now, and that will have repercussions on their performance in the broader economy. And so the lengthening out of that conflict will have a heavier load on the global economy. And frankly, especially in those countries where there is a very, very high dependency on purchasing energy and on purchasing fertilizers and other products, which are coming from the Middle East. It's least felt in the U.S. You see the pricing also in the U.S. of the gas station, but the U.S. is very independent. That's why we also see very little so far in our business environment in the U.S. But when you go to Europe, you feel it quite noticeable already. And then if you talk to our friends in India and in other countries who are heavily impacted, they would -- they are seeing great concern if that conflict continues over the summer. Julien Blouin: Okay. No, that's helpful. And then I guess on the office leasing front, I mean, results continue to be really strong. But I guess what are tenants and brokers telling you regarding their future plans for footprint? Are they confidently moving ahead with plans for later this year or next year? Or are you seeing any indication that first, they're trying to solve for sort of AI impacts to their go-forward headcounts and sort of office using employee bases before they sort of commit to space? Kelly Howe: Thanks for the question. Our leasing pipeline is quite strong. The indication that we get is that organizations are plowing forward with getting their people together, getting people into the office. In some cases, we've even gotten feedback from clients that they overshot on the downsizing through the pandemic and now need to correct for that. Ironically, I would argue that the AI boom has actually been also a boom for our leasing business as the ecosystems around all of the AI start-ups, AI and I would say, financial services has really caused an uptick in activity, particularly on the coast, San Francisco, New York. And so at this point in time, we're really not seeing an impact on our business from kind of what people are thinking about in terms of AI concerns, headcount, employment, et cetera. Operator: And the next question comes from the line of Seth Bergey with Citi. Seth Bergey: I just wanted to kind of ask about the commentary on kind of the office revenue outperformance. Is that kind of driven by market share gain or deal size mix? And can you just talk about if that's kind of in any particular geographies? Kelly Howe: I assume you're referring to leasing specifically. So I can go ahead and address that. Yes, our office demand was very healthy in the first quarter. It is driven both by an increase in transactions and an increase in deal size. So we've seen both. It is definitely driven by gateway markets. As I noted earlier, in particular, we've seen a lot of strength in places like New York and San Francisco, driven largely by kind of AI and AI organizations looking for space to get their people together and also financial services. Operator: And the next question comes from the line of Brendan Lynch with Barclays. Brendan Lynch: Could you provide a little bit more detail around the decarbonization fund within LaSalle and examples of similar projects in the past and kind of size of this current initiative? Christian Ulbrich: Well, this is a new initiative, and I'm not quite sure whether there are a lot of examples out there from other fund managers. What we are doing there is we are looking for mostly existing buildings, which are not up to the expectations of the higher-end potential tenants in the market. And we want to completely refit those buildings and turn them into a level that they can meet the expectations of the top tenants in the market. And that includes, obviously, that these buildings have to be very excellent in their energy consumption ideally net zero or close to that level. And we are starting with a couple of projects, which have been identified. The initial size in our first outlook is $300 million, which we want to operate with. And then obviously, we go into fundraising now. And hopefully, we bring that fund up to a decent level relatively swiftly. Brendan Lynch: Great. And maybe for a follow-up on the M&A pipeline. Are you primarily looking at geographic expansion or new capabilities or technology investments? Just any additional color that you could provide there around what you're targeting? Christian Ulbrich: Well, as we stated in our Investor Day, we see very significant growth opportunities in our core activities. And so we will focus, therefore, very much on those areas, which we already cover today as core services and look for -- if so, for opportunities to increase our market share in geographies where our market share may not be where we like it to be. And if there is an opportunity on the M&A side, we will look at it. But as we have said several times before, we are very confident that our organic growth rate will stay at the high single-digit level. And so there is no need to do any M&A. The M&A market overall has significantly increased in activity in our space. And we also see what we would call a little bit of nervousness on the seller side with regards to the price levels they can achieve. So it may become more attractive in the coming 6 months, also depending on how the geopolitical environment will pursue. Operator: The next question comes from the line of Mitch Germain with Citizens Bank. Mitch Germain: How should we think about how we measure the performance of the investments that you've made within the -- within LaSalle? I mean this is the second, I think, I believe, $100 million investment. So how do we think about maybe the economics and how it impacts your earnings and the types of returns that you're targeting? Christian Ulbrich: Well, Mitch, as we have said before, and we will be very consistent around that, every use of capital goes through a very rigorous analysis and it has -- first of all, the biggest hurdle it has to beat is it has to be better than share repurchases. So we looked at the proposal, which came from our LaSalle colleagues, the last one and now the one we have spoken about today, and it is well above the returns we expect from share repurchases. And obviously, there's numerous implications when we expand the footprint of LaSalle. It is not only the opportunity, which is directly within the LaSalle P&L, but there's also notable cross-selling with a broader platform of JLL. So we are very comfortable when they come with a convincing idea that this is, from a shareholder perspective, an excellent opportunity to use capital, and as I said, well above share repurchases. Mitch Germain: That's super helpful. And then the last one, Christian, I appreciate the color you gave on the recycling out of those Property Management contracts. I think you said 16%. So I'm assuming most of these contracts are about a year in term. So should we think that kind of by midyear or maybe 3Q that you've cycled through what you want to accomplish there? Kelly Howe: Yes. Yes. So we started on this initiative to really take a deep dive on the contracts last year and started cycling through second half of last year. We had, as I think noted earlier, expected to have that process wrapped up kind of halfway through this year. One of the things that we pleasantly -- that pleasantly surprised us as we got into that process was that many clients were actually interested in renegotiating terms of those contracts, which we view as a win. And so the upside is that, obviously, the outcome for us is better, but it's taking a bit longer to cycle through those and we expect that to go through the end of the year at this point. We do expect the headwind from that to be offset from strength in other parts of our business, namely in the Americas where we're seeing strong underlying growth in that part of the portfolio. Mitch Germain: Kelly, if I could just follow up, what sort of -- maybe renewals, not the right word, but what sort of stickiness have you gotten from that process? Kelly Howe: The specific contracts that we were targeting were in our Asia Pacific region. Many of them have been structured in a way that, frankly, were just unattractive to us from a financial standpoint. Very, very, very high pass-through costs, low portions of actual value-add fee revenue generating a portion of that. And so I would say the stickiness has been -- it's been about, I would say, 1/3 of those contracts, as we've gone through, have been interested in renegotiating to something that is more attractive, I would argue, for both sides, more attractive for them, but also more attractive for us from a commercial standpoint. Operator: And I'm showing no further questions at this time. I would like to turn it back to Christian Ulbrich for closing remarks. Christian Ulbrich: Thank you, operator. With no further questions, we will close today's call, and we are looking forward to speak to you again next quarter. Thank you. Operator: Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you for attending. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to Baxter International's First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time. . I would now like to turn the call over to Mr. Kevin Moran, Vice President, Investor Relations at Baxter International. Mr. Moran, you may begin. Kevin Moran: Good morning, and welcome. Today, we'll discuss Baxter's first quarter results along with our financial outlook for the full year 2026. This morning, a press release was issued with our preliminary earnings results and reiterated outlook. The press release and investor presentation are available on the Investors section of the Baxter website. Joining me today are Andrew Hider, President and Chief Executive Officer; and Anita Zielinski, Interim Chief Financial Officer, Chief Accounting Officer and Controller. During the call, we will be making forward-looking statements, including comments regarding our reiterated financial outlook for the full year 2026 and the anticipated drivers of the second quarter and second half 2026 performance. The anticipated impact of various regulatory and operational matters, including ones related to our infusion pump platform and ongoing supply chain challenges and commentary regarding the global macroeconomic environment, including estimated impacts of tariffs and broader inflationary pressures. Forward-looking statements involve risks and uncertainties, which could cause our actual results to differ materially from our current expectations. Please refer to today's press release, the forward-looking statement slide at the beginning of our investor presentation and our SEC filings for more detail. In addition, please note that on today's call, all of our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. Non-GAAP financial measures are used to help investors understand Baxter's ongoing business performance. GAAP to non-GAAP reconciliations can be found in the schedules attached in our press release and our investor presentation. On the call, we will reference organic growth which excludes the impact of foreign exchange, MSA revenues from Vantive nd impacts associated with business acquisitions or divestitures. As a reminder, Continuing operations excludes Baxter's Kidney Care business, which is now reported as discontinued operations. Finally, Andrew, Anita and I will take questions following the prepared remarks, and we kindly ask that you limit yourself to 1 question and 1 brief follow-up so that we can give as many people in the queue and opportunity. With that, I'd like to turn the call over to Andrew. Andrew Hider: Thank you, Kevin, and good morning, everyone, and welcome Anita, who is serving as Interim CFO until we appoint a permanent successor, she will continue her duties as Chief Accounting Officer and Controller. I have full confidence that Anita's stewardship, supported by the diligence of our finance team will help ensure continuity and a seamless transition while also supporting our turnaround, including efforts to strengthen our balance sheet. I'd also like to thank [ Joel ] for his contributions and partnership during his time with Baxter. We wish him all the best. We have launched a comprehensive search for a permanent successor, and I look forward to providing an update when appropriate. In the meantime, my focus remains on executing our turnaround, including stabilizing the business, strengthening the balance sheet and driving a culture of continuous improvement. The Baxter team is working hard and made progress on all 3 fronts in the quarter. I'll cover this in more detail in a few minutes. For the first quarter, financial results were in line with our overall expectations, and we are on track to deliver on our guidance for the full year. Although we are not satisfied with where our performance stands today, we have a road map in place to improve results and drive shareholder value. I have clear insights to the challenges facing our business. We believe we are taking the actions necessary to fulfill the company's potential. As I have come to learn through my immersive 9 months as CEO and deep engagement with customers, employees and our leaders. Baxter is a foundation of good businesses with leading positions and the potential to outgrow our markets, expand margins and increase cash flow. We are focused on delivering not only better but also more consistent and predictable performance. With that, let me provide a high-level overview of our performance within the quarter. First quarter global sales from continuing operations totaled $2.7 billion, representing an increase of 3% year-over-year on a reported basis and a decline of 1% on an organic basis. Adjusted earnings from continuing operations for the quarter were $0.36 per diluted share versus $0.55 in the prior year period. As we stated in our last call, we expected the first quarter to be challenging, including difficult prior year comps. As a reminder, in the first quarter of 2025, we saw a onetime distributor build following Hurricane Helene, which benefited the MPT segment. Also in the prior year, operating margins realized a benefit due to the timing of certain functional costs being reclassified. In the quarter, we saw the expected headwinds from both tariffs and higher manufacturing costs, including absorption pressure operating margin. While we did not see a material impact from Novum LVP returns in the quarter, we believe it's prudent to continue to factor this possibility into our full year guidance. We remain focused on supporting our current Novum customers with their implementation of currently available mitigations. We continue to work diligently to finalize hardware and software corrections to resolve the active field actions. Once available, we will implement the corrections in coordination with regulatory authorities, including any necessary submissions. Looking at the overall demand environment, we continue to believe we are in attractive end markets. Advanced Surgery, for example, had another great quarter, growing 10% and we are sustaining a strong order book in our care and Connectivity Solutions business. We continue to monitor the direct and broader macroeconomic effects of higher oil prices and conflict in the Middle East. Our Middle East exposure is less than 2% of total revenue. Importantly, our exposure to fuel today is less than half of what it was historically, given the divestiture of the kidney business. That said, this is obviously a fluid situation, which we are actively monitoring. In the event, the landscape changes, it will not be Baxter specific, and we are prepared to navigate any unforeseen dynamic with rigor and agility. To support our customers, we are continuing to advance innovation in targeted areas of the portfolio. This includes positive response from customers and strong order growth from Dynamo, a smart hospital stretcher designed to improve patient safety and care team efficiency. In the quarter, we also launched the IV Verified Line labeling system, an automated solution that supports safer medication administration and the XR spine surgical table, which is designed to support surgical teams across a range of spine procedures. We also have an active pipeline of differentiated solutions with integrated AI functionality, designed to accelerate future growth. We are already leveraging AI in our Connected Care Foundation, which unifies Baxter's unique data set provided by [ Internet of Things ] devices like beds, pumps and vitals to provide actionable data and analysis. In addition, we are using AI in frontline care to develop products that strengthen clinical insights and operational efficiency. Overall, our performance in the first quarter was in line with how we expected the year to begin with a few puts and takes across the portfolio. Importantly, our results support the broader framework we laid out for 2026. And including known mechanical headwinds and a more challenging comparison to the prior year in the first half and improving performance in the second half. It is still early in our turnaround, but we are on the right track and showing progress on our 3 strategic priorities. The first of those priorities is stabilizing the business, specifically in areas that require increased focus. As an example, last quarter, we referenced back order challenges at 1 of our manufacturing facilities. That was impacting revenue and driving unfavorable mix within Pharma. During the quarter, we made significant progress in clearing back orders in addition to increasing throughput. The second priority is strengthening the balance sheet. That includes improving free cash flow to support deleveraging. I'm encouraged with the positive free cash flow generation in the quarter, which reflects early success in our effort to improve working capital efficiency. While we still have more work to do, this is a solid step in the right direction and reinforces my comments that the actions we are taking will strengthen cash generation and our overall financial flexibility over time. Our near-term capital deployment priority is debt pay down, and we continue to target net leverage of approximately 3x by the end of 2026. Once we reach our leverage goal, we will have a stronger balance sheet with more optionality to drive shareholder value, including strategic tuck-in M&A that enhances our customer offerings and growth profile as well as the option to return capital through share repurchases. Turning to our third priority, driving continuous improvement. It has been almost 6 months since we rolled out the Baxter Growth and Performance System, or GPS, which is focused on simplifying processes, leveraging data and strengthening performance management. In the time since launch, we have delayered management teams and pushed down P&L responsibility directly to leaders of each of our operating businesses. We are setting rigorous KPI measures to drive accountability and continuing to embed the operating discipline into our culture to enable better execution, consistency and improve performance over time. We have also started to deploy AI tools to accelerate efficiency gains within internal quality workflows, such as the customer correspondence and AI-assisted corrective field action communications scheduled to be deployed later this year. Looking forward, we will thoughtfully embed AI directly into internal process improvements, frontline workflows and manufacturing at enterprise scale, with the goal of strengthening speed consistency, reliability while also maintaining rigorous governance and a focus on patient safety. Baxter GPS is becoming part of how the company runs the business. We kicked off the year with 10 President [ Kaizen ] events. And we've now launched more than 230 continuous improvement events. We're building a stronger culture of continuous improvement through leader training and establishing a lean community of practice. Today much of our focus has been concentrated on cash flow, service reliability and speed to market. While we are still in the early stages of organization-wide adoption, we are seeing strong traction. Ultimately, the purpose of GPS is to enable a consistent approach across the enterprise to identify problems and opportunities earlier, the improved visibility, sulfide processes and drive accountability. This is not a short-term initiative. It is the new core of how we will operate going forward, and improve execution to deliver on Baxter's full potential. I want to take a moment to thank our more than 37,000 Baxter colleagues around the world for their resilience and dedication to our mission. As the [ ore has been rowing ] in the same direction and speed, the power we will collectively generate will be hard to stop. We continue to believe that our long-term earnings power is meaningfully better than today's level. We are taking decisive steps in the early stages of our turnaround to get us there. We have streamlined the organization for greater accountability. We have launched Baxter GPS to drive continuous improvement and competitive advantage. We have heightened our focus on innovation to better meet our customers' needs, all to drive improved performance and long-term shareholder value creation. I will now turn the call over to Anita to provide more detail on our first quarter results, including segment level performance as well as our 2026 guidance, which we are reiterating today. Anita, over to you. Anita Zielinski: Thanks, Andrew, and good morning, everyone. I'm happy to join the call this morning to cover the details of Baxter's first quarter financial performance as well as commentary in our outlook for the remainder of 2026. First quarter 2026, global sales from continuing operations totaled $2.7 billion and increased 3% on a reported basis and declined 1% on an organic basis. On the bottom line, adjusted earnings from continuing operations were $0.36 per share, a decrease of 35%. As expected and previously discussed, results reflect an unfavorable comparison to first quarter 2025, which benefited from a timing shift in expense recognition. This benefit in the prior year related to an updated estimate, which resulted in the reclassification of certain functional costs from SG&A to cost of sales. This was approximately a $50 million headwind in the quarter. Additionally, and as expected, we saw higher costs related to tariffs, which were not present in the prior year period and higher manufacturing costs, including lower absorption. . Now I'll walk through our results by reportable segment. Commentary regarding sales growth will be on an organic basis. Sales in our Medical Products & Therapy segment or MPT, were $1.3 billion and declined 2% in the quarter. Within MPT, sales of our Infusion Therapies and Technologies or ITT division totaled $981 million and declined 5%. Performance in the quarter reflects lower infusion pump sales due to the previously discussed ship and installation hold of Novum LVP and an unfavorable comparison to the prior year due to a onetime distributor build with an IV Solutions following Hurricane Helene. Within IV Solutions, performance in the quarter was in line with our expectations. As previously shared, clinical practice changes in the market have created a new baseline in demand. In Infusion Systems, results in the quarter reflected the net impact of lower sales due to the ongoing shipment and installation hold of the Novum LVP, customer returns and transition to spectrum. Sales in Advanced Surgery totaled $304 million and grew 10%. Results in the quarter reflected continued strong demand and increased volumes for our global portfolio of [ hemostats and sealants ], strong commercial execution across regions and steady procedure volumes. MPT's adjusted operating margin totaled 14.5% for the quarter. decreasing 480 basis points. This reflects the same drivers as total Baxter, including the unfavorable year-over-year comparison related to cost timing, tariffs, and higher manufacturing costs, including absorption. In the Healthcare Systems & Technology segment or HST, sales in the quarter totaled $705 million decreasing 2% due to a decline in the Front Line Care division. Within HST, sales of our Care & Connectivity Solutions or CCS division were $435 million, flat compared to the prior year period. The Patient Support Systems, or PFS portfolio, which is the largest business within CCS, saw growth in the quarter and continues to see momentum, including a strong capital order book within the U.S. This was offset by our Care Communications portfolio, which is impacted by the timing of installations. To date, we have not observed a slowdown in U.S. hospital capital spending. However, given the broader macroeconomic uncertainty, we continue to closely monitor the situation. Front Line Care sales were $270 million and declined 4%. Performance in the quarter reflects the timing of government orders and large customer deals. It also includes planned global exits in the portfolio. HST adjusted operating margin totaled 9.4% for the quarter, decreasing 380 basis points. These results reflect an unfavorable year-over-year comparison related to previously discussed cost timing and higher costs related to tariffs. Moving on to our Pharmaceutical segment. Sales in the quarter totaled $621 million, increasing 1%. Within Pharmaceuticals, sales of our Injectables and Anesthesia division were $301 million, a decline of 13%. Consistent with last quarter, the Injectables portfolio was negatively impacted by supply constraints and continued softness in certain [indiscernible] products. As Andrew referenced, during the quarter, we made significant progress in clearing back orders at 1 of our manufacturing facilities. Additionally, supply constraints associated with the disruption at a contract manufacturer contributed to the performance in the quarter. While we are working closely with the manufacturer to help improve supply of products, we do expect limited supply into 2027. Our Anesthesia portfolio also declined low double digits, reflecting continued softer demand for inhaled anesthesia products globally. Drug compounding grew 20% and continues to reflect strong demand for our services. Pharmaceuticals adjusted operating margin totaled 7.4% for the quarter, decreasing 340 basis points. This reflects the previously discussed unfavorable year-over-year comparison related to cost timing, price erosion and an unfavorable product mix within Injectables, driven in part by supply constraints impacting select higher-margin products. Finally, other sales, which represent sales not allocated to [indiscernible] and primarily includes sales of products and services provided directly through certain manufacturing facilities were $14 million in the quarter. MSA revenue from Vantive totaled $76 million. As a reminder, these sales are included in our reported growth, but they are not reflected in our organic growth. Now moving to the rest of the P&L. First quarter adjusted gross margins from continuing operations were 36.8%, a decrease of 500 basis points driven by the previously discussed headwinds and cost of goods sold. First quarter adjusted SG&A from continuing operations totaled $614 million or 22.7% of sales, slightly lower than the prior year. Adjusted R&D spending from continuing operations in the quarter totaled $124 million or 4.6% of sales. TSA income and other reimbursements totaled $42 million in the quarter, in line with our expectations. Altogether, these factors resulted in an adjusted operating margin of 11% on a continuing operations basis, a decrease of 390 basis points, reflecting the same underlying drivers discussed earlier in relation to earnings per share. Net interest expense and other expense from continuing operations totaled $67 million in the quarter. The continuing operations adjusted tax rate for the quarter was 18.3%, driven primarily by mix of earnings across jurisdictions. In total, adjusted earnings from continuing operations were $0.36 per share for the quarter. Before turning to our 2026 outlook, I want to comment on cash flow and liquidity. First quarter free cash flow was $76 million. This compares to negative $221 million in the first quarter of 2025. The performance in the quarter reflects improved cash flow generation, including progress across targeted areas of working capital as well as continued focus on execution. We remain focused on strengthening cash flow generation and maintaining discipline around working capital, which are foundational elements of our financial strategy. Improving the balance sheet continues to be a key priority, and we intend to deploy cash towards reducing leverage in line with our capital allocation framework. Now turning to our outlook for the full year 2026, which we are reiterating. For the full year, we continue to expect total sales growth to be flat to 1% growth on a reported basis. This reflects current foreign exchange rates, which are expected to contribute approximately 100 basis points top line growth for the year. In addition, reported sales are expected to include a headwind of approximately $25 million from MSA revenues from Vantive, representing approximately 30 basis points of impact on reported growth. Excluding the impact of foreign currency and MSA revenues, we expect approximately flat organic sales growth for 2026. As it relates to the segments, there are no changes to our organic sales assumptions. In MPT, we expect full year organic sales to be flat to slightly up. This reflects the uncertain timing for the resolution of the Novum shipment and installation hold. Although we did not see a material impact from customer returns in the first quarter, we continue to believe it's prudent to include the potential impact from various customer responses in our guidance. Our guidance also assumes that the ship and installation hold will remain in place for the full year. In HST, we continue to expect full year organic sales to grow low single digits, supported by anticipated contributions from both the Care & Connectivity Solutions and Front Line Care divisions. In Pharmaceuticals, we expect full year organic sales to be approximately flat. This reflects ongoing pressures in Injectables & Anesthesia related to softer market demand, continuing supply challenges and IV push utilization trends that have been discussed in prior quarters. We expect this to be offset by continued growth in drug compounding. Turning to our outlook for other P&L line items, beginning with tariffs. We continue to estimate a full year impact, net of mitigating actions to be approximately $80 million, which represents a year-over-year headwind of approximately $40 million as we experienced a full year impact. TSA income and other reimbursements are expected to range from $130 million to $140 million. We continue to expect full year adjusted operating margin from continuing operations to range between 13% to 14%. We expect our nonoperating expenses, which include net interest expense and other income and expense to total between $280 million to $300 million, reflecting higher interest expense and a lower contribution from other income. On a continuing operations basis, we anticipate a full year tax rate to range between 18.5% and 19.5%. We expect our diluted share count to average approximately 518 million shares for the year. Based on all these factors, we continue to expect full year adjusted earnings on a continuing operations basis, of $1.85 to $2.05 per diluted share. While we are not providing quarterly guidance, I will offer some additional color on how we expect performance to progress over the remainder of the year. Overall, we are reiterating the broader framework we previously laid out for 2026, including the rollout of [ no mechanical ] headwinds and a more challenging comparison to the prior year in the first half, followed by expected improvement in the second half. We now expect second quarter earnings to be similar to the first quarter with slight improvement in volumes. This reflects the continuation of the higher manufacturing costs, including absorption headwinds within ITT, which are expected to be more pronounced in the second quarter. As previously shared, as we move into the second half of the year, we expect to have fully rolled through the absorption headwinds in addition to realizing an anticipated benefit from the previously discussed actions taken earlier in the year to rightsize our cost structure. Within HST, we expect growth in the second half supported by new product launches, including Connex 360 and Dynamo. Our order in the U.S. continues to support visibility into improved performance in the second half. In Pharmaceuticals, we continue to expect the previously discussed headwinds to persist through the first half of the year. As we move into the second half, we anticipate a more favorable comparison and improved performance. Taken together, we continue to expect a second half improvement in organic sales growth, operating margin and adjusted earnings. For clarity, I will now provide a bridge from expected first half to second half margins. First, we expect improvement in volumes in the back half, consistent with typical seasonality we've seen in prior years and the associated incremental operating leverage that comes with it. This represents approximately half of the anticipated operating margin improvement from the first half to the second half, roughly 250 basis points of the total 500 basis point implied expansion. Second, we expect to realize the benefits from the cost structure actions taken earlier this year. This represents around 25% of the improvement to operating margins, roughly 125 basis points. To be clear, these actions are largely complete, and we expect them to be realized in the second half. And third, we expect to roll through the higher cost inventory produced in the second half of 2025 in Q2. This represents the remaining 25% of the anticipated improvement to operating margins or roughly another 125 basis points of expansion. With respect to free cash flow, we continue to expect free cash flow to be back half weighted, consistent with 2025. This reflects normal seasonality, the expected cadence of earnings and the expected benefit of recent cost structure actions. In closing, I just want to reiterate that I'm excited to see the traction within the organization from Baxter GPS. And I look forward to driving improved operational discipline and support more consistent execution across the business. With that, we can now open up the call for Q&A. Operator: [Operator Instructions] I would like to remind participants that call is being recorded, and a digital replay will be available on the Baxter International website for 60 days at www.baxter.com. Our first question comes from Robbie Marcus of JPM. Robert Marcus: Congrats on the better-than-expected quarter. Two for me. First one, just wanted to get thoughts on how first quarter translates into the reiterated guide. How much of this is conservatism, how much of this is a pull forward or different assumptions moving forward. More specifically, especially as we look to 2Q, the Street's right around flat organic sales growth. How do you feel about that? And then I got a follow-up. Kevin Moran: Robbie, this is Kevin. Let me take this one just from a near-term modeling perspective. In Q1, I'd say it came in overall in line with our expectations. The 1 piece to call out there is we've been transparent about the potential risk of responses from Novam customers. We did not see a material impact in the quarter. But as Andrew referenced in his prepared remarks, we think it's prudent to continue to contemplate that in the guidance. As we move to Q2, I'd say, in line with our original expectations, we do expect some sequential improvement Q1 to Q2 on the top line, but still pressured year-over-year like we saw in Q1. And I think about it as pretty consistent year-over-year drivers from what we saw in Q1. So for example, the headwind from Novam sales, this will be the last quarter before we lap it. Andrew again talked about the risk of potential returns for Novum. We've talked about Pressures and Injectables. And we also said that HST's growth is going to come from the back half. And so the first half, we expect to be pressured and then we expect growth in the second half. And so to kind of sum it all up, the full year reiterated our expectation of approximately flat, kind of [ Novum ] pressures in the first half and then an improvement in the second. Robert Marcus: Great. Maybe if I could shift the focus to 2027. You have a good amount of TSAs and MSAs rolling off. There is still a lot of end market uncertainty. Maybe highlight if there are some of the key new product launches we can be looking for next year? And I guess the real concern out there from investors is, can EPS be a positive growth number, yes, next year. So if you're willing to comment on that, how you get there and some of the top and bottom line drivers? I appreciate it. Andrew Hider: Yes. Robbie, just a couple of items, and I'm going to start with what we've said. I'll walk through our view, and then I do want to walk a little bit on innovation. So look, while we're not providing guidance, as you're well aware, what we have gone through is that we're going to be rolling off the [indiscernible] and we expect to cover this, although we would expect to have modest growth within 2027. And we would also look to that to say we would expect to grow earnings modestly as well. When we look at our product set, not only we confidence -- we have confidence in our position with customers, and we're continuing to really outline and gain confidence in our ability to execute for our customers, we've launched some exciting new products. And I've outlined a few of these, but just to walk through. We talked about Connex 360 being a key [indiscernible] that we've launched and we've seen favorable insight from customers as well as engagement with customers as well as our Dynamo stretcher, which is a connected stretcher. And I'll tell you, we worked very closely with customers around the design, development and launch of this product and have had very strong feedback. Now it's a competitive market. And so certainly, we have to earn our right but we've seen very favorable discussions with customers and favorable uptick from engagement. So -- and I also highlighted 2 more -- while [indiscernible] still proving the point around, we are outlining novation and its impact on the future of Baxter. And we're going to continue to drive innovation as a key element of our future. We invest here. We expect a strong engagement with our customers through this process, and we would look to innovation being a -- certainly a key element of our overall growth in the future. Operator: David Roman of Goldman Sachs is on the line with the question. David Roman: Maybe we could just dive into a couple of businesses here. Maybe I'll start with MPT. There are a lot of moving parts here considering the dynamics with Novum IV conservation. But can you unpack for us a little bit what's going on beyond some of those businesses, for example, with the IV set business? How do you protect the pump disposal business, given the Novum dynamics? And I think that's something like 4 to 5x the size of your capital business and higher margins? And what are the things that can get this business back to growth besides just the stabilization in IV utilization? Kevin Moran: Yes. So a couple of things here, David. Let me start with our overall pump portfolio. And I outlined a bit around Novum, so I won't dig into that. We have launched Novum syringe, and that is a nice addition for Baxter. Additionally, we also have spectrum and spectrum, our LVP platform. So we continue to support the overall market. We expect that to be -- and we've had obviously strong feedback from customers, and we put this product on our IQX. So that allows us to have communication with our pump portfolio. And so overall, we feel we continue to have strong interest in our spectrum LVP pump. And we feel good about our offerings, especially the value proposition we bring to customers in this space. And with that, we would expect sets to be in line with that confidence. And just as a reminder, we do expect our pump revenue to grow in the back half of the year, and we're staying very close to our customer base through this. David Roman: And then maybe as a follow-up, I appreciate the bridge from first half to second half walk on operating margins. As you sit here today, a lot of things that you're laying out are contemplated on expectations for the second half of the year. Can you maybe just go into a little bit more detail about what are the signposts that you're seeing whether it's KPIs or orders or other customer dynamics that give you that confidence to embed such a significant ramp in the back half of the year? Kevin Moran: So maybe I'll walk through the conference, and then we can certainly go into buckets if needed. But overall, I'd say, first and foremost, we obviously -- and you've known this business, we do have a seasonality aspect that we've continued to look at and we are validating. Number two, when I speak to customers when we engage around our product set, we see strong interest. And we've looked at -- and there's some elements, right? We've talked to in the past, our IV Solutions business, and it's rightsizing, we would expect that to normalize within 2026, which we've outlined. Number two, we continue to look at HST as more a back half area, and we've seen continued strong interest in our product portfolio. With Q1, we did have a little nuance within Front Line Care on timing. We would expect that to normalize out throughout the year, and we would expect HST to grow at low single digits. So overall, we're feeling confident in our view and it's a credible path for our ability to execute and then really deliver on the growth -- or excuse me, what we've said in our earnings on growth, but also in our operating margin expansion. And so Overall, I would say we continue to look at the business. We continue to outline our KPIs to ensure we've got clarity and folks around executing within the year. Operator: Larry Biegelsen with Wells Fargo is on the line with the question. Larry Biegelsen: Andrew, I wanted to ask on inflation. What's embedded in the operating margin guidance for gross margin in 2026? And how are you absorbing the increased cost pressures from oil, freight, chips, et cetera. Since the Q1 call, oil, it looks like it's up about $50 a barrel since you last reported? And I had 1 follow-up. Andrew Hider: Yes. Larry. Let me walk through a couple of items here, and I'll outline how we view this as well as how we're executing towards it. To lay this out specifically, as we view oil and its impact, a reminder that we sold our Kidney Care business, and with that sale, we've gone, call it, less than 50% now is an impact on oil prices to our P&L. And so if oil stays flat as it is today, we do see this as something we can manage and mitigate and will not have a material impact in 2026. Additionally, as we see other areas, our team, and as you would expect, we've taken a very proactive approach to managing our supply chain and our supply channel. And so we are engaging very deeply with our suppliers. We were needed. We've started to look at dual sourcing, really outlining, ensuring we minimize the impact and use this as a competitive advantage for the long term. And so what I can state is as we -- as we look at our ability to minimize inflation, we've largely outlined how we want to drive this. That said, Baxter is not immune. And we continue to be very proactive, we continue to monitor. We use something called daily visual management around managing and ensuring we have our supply base. We're not immune to macro trends, and we continue to outline where we see issue, how do we impact and how do we drive that to minimize the overall impact on the business. Larry Biegelsen: That's helpful. And Andrew, maybe a high-level question. With more time under your belt now, anything more you can share about the turnaround plan and any strategic changes that we could anticipate at Baxter. Andrew Hider: Look, just to walk through, I took this job 9 months ago. And I'll tell you, I saw a compelling opportunity to create significant value, both not only near term but over the long term. And since then, my conviction has only gained to strengthened, and I am fully committed to restoring Baxter as an industry-leading company. And now why is that gain traction? I as a CEO, something called Standard work. And part of my standard work is to visit facilities, engage with our teams on how we produce product, how we drive operations as a strategic competitive advantage as well as customers. And I'll tell you the feedback from our customers is that Baxter is a trust brand. It is a brand in which they look to Baxter for innovation, for capability and to really enabling their workflow to be at a more systematic and simpler process. And so we have the ability to drive that. Now we're early in our journey. And so we've started to gain traction. We've started to see really the efforts around GPS, and I highlighted a few of those. And I guess 1 of them I would highlight is we've done over 230 events in Q1. Now no single event dictates success, it's the momentum and the build on our structure and our foundation for the future. And so look, this quarter, we met what we said we'd mean. By no means are we saying this is the end. We are laser-focused in here, we're laser focused on the future. And we've got a lot of work to do. but we've seen nice progress towards adoption of the fundamentals for how we want to get to the future and how to drive the business forward. Operator: Vijay Kumar of Evercore ISI is on the line with the question. Vijay Kumar: [indiscernible] just looking at the performance here, excluding the comps, you guys said up low singles [indiscernible] on an underlying basis, but the guidance is calling for flattish organic. So maybe just walk us through on why wouldn't Q1 trends sustain? What are you assuming for normal step down or returns, if you will, maybe comment on HSD order performance. I know there was some timing element. Would it orders grow and what gives you confidence for HSD growth in the back half? . Kevin Moran: Vijay, this is Kevin. I can take this one from a modeling perspective and reiterate some of the comments I shared with Robbie. So I guess, overall, Q1 came in line with the expectations. Again, the 1 item to note there is we've been very clear and transparent about contemplating the potential risk from responses from Novum customers. we did not see a material impact in the quarter. However, we think it's prudent to continue to reflect that in our guidance going forward. And when we think about Q2, it's going to be a lot of the same dynamics and year-over-year headwinds that impacted Q1. Injectables, Novum, the potential for Novum returns. We've said HST's growth is going to come from the back half of the year. And so we do expect some sequential improvement in volumes in Q2. However, it's still going to be pressured year-over-year. Vijay Kumar: Sorry, just on the order growth in the quarter? Kevin Moran: I'm sorry, can you repeat your question? Vijay Kumar: HST order trends in the quarter? Kevin Moran: Each -- I'm sorry, Vijay, we're having trouble hearing you. Trends of what? Vijay Kumar: Order growth for HST. Kevin Moran: That's the timing we saw in the quarter. Got it. Andrew Hider: Yes. So -- and Vijay, I'll walk through this, but let me get a little bit more specific. Within Q1, the HST performance was largely driven by our Frontline Care business, and there was some timing aspects within that portfolio, plus we did have some planned exits within the portfolio. And these were planned. CCS came in roughly flat for the quarter. And within that, we did see growth in PSS, which is the largest piece of our business for CCS, giving a lot of items here. Net-net, we do expect this business to grow low single digits for the year. Q1 did have -- for HST, a pretty big number last year. So as you recall, last year was a big comp to come off of. We would expect it to be weighted, our growth weighted to the back half. And we've seen strong demand for our Connected Care business. as well as how we look at the timing for FLC. And so overall, again, reiterating, we expect this business to grow low single digits and to be back half weighted. Operator: Matt Miksic of Barclays is on the line with the question. Matthew Miksic: Congrats on a great start to the year. Yes, I wanted to follow up on just a couple of things. One on the sort of general macro factors that are causing some concerns, I guess, and in the past had been a challenge for Baxter. I think the expectation was that was going to be tougher, David talked a little bit about oil components and chips and supply teams. One of the companies in this space report some issues around chips that had been a problem. How are you mitigating those? And so how far out into the future? Do you feel like you are kind of set through the end of the year or for the next couple of quarters? And then I had 1 follow-up. Andrew Hider: Yes. Look, and I'll walk from specifically, chips. So it's overall [indiscernible]. So from a memory chip standpoint, at this stage, we've not experienced material storages or supply disruptions. And now that said, versus that we're taking a very proactive approach to managing risk. And many areas that we're doing through disciplined forecasting, through supplier engagement, dual sourcing efforts, and certainly something that we continue to look at. As I stated earlier, Baxter is not immune. We've outlined this risk early on and we are taking countermeasures around how to minimize this and it's something we are going to continue to stay close to and something we're going to continue to monitor. But to date, we have not experienced a material shortage. Matthew Miksic: Okay. And then just a follow-up on some of the growthier areas. As we all know and as you know, sort of the search for growth drivers and innovation and shiny object, if you will, has been one of the quest of Baxter for some time. And listening to you the last 6 months or so and on this call, talk about some of the -- getting after some of the growth engines that you have within the portfolio in Surgery or I don't know if it's in HST or in Connected Care, it seems like a slightly different take on putting R&D to work to generate growth, maybe putting more wood behind arrows you already have. If you talk a little bit about that in the near to intermediate term, that would be great. Andrew Hider: Absolutely. And I'm going to start in an area and I will answer the question, but I just -- I want to be clear, we are -- we will be known as very disciplined capital allocators. And I say that to start because, obviously, I have outlined the debt repayment. But the second piece of that is invest for growth. And part of that is how we invest in innovation. And we've outlined that in the past, but as a reminder, I view innovation as base heads, not walk off grand slams. And why do I say base heads? Because we have -- we need to have that constant drive to always be in front of our customers, listening, turning that into actionable insights and driving products that overcome the obstacles that our customers face. We have put our -- we've now positioned our business to be decentralized. So think about us as being very focused on the end markets we serve and then building it into our process and how we drive innovation. And so as we look at innovation, it is an enabler for our future. Now things take time, and I want to be very clear on that. It's early days. It's early stages. We've started to see some movement. And why do I know that with confidence. We do QBRs, which is a quarterly business review with our innovation leaders similar to our businesses. So it's the same expectation around where we spend our money and understanding that drive and making sure that we are laser focused on driving growth and driving expansion for our customers to enable their success. And so we've had a couple of early successes. We have some early wins, and I outline a few of those Connex 360 as well as Dynamo as well as by the way, we've launched a few more products in the quarter that will -- there's certainly a niche area of focus offers a continued path for our customers to see the impact from innovation. And so I would just say, over time, you'll see us on that cadence of focusing on how do we expand our value for customers and ultimately drive it from an ROIC perspective back to our shareholders. Operator: Matt Taylor of Jefferies is on the line with the question. Matthew Taylor: I had a couple of follow-ups. I just wanted to know better what you were assuming for the Novum returns, just so we can understand if there aren't returns, what the upside could be? Kevin Moran: This is Kevin. So we haven't explicitly quantified what the potential risk is for returns. But as you can imagine, this is something we continuously evaluate from an accounting perspective and from a guidance perspective. Thus far to date, since the ship and installation hold, it has been fairly immaterial to our results. Again, but we just think it's prudent to assume that this potential could happen. We have talked about our total pump portfolio being less than 2% of sales, and that includes both Novum and Spectrum. So you can at least ring fence the size of our total pump portfolio, of which some of that would be related to Novum. Matthew Taylor: Got you. And then can I ask a follow-up on the inflation issues. You said that oil would be manageable in 2026. I guess my question is if it stays elevated, is it still manageable in 2027? Or can you provide any framing of exposure there next year as [indiscernible] hedges roll off, et cetera. Andrew Hider: So I'll just kind of reiterate what I stated a little earlier and then we can through the other aspect. What I stated earlier was if oil stays at its current level, we have been able to mitigate, and we would not see a [indiscernible] challenge on 2026. As far as 2027 goes, as you're -- well, we're not giving guidance today. That said, we're very focused on every aspect of our business that's going to be part of the supply chain and potential areas that we would want to mitigate. Operator: Joanne Wuensch with Citi is on the line with the question. Joanne Wuensch: I'll just put the 2 upfront. How do I think about the recovery in Injectables & Anesthesia. It sounds like that also has a back half improvement. And could you please comment on the CFO search? Thank you so much. Andrew Hider: Yes. So let me walk through this aspect. And on to Pharma specifically and get into a couple of areas on it. First, we have taken pharma. We've outlined as we've combined this with our ITT business. lot of synergies across that business. And simply put, we do -- what we do really, really well is take high-value solutions that are patient impact and we make it easy for our customers to utilize that in their setting. And we've been able to bring that together. And so the team is excited about what that brings. We have seen a couple of challenges couple of challenges in this business. And one of them -- and I outlined last quarter and into this quarter, we had a challenge in one of our operations. And the team a GPS approach. They outlined where we had the challenge, they took short term and drilled the business and aligning around long-term countermeasure to enable this business to longer term be back on track. And so we've been able to mitigate this, and we saw that trend throughout the quarter. Additionally, we also have a challenge with the contract manufacturer. And I'll tell you, having been personally engaged in this, this is going to take time. We are working very closely with them. We have people on site to work with them to improve the supply, but this will take some time, and we are staying very close to this as it's important for our customers to get this product back on track. As far as longer term, when we think about this business. The [ fit ], the area is really aligns around our ability to bring strong capabilities to the markets and compounding has been a piece of that as well around high value, high -- or excuse me, high growth, where we focus on ensuring that we also identify margin and how we attack the margin. As far as the CFO goes, look, that is well underway. We have started the search. We are seeing tremendous interest many of the variables that brought me to Baxter around our strong position with customers, the brand and potential for the future is the same that we're seeing. And so it's well underway. We're in a fortunate position with the need of being in place and a broader team continuing to execute, [indiscernible] on executing. And so we're focused on getting a CFO that understands execution as well as knows our business. And you can expect we'll update at the appropriate time. Operator: Jayson Bedford of Raymond James is on the line with the question. Jayson Bedford: Congrats on the progress here. Just a quick 1 for me. On the Novum fix, you mentioned that you'll be prepared for any necessary submissions. So I guess the question is, do you anticipate that you'll have to refile? And if so, will you notify us if you do? Andrew Hider: So as far as Novum goes, and I'm just going to walk through -- and we don't have any updates today. I want to be very clear. But I'm very pleased with the progress and level of engagement I'm seeing from our teams as they continue to address the open Novum field actions and support needed from our customers. As we stated, our guidance assumes that the ship and hold will remain in place during the year for Novum LVP. To be clear, we continue to diligently finalize additional hardware and software corrections to resolve the open field actions. And once those are available, we'll implement them in accordance with regulatory authorities and including any necessary submissions. And so we are moving. We have a strong portfolio with our Spectrum LVP, and we continue to stay very close with our customers through this process. Jayson Bedford: Okay. And just maybe as a quick follow-up. It sounds like the returns are not material, but is it safe to assume that you're seeing kind of a stabilization of returns, if I think of 1Q versus 4Q and 3Q? Anita Zielinski: That's correct. So in Q1, we did not see a material impact from the Novum LVP returns or exchanges, but we have factored this possibility into our full year guidance. And this guidance does assume that those shipment [indiscernible] hold installation remains in place throughout the year. Operator: Andrew Hider, I turn the call back over to you. Andrew Hider: Thanks, operator, and thank you for your questions today. As we shared, while we're still early in our turnaround, our team is moving with urgency and discipline and our efforts are gaining traction. Through Baxter GPS, we're aligning our organization around us shared standards of excellence and building a culture of continuous improvement. We're now operating from a stronger foundation and focused on driving more consistent performance, accelerating growth and meaningful innovation, expanding margins, strengthening cash flow, and reinforcing our balance sheet to create durable, long-term shareholder value creation. Thank you for continued interest. We look forward to sharing updates on our progress next quarter. Stay safe, and goodbye for now. Operator: Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating.
Operator: Good day, and welcome to the Saia, 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 Matt Batteh, Saia's Executive Vice President and Chief Financial Officer. Please go ahead. Matthew Batteh: Thank you, Chad. Good morning, everyone. Welcome to Saia's First Quarter 2026 Conference Call. With me for today's call is Saia's President and Chief Executive Officer, Fritz Holzgrefe. Before we begin, you should note that during this call, we may make some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements and all of the statements that might be made on this call that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. We refer you to our press release and our SEC filings for more information on the exact risk factors that could cause actual results to differ. I will now turn the call over to Fritz for some opening comments. Frederick Holzgrefe: Good morning, and thank you for joining us to discuss Saia's first quarter results. As we moved into 2026, we remain focused on serving our customers enhancing operational efficiency and integrating our newer terminals into our national network. Q1 2026 was no different than history with weather impacting operational results. This year was pronounced as we saw weather patterns impacting our core and profitable Texas and Mid-South regions. However, much like history, we saw seasonally -- seasonality increase in March and particularly in the second half of the month as our customers began to tap our national network. Our teams, fleet and footprint are well positioned to take advantage of this opportunity to support our customers' seasonal demands. Service metrics continue to improve through the quarter. During the quarter, our team remained focused on what matters most, serving the customer. We achieved a cargo claims ratio of 0.5%, which is our sixth straight quarter of claims ratio below 0.6%, a record of consecutive quarters achieving this milestone. Customers also value our ability to reliably pick up and deliver freight in the time frames that meet their requirements and expectations. Across our KPIs, we continue to meet and exceed expectations throughout the network. Despite the dynamic environment this quarter, we improved operationally. Most notably, we saw a significant increase in miles between preventable accidents and a significant improvement in hours between lost time injuries. Miles between preventable accidents were a first quarter record, while hours between lost time injuries were at the highest first quarter level since 2020. Both metrics are a testament to our ongoing commitment to safety, training and technology. Our operational execution is driven by our continued investments in our network and optimization technology. Although we're still in the early stages of realizing the full long-term benefits of a national network, execution remains strong across the organization, improving upon trends seen in the back half of last year. Increasingly, customers value consistency and reliability and our performance in these areas is enabled by the longer-term investments that are core to our strategy. As a result, productivity continued to improve in the quarter, with making their strongest performance since the third quarter of 2024, improving more than 2.5% compared to the first quarter of 2025 and improving approximately 1% sequentially from the fourth quarter. These metrics demonstrate the impact of our ongoing investments in optimization technology. As the freight backdrop improves and we continue to build density on our national network, we anticipate additional network leverage and asset utilization. With service levels among the best in the industry and our increasing value proposition to our customers, we continue to make progress on pricing and mix management. Revenue per shipment excluding fuel ramped throughout the quarter in part due to our efforts around contractual renewals, which were 6.7% for the quarter. While there's still movement among shipments with ever-changing backdrop, our renewal rates reflect our value proposition to the customers and our ability to provide solutions that meet their needs. First quarter results were largely in line with our expectations as volumes in late March were strong, offsetting, to some extent, a weather impact to January and February. Revenue for the quarter was $806 million, a record for the first quarter and a 2.4% improvement over prior year. While trends in the first couple of months of the year can always be volatile, I was pleased to see the volume acceleration in the back half of March, resulting in a shipment increase of 1% for the quarter. As customers continue to value our expanded presence in our now national network, we saw shipment growth in both our legacy and ramping markets. Weight per shipment, while still down compared to prior year, improved sequentially each month of the quarter, a result of our targeted actions around mix management and improving shipper sentiment throughout the quarter. Now I'll provide additional detail as it relates to cost. However, it's important to note, we were negatively impacted in March by the 30% increase in diesel costs in a matter of a few days. This rapid increase in cost created a meaningful short-term impact on profitability, given the timing difference of our surcharge program, which is based on weekly national average diesel prices. I'll now turn the call over to Matt for more details from our first quarter results. Matthew Batteh: Thanks, Fritz. Revenue was a record for any first quarter, increasing by 2.4% to $806.2 million, partially as a result of an increase in fuel surcharge revenue as well as a 1% increase in shipments for workday. Revenue per shipment, excluding fuel surcharge, decreased 1.2% to $297.11 compared to $300.76 in the first quarter of 2025, largely as a result of lower weight per shipment and shorter length of haul compared to the prior year. However, I was pleased to see revenue per shipment, excluding fuel surcharge, increased throughout the quarter. Revenue per shipment, including fuel, increased 0.7% compared to the first quarter of 2025. Fuel surcharge revenue increased by 12.3% and was 16.5% of total revenue compared to 15.1% a year ago. Tonnage decreased 2.1% compared to the prior year, attributable to a 3.1% decrease in our average weight per shipment. Our average length of haul decreased 1.7% to 890 miles compared to 905 miles in the first quarter of 2025. Yield, excluding fuel, increased by 1.9%, while yield increased by 3.8%, including fuel surcharge compared to the first quarter of 2025. Shifting to the expense side for a few key items to note in the quarter. Salaries, wages and benefits increased $4 million or 1% compared to the first quarter of 2025. This increase was primarily driven by a $7.9 million increase in health insurance costs as well as a $1.4 million increase in workers' compensation costs, both of which are primarily the result of escalating cost of claims. These increases were partially offset by a $5.1 million or 1.8% decrease in salaries and wages combined compared to the first quarter of 2025, as head count at the end of the quarter was 6.3% lower than the first quarter of '25 and was 0.7% lower than the fourth quarter of 2025. Excluding linehaul drivers, head count decreased 7.9% compared to the first quarter of 2025. These reductions were a result of our continued focus on operational efficiency and network cost management. Purchase transportation expense, including both non-asset truckload volume and LTL purchased transportation miles increased by 7.5% compared to the first quarter last year, and was 8% of total revenue compared to 7.6% in the first quarter of 2025. Truck and rail PT miles combined were 13.4% of our total linehaul miles in the quarter compared to 12.4% in the prior year. The increase in purchased transportation usage was driven entirely by rail that match customer service expectations, as we leverage the most cost-effective mode. Fuel expense for the quarter increased by 3.6% compared to the prior year, while company linehaul miles decreased 4%. The increase in fuel expense was primarily the result of a 13.6% increase in national average diesel prices on a year-over-year basis, as national average price per gallon increased more than 30% from February to March. Due to the rapid rise in diesel cost in March, our costs were elevated in real time while the fuel surcharge table updates the followup week. This period of quickly rising diesel costs resulted in an approximately $3.5 million margin headwind. Claims and insurance expense increased by 6.3% year-over-year. This increase was primarily due to rising insurance premium costs in addition to inflationary costs associated with the claims expense. While claims costs continue to escalate at a rapid pace, our efforts to remain focused around safety and training, resulting in a significant decrease in preventable accidents compared to the first quarter of 2025. Depreciation expense of $62.2 million in the quarter was 5.3% higher year-over-year primarily due to ongoing investments in revenue equipment, real estate and technology. Moving to costs on a per shipment basis. Cost per shipment increased 2% compared to the first quarter of 2025, largely due to increases in self-insurance related costs. Health insurance alone accounted for more than 50% of the year-over-year cost per shipment increase due to cost inflation and claims mix trending more towards -- towards more high-cost claims. Compared to the first quarter of 2025, salaries, wages and purchase transportation combined were down 1.2% on a per shipment basis as a result of our actions around cost control and network optimization. Meanwhile, higher fuel costs contributed to the increase in cost per shipment compared to the prior year, as fuel prices surged during March due to external factors. As a reminder, while our fuel surcharge program helps mitigate rising fuel costs, our fuel surcharge table updates weekly, whereas fuel costs are incurred in real time. The impact of this timing is more pronounced in a rapidly increasing fuel environment. Total operating expenses increased by 3.1% in the quarter and with the year-over-year revenue increase of 2.4%, our operating ratio increased to 91.7% compared to 91.1% a year ago. Our tax rate for the first quarter was 23.3% compared to 24% in the first quarter last year, and our diluted earnings per share were $1.86, which is flat compared to the first quarter a year ago. Focusing on the balance sheet. We finished the quarter with $39 million of cash on hand, $12 million drawn on the revolving credit facility and $113 million in total debt outstanding. I'll now turn the call back over to Fritz for some closing comments. Frederick Holzgrefe: Thanks, Matt. While 2026 has shown some positive demand signals, the ever-changing macroeconomic environment continues to create uncertainty from a customer perspective. One constant, however, is our team's ability to adapt to change and deliver solutions for our customers. As we remain focused on serving our customers while driving efficiency across our operations, I'm increasingly excited about the opportunity ahead. Our disciplined approach to cost management is reflected in our cost structure. We remain vigilant about managing cost. We noted in Q1 that employee-related costs associated running the business continue to be inflationary. It's critically important that we invest in what we feel is the best team in the freight business. At the same time, we continue to invest in the technologies that allow us to best manage and deploy the industry-leading team. Dating back to 2017 since we began our journey to becoming a national network, we've opened 70 facilities. Throughout, we've maintained a competitive cost structure or deployment of data analytics and optimization tools that have served us well. We'll continue to invest in those capabilities and expand the use of those tools, which remains core to our strategy. Looking forward, we remain committed to executing our long-term strategy of getting closer to the customer, providing a high level of service and being appropriately compensated for the quality and service provided. As the industry is perhaps emerging from a 4-year free recession, we see size upside as significant. We've invested with keen focus on supporting success, which has required a best-in-class team, a national terminal network, a flexible modern fleet and a technology stack to bring all these elements together. Over the last 36 months, we've invested approximately $1.8 billion in our network and fleet alone, representing more than 19% of total revenue during that time. This investment is a clear signal of our commitment to customers, and we believe we're still in the early stages of fully realizing the benefits of these investments, which we expect will generate substantial long-term value for our shareholders. With that said, we're now ready to open the line for questions, operator. Operator: [Operator Instructions] And the first question will be from Jordan Alliger from Goldman Sachs. Jordan Alliger: Great. So maybe, I guess, in the context of perhaps underlying demand feeling maybe a bit better. Can you talk or give your thoughts on margin progression as we go Q1 to Q2 and perhaps some of the specific levers that underpin that, whether it be volume yield cost? Frederick Holzgrefe: Jordan, sure. So I'll go ahead and give the shipments and tonnage stats monthly just so everyone has those and then get into the margin commentary. So Obviously, January and February, we're already out there, but just to reaffirm those and reiterate January shipments per day were down 2.1%, tonnage per day was down 7%. February shipments per day up 0.3% and tonnage per day down 2.7%. March shipments per day up 4.3%, tonnage per day up 2.8%. And April to date, shipments are tracking up about 5.5%, tonnage up about 6.5%. And as we think about what the Q1 looked like, I mean, we saw some nice acceleration in the back half of March, which was good to see that didn't come to fruition last year, so it was good to see that back around this year. But strong back half of March. And obviously, you see the April-to-date number. So when we think about what margin progression looks like, if I look back in history, Q1 to Q2, typically about 250 to 300 basis points of improvement sequentially from Q1 to Q2. This year, we think with what we've got going, the momentum we see, we think we can do about 400 to 450 basis points of improvement, which would be obviously a significant step-up from where we are. Now with that, obviously, there's a lot going on in the backdrop. We're projecting, as we stand now, May and June to be seasonal. A lot of factors out there with demand and what the diesel environment looks like and everything like that. But where we sit right now, if we we see May and June come together a normal seasonality. We feel like we can hit that. And if things really get better and the environment is really improving dramatically that we can outperform that, but that's where we stand right now. Operator: And the next question will be from Ken Hoexter from Bank of America. Ken Hoexter: So if you dig into the revenue per shipment ex fuel down 1.2%, Matt, you mentioned lower weight, shorter length of haul, but but it also decreased sequentially. But then you noted an acceleration in the quarter. Maybe, I don't know if you want to do that by month over month? Or how do you see that accelerating? I don't know if you want to talk about maybe core pricing or contract pricing within that, so we can kind of understand what is really going on there? And I guess with that, the weight per shipment, you're going to lap the Southern Cal issues in April, and I don't know if you get in the truckload spillover maybe in that same thing, how does it work with weight per shipment shifting as well? Matthew Batteh: Yes, we'll unpack those pieces a bit. So if I -- obviously, from a year-over-year standpoint, the Los Angeles region headwinds that we've talked about we're still there. They have made it a touch, but that region shipments were still down about 14.5% on a year-over-year basis. That's typically our highest revenue per bill region longer length of haul. But also included in that on a year-over-year basis, we're still winning in these 1- and 2-day land markets. And that's not a bad business. But generally, it's not going as far -- the price is a little bit less compared to something that's going more on our company average length of haul. That's not a bad business. And what we're seeing is more and more opportunities with customers as we're putting dots on the map. We're getting it back with them, and they're routing as different freight that we may not have had access to before. So that's a good business for us. That mix shifts around a little bit Q4 to Q1 as you start to get it more seasonal. But I mean we're pleased to see the weight per shipment improved throughout the quarter, along with our revenue per shipment month by month. Part of that's our actions on contractual renewals. You heard for it to get the 6.7%. That was the highest number that we've seen in quite a while, and that was capped by a March number that was north of 7%. We feel good about that. But there are shippers that are still moving around. The environment is still a little bit dynamic around some of that. So we continue to manage the mix. There is nothing that's changed from our efforts and focus on pricing. But we're getting more of that in some of these shorter-haul markets. Operator: And the next question will come from Jonathan Chappell from Evercore ISI. Jonathan Chappell: I understand there's a lot going on, and we don't want to get ahead of our skis here, but those numbers that you just noted for 2Q, especially, Matt, as we think about the rest of the year, the full year OR improvement guide from February of 100 to 200 basis points with the high end assuming some volume tailwinds, with what you think you have line of sight on with 1Q being done, the acceleration of tonnage through April and that 2Q bogey you just laid out there, does the high end become the low end? Or are we still I don't know, kind of questioning the pace of demand in the back half? Frederick Holzgrefe: I think it's -- John, you bring up good points. I think I'll start with what we're hearing from customers. We -- as you might expect, we spend a fair amount of time connected to customers, we survey, we communicate, try to understand where their business is. And I think the 1 thing that I would say is that we like to hear right now are 2 things. Number one, they track and give us feedback on our performance all the time in our Net Promoter Scores and our customer set have never been higher. They continue to improve, and we're excited about that. The second part of that, which I think is more tied to your question, is their sentiment is they're getting -- it's more positive. They see a better second half. Now Matt and I are -- and I talked to you about before, we tend to be a little bit more, let's show me, right? So those are positive tones. We like that. I'd like to see it in the results. I think right now, what we're excited about was what's in front of us for Q2. And I think the ranges that we've talked about earlier in the year, the $100 million to $200 million is certainly within range, but there's still a lot to go on. And the macro is still -- diesel costs are at high levels. Overall, transportation structure costs are high. Does that have an impact on demand down the road? I don't know yet. But I do know that short term, customers think we're doing a great job. It's showing up in the April results in second half of March, like all that. The feedback from customers is great. So we feel good about what we've talked about for Q2. And I think the trends would indicate that the second half of the year could be pretty good. Operator: And the next question is from Tom Wadewitz from UBS. Thomas Wadewitz: Yes. Let's see, I wanted to see if you could talk a little bit about the, I guess, weight per shipment, what that's doing and what it kind of did in kind of March to April? I guess also if you could just kind of help us understand, you're assuming normal seasonality in May, June. What does that mean in terms of like what your year-over-year tons per day, shipments per day look like? So I think just some more about kind of both how you see shipments developing and also what doing and how much that kind of matters to how you're looking at things? Matthew Batteh: Sure, Tom. Yes. I mean, we saw weight per shipment increase throughout Q1, which was good to see. As Fritz noted in the prescripted comments, that's what we feel is partly driven by our actions around core pricing increases and how we're targeting business and mix management. We also feel like it's a little bit to do with the backdrop improving and we've seen some positive signals, customer conversations, as you talked about. But you get into some of the spring periods and that you have some rollout at times or different mix with customers, but it increased pretty steadily throughout Q1, which was good to see. As we go into April, it's up a touch. You saw that in the tonnage numbers that we've talked about from a shipments and tonnage standpoint in April. Remains to be seen what that does in the back half of the quarter. Obviously, there's a lot going on. Shippers are still trying to figure everything out. So we feel good about where the trends are now. But we've got a couple of important months to go through and what is generally the peak quarter of freight. In terms of what seasonality does, typically, you'd see a step up of 1% to 2%-or-so in the March to April time frame. Somewhere in the middle is generally where that lands. And then what you'd also see is a step up April to May and May to June as well. So typically, what you're getting through Q2, which again is the most seasonal -- most typically strong period in the quarter, you're getting step-ups throughout the quarter. So that's what we're assuming right now as we stand. And as we're talking to our customers and getting demand signals from them, that's how we're forecasting right now. Thomas Wadewitz: What about -- and Fritz, I apologize if you might have said this in your remarks, but what about the growth in the kind of new terminals versus growth in the legacy terminals? Is that kind of similar? Or are you seeing meaningfully higher shipment growth in the kind of the terminals from the last 2 years? . Matthew Batteh: I'll give the number, Tom, and then Fritz will comment on it. But we -- one of the things we were really excited about in this quarter is we saw shipment growth in both the legacy and the ramping facilities. We've seen it for a while on the ramping facilities, obviously, but this was the first time in 5-or-so quarters that we've seen it in the legacy. So that was good. But the ramping is still outperforming legacy, but those grew for the first time in a while. Frederick Holzgrefe: Yes. I think it's -- what's exciting about this is having the legacy facilities grow at the same time in the new facilities are growing at a faster rate as we'd expect. And what's fantastic about that is that customers are considering us more for their complete solution. And they said, look, you can do a great job for us in markets you've always been in and now you've got these new points. So this is kind of the plan coming together. We're kind of getting to the point where growth in a legacy market is often tied to the fact that we can provide service in a ramping market at the same time. So you're now becoming a more important part of the customer's supply chain. So the percentages matter perhaps a little bit less now because the customer is looking at us as a solution rather than kind of in the legacy market. Operator: The next question is from Scott Group from Wolfe Research. Scott Group: So the pricing renewal numbers sound good, but if I just look at like a blended average of the pricing metrics you're actually reporting in the quarter, they're basically flat. So I guess, when do you think we should start to see sort of those yields and rev per shipment numbers actually improve and get closer to some of the renewal numbers? Or do we start to see some of that in Q2? And just I don't know, any thoughts there? Matthew Batteh: Yes, I think we'll start to see some of that in the back half of Q2. Obviously, we're right now just lapping some of that big change in the Los Angeles region business from last year. And there's still volume moving around with shippers and you don't always know what you take, and they move around a bit. But as the environment hopefully continues to tighten, we should see some of that come. I think we'll get closer to that as we get into the back half of the year. But I'd also expect us to see some of that improve in the back half of this quarter as well. Frederick Holzgrefe: Yes. I think the top part of the SoCal market for us, I think we start exiting out of that kind of in May, where it's more kind of we start lapping that we're past those tough months. Scott Group: Maybe just to that point, like we've got some moving parts there are obviously, like fuel is a big factor right now on yield trends, like within that margin guide that you gave us, like any way to like sort of like bracket, what sort of the revenue assumptions are? Matthew Batteh: We don't give that level of detail, Scott. But I mean, from a volume perspective, we talked about seasonality. Fuel plays a factor in that. But as we talked about, I mean, we're paying fuel costs in real time during that run up in March, they've stabilized a little bit. I think anyone's guess is as good as ours in terms of what that market is going to do. It doesn't seem like it's changing real time right now. So I would say that it's more just about the guide that we gave is underpinned by seasonal May and June is what I would say. Frederick Holzgrefe: And we're not assuming a change in fuel. It's like whatever it is presently, we're going to -- it could go up or down, diesel can go up or down from here through the end of the quarter. Operator: The next question will come from Ravi Shanker from Morgan Stanley. Ravi Shanker: If you can just unpack what you're seeing in terms of end markets, particularly retail versus industrial? And what's the typical lag between retail kind of end markets picking up versus industrial going into a cycle? Frederick Holzgrefe: Yes. I don't necessarily have a call out for retail and industrial. What I would tell you is that what we see the feedback we're getting from customers is kind of across the board. So it's across all the markets. So there is a one that's necessarily outpacing another for us presently. The -- so that I think is overall is probably positive, maybe it's more broad-based. I think that in some of the end markets, we participate and have pretty good line of sight to markets that are attractive will be grocery here that your data center businesses, all those sorts of things, we represent pretty well in there. And I think that those -- it's pretty across the universe. I think it's pretty consistent feedback both from we're doing a good job, and they feel maybe a little bit positive about the balance of the year. Ravi Shanker: Got it. And maybe I can squeeze in a quick follow-up here. Just on the tech side, kind of you mentioned a number of new investments on productivity. Are there any kind of big tech products or packages that you're dropping in that you think should see like a step function improvement in your optimization efforts here? Frederick Holzgrefe: I don't think that there is a -- we're quite ready to talk about any step-function changes. But what we continuously have been investing in the core optimization tools that we've had that are really critical to the cost structure that we have. I mean if you consider you benchmark us against the other public national carriers, not only are we the smallest of the public national carriers, but we're also -- our cost structure is very, very competitive. And what I would say is I point that specifically to how we run our linehaul network and how we plan our city operation. Those are all large -- our models or AI -- early stage AI models that we've been working on for a number of years, and there'll be continued enhancements around that. Now certainly, from here, how we interact with customers. We can deploy AI around customer service things, around track and trace as an example. Customers really value that. It's a cost-effective way for us to provide data to customers. Those are kind of things that we've launched, but they don't necessarily change the cost structure. If you got down the road and looked at things like Vision AI or things in that area, we're investing, those are things that are potentially operationally significant. I think that the big thing for us is that I think as we continue to focus on this national network, technology deployed and where we can optimize -- continue to optimize our pricing will be the real opportunity over time. So that -- our technology investment and focus is across the board. The cost things you have to do to stay ahead of inflation. And certainly, there are opportunities to continue to improve that. But I don't know that there's a step function out there yet for that. but we'll continue to focus our investments around optimization tools. Matthew Batteh: And you see that in our numbers, Ravi. If you look at the commentary around our touch is improving best since they've been in the third quarter of '24, you see it in the per shipment cost of salaries, wages and PT, that's how we always think about it in terms of what it takes to run a network to run an operation that on a per shipment basis is down. That's all a product of optimization, technology of cost management. And keep in mind, over that period, there's 20-plus new terminals in our network. So those are by no means are mature yet or fully efficient. So it's not new for us. We're going to continue improving that. But that's been the root of where our focus has been for a long period of time. And then to Fritz's point, the opportunity around pricing for us, the customer conversations that we now have are more equal on a footprint than they've ever been. We've got a national network. We can do more for them, and we're seeing more of that in these 1- and 2-day wins, but that's just a product of us being able to say yes to more things. Operator: The next question will be from Eric Morgan from Barclays. Eric Morgan: I was wondering if you could give us some thoughts on what we're seeing in the truckload market. Just curious if any of this tightness is driving some incremental volume onto your network? And maybe I'm not sure if that's the reason -- or 1 reason for the weight per shipment upward trend. And then my follow-up, just on your answer to the 2Q touch question, you said that you usually see that improvement from April to May and May to June. Is there any way to just translate that into what it would equate to on a year-on-year basis for the quarter? Matthew Batteh: We don't give the year-over-year base, Eric, and that was in shipments that I was referring to just for clarity on shipment type. Frederick Holzgrefe: Yes. So on your market question, I think what I would say is that I think you're -- over time now, you're starting to see freight moving, it's through its more historic moats and customers in a supply chain that is seeing increasing costs, what you're seeing is it may be a flight to quality, right? You're in an environment where you need to move freight inventory through your supply chain. It's expensive. You want to make sure it's delivered on time because you can't afford in a higher cost environment. So I think you're starting to see the reliability of our network starting to shine. And I think more broadly across all modes of transport. I think as you see the truckload market tighten up a bit, you see LTL freight returning the LTL market. That's probably a help in there somewhere, but I think, specifically, as it relates to us, I think it's reflective of our performance for our customers. Operator: And the next question is from Chris Wetherbee from Wells Fargo. Unknown Analyst: I guess, I wanted to ask about sort of the density or the building density and the newer more newly open parts of the network. And I think in the past, you guys have given us sort of operating ratio for facilities that have been open a couple of years. Just maybe get a sense of how that's progressing, particularly in March and April where it seems like the volume performance is looking a little stronger. Matthew Batteh: Yes. We're pleased with this. I mean they're still above company average, right? I mean there's a group of facilities are still relatively immature. We saw them improve. If I look at just those batch facilities, compared to where they were in the prior year. So the way we're thinking about this now is the '23 and '24 openings now we're past the 22%. So we're considering those kind of just part of the whole -- but the way that we look at those, I mean, that actually facilities year-over-year, they improved margins by over 2 points on the OR side, which is good. I mean there's still in the upper 90s, and we -- they are a drag on the overall. But we're going to continue working those down. They're still relatively new, but good performance from those on a year-over-year basis. Frederick Holzgrefe: Chris, I think part of the OR guide into Q2 is reflective of growth not only in our legacy markets, which we like, but it's continued sort of leverage in the ramping new markets, which is really, really key to the whole value story here. And I think that's what we're excited about. Unknown Analyst: And then just on sort of that -- the legacy versus the new, I guess, just getting a sense of how you're feeling the demand potential improvement? I guess, I don't know if you can measure that by thinking about how much is growth in legacy versus new in terms of what's kind of core demand and maybe what Saia initiatives, i.e., you're getting the opportunity freight for existing customers in the new network or vice versa. I just want to get a sense if there's anything you can tell from that sort of broadening out of this demand dynamic? Frederick Holzgrefe: Well, I think the big thing that I would point out, right, is we've highlighted that our legacy facilities are back -- first quarter reflected the first quarter and a number of quarters, we actually saw growth in those markets. And I think what that is indicative of it, I think this is an important piece. We're now in a bigger part of the customer supply chain in these new facilities. We're doing a great job for those customers in the facilities. And now when you're in that -- a little bit of a synergy that's coming out of this, it simply says when you're a national player and you could do more for a customer, you're hacking a lot easier to do business with. So now it's like, all right, well, let's give them more freight from Dallas to Atlanta because that makes sense because I know that they can cover. When they do the pickups for everything that's going into Montana, that matters too, right? So the combination of all that, I think we're starting to see the building of value of having that footprint because you're able to solve all those upper Midwest problems or markets where we haven't covered well historically. Now you're able to do that. So now the customer can say, look, let's lean into it in businesses that we've long done business with you, but now you're moving up to the top of the stack in our supply chain. So that -- I think that's exciting for us. And that's really what I think is going to drive the growth Q2 and [Audio Gap] citing force. I don't see an impediment short of a broader economic slowdown that would say that we can't continue to drive margin performance in this business and in the long term real value-creating goals that I think that we have, which are sub-80 OR is -- that's out there for us, and I think we can get there. I don't see an impediment to that. Unknown Analyst: And then just 1 follow-up on my end. Free cash flow, no 1 touched on it yet, but it was very strong in the quarter. Could this market inflection here? Or is there some other considerations we need to be thinking about? Matthew Batteh: Well, we've long talked about our plan this year was to be free cash flow positive. Obviously, we understand our duties to the shareholder, and we've feel good about how we've returned the investments in the business, but a lot of that build-out is done now. We still have some terminal opportunities here and there. So we understand that we're stewards of the shareholders' capital, and -- but absolutely, if this market continues to tighten our plans around that could escalate further. I think there's still some of the unknown out there in this near term. But based on the indicators that we're seeing from the demand side from customer conversations, we feel like this could be a really great inflection point for us. Operator: And the next question will be from Jason Seidl with TD Cowen. Jason Seidl: This is day on for Jason Seidl. Maybe just 1 for me on circling back on pricing. So on your last call, I think you spoke to some better-than-expected capture on GI since then freight markets generally have tightened up, your core pricing is sounding robust. Have you seen any changes or improvements on the capture side there as the year has progressed? And does that telegraph anything further for momentum on core pricing as you move through those annular fees? Matthew Batteh: I would say that it's been relatively steady. No major difference there. Some of the movement we see is generally around the national accounts or the larger customers a bit more who typically are -- they're using more carriers or they've got a more sophisticated TMS, things like that. So there's always some movement with that. But I would say it's been relatively similar to what we've been seeing on the capture side. And I think a big component of that is our ability to do more for our customer. It's harder to make a change when we can do everything before. Just you're thinking about it twice when you have to make that decision now. And now that we've got 214 facilities in the national network, we feel like our value prop to our customer is better than it's ever been. So relatively in line with where it's been, but I think every time that we can say yes to a customer and do more, then we get that chance to hold on to that at a higher price. Operator: And the next question is from Richa Harnain from Deutsche Bank. Richa Talwar: It's Richa here. Yes, maybe I can revisit how you manage purchase transportation. I know you look at it holistically with size, wages and benefits and optimize that in totality. Matt, you said it a couple of times your siren benefits plus PT per shipment, was impressively down in Q1. But just as truck rates rise, do you plan to enforce more or do you think your pass-through mechanisms with purchase transportation give you enough protection? And then just to clarify, I know Fritz, we talked about like the upside scenario. It seems like the macro is providing some help right now, which is nice. But if that doesn't materialize, given all the uncertainty out there, do you still think you can improve OR by at least 50 bps this year? Or could it actually be higher than that with all the momentum and productivity initiatives that we're hearing about in earnest today? Frederick Holzgrefe: No problem. Good question. On the PT side, one of the things that when we go through our decision-making process around PT, we always focus on, all right, number one, how does that match what customers need? Like what's the service schedule? Does it meet the quality standard that we need. What we found in Q1, particularly in the second half of March, we saw opportunities to really lean into rail. And the rail -- the entire increase of our PT year-over-year, I mean there's certainly some rate underneath, but the real piece is we really leaned into using rail, which on a cost per shipment base or cost per mile basis is upwards of $0.50 cheaper than our internal model. So in that case, because we could meet the customer need, the cost decision became sort of straightforward and we made that call. Now over time, I think one of the things that's important, and I think you've got to on track with this and that is as we build density in this network and scale, the opportunity for us to run more balanced schedules across the network, which allows us to use -- potentially use a Saia driver for the linehaul move, in that case, we've got freight for them to go from if he's traveling east, when he comes back west, you'll have a full load, and that's cost optimal and that makes a lot of sense. As the maturity of the network grows, there'll be opportunities to do that. But at the same time, we're going to take advantage of when PT works for us, starting with service, then we'll get to dealing with the cost side. If the cost side is better, where it makes sense for us to better utilize our resources maybe on another part of the network. With respect to kind of the momentum we're seeing in the business, I think there is certainly in a flattish kind of softening macro environment, can we get OR improvement in the business? I think we can. I think we've got some underlying efficiency goals that we have in place that we're achieving. I think that there -- as we get new volume in those facilities that are ramping that automatically gets us a bit of a cost leverage there. So I think we're in the process right now of really shoring up what I would say is the lower end of the range, right? So if macro softens up, can we still get better? I think we can. Is it 50 bps sort of idea, is that out there in a tough flattish market, I think we can achieve that, particularly as we continue to have success with customers in those new markets. So all in, I think what's exciting about this because of where we are, we've got line of sight to things that we can improve on and are improving and optimizing as we go. Richa Talwar: Okay. And can I just ask 1 quick follow-up? The good demand that you're seeing, I think legacy facility is seeing growth after like 5 quarters. Any sense of that being pulled forward or any concern around that based on your customer feedback? Frederick Holzgrefe: I don't think so. I think that what we see is it's more of a sort of broader sort of sentiment in the marketplace. So meaning, I don't see anybody making the decision to let's move the freight quickly now before things become more inflationary. I think it jumped up. The inflationary diesel cost jumped up pretty rapidly. And as a result of that, I don't think someone could necessarily foresaw kind of those cost increases that maybe move that forward. So I conclude that I don't think that we see any real pull forward there. Operator: [Operator Instructions] The next question is from Brian Ossenbeck from JPMorgan. Brian Ossenbeck: Just wanted to ask about the capacity and, I guess, ability to make service if you do have a more significant inflection in demand and volume, I don't know if you're ramping up for that probability already? Or if you have more productivity, you think you can leverage in that scenario? So maybe you can talk through that a little bit in terms of how you were planning for it right now? And if it were to actually materialize, how you would handle that, would you maybe even trim down some of the volume coming in to your that service is met in that type of scenario? Frederick Holzgrefe: It's a good question, Brian. Thank you for that. A couple of things. We feel like we -- because of our ability to manage PT efficiently and effectively, I think that's always going to be a bit of a natural leverage for us. So if you -- if we had unexpected short-term or shorter-term volume variation, we've got that sort of safety valve that we know how to manage. So I think we can handle that in the short term. I also think that as we scale the business, we have certainly continued efficiency opportunities. So I think that that's kind of within our framework. And then I think the other thing is, quite frankly, is that these are scarce assets, meaning the -- our fleet -- we're doing a good job with the fleet, with the real estate terminal network, the technology that's all inflationary. So in an environment, as it strengthens and firms up, we're going to expect to not only provide great service to our customer, we're also going to expect that we would be compensated for that significant investment we've made. So that may help manage sort of volume inflections and changes in terms of in a stronger backdrop, we probably focus more on making sure we're compensated for all of that investment that we've made. Because when you do business with Saia, you're going to get -- you get best-in-class service. So we expect to get paid for that investment. So that probably becomes a bit more of kind of our focus in that sort of the backdrop. Operator: Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Fritz Holzgrefe, Sias President and Chief Executive Officer, for closing remarks. Frederick Holzgrefe: Thank you, operator, and thanks to all that have called in. At Saia, we believe that our value proposition to the customer continues to be significant and we look forward to talking about the success we will achieve in the quarters and years to come. Thank you, everybody. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.